Risk On, Risk Off, Risk On… Keep Your Eye On The Bouncing Ball

While China’s Shanghai composite made more noisy news overnight by falling another 7.5%, the real news today is that the Hang Sen (HIS), Hong Kong’s composite, held its ground and even advanced. The HSI is simply a more rational indicator of where Asia as a whole is going. It is staffed by experienced pros and is relatively free of the bureaucratic manipulation that preys upon Shanghai.

Another interesting and important change on the day came via the strength of the U.S. dollar, which picked up ground against the euro, the yen and the British pound. This may well be because the People’s Bank of China lowered interest rates dramatically. However, the real reason, we feel, is that in general the dollar was oversold yesterday in a short term move that saw equities markets in Asia and Europe close, causing fearful eyes to turn to the U.S. stocks.

Traders and investors dumped out of dollars and went to the euro for a short-blast haven play. Today, now that the equities carnage seems to be continuing to play out, that same money has been gravitating slowly back to the dollar.

No one knows where the fickle and destructive finger of fate will fall next in the world of equities.

Without doubt dollar strength and regular trading movement hammered gold. It is down a total of $15.00 on the day. Over $8.00 of that can be ascribed to dollar strength.

Crude oil, both West Texas and Brent, struggled to bounce back today but it was subject to the dollar robustness that dragged down gold.

Our reading on crude in the next few weeks is that it will trade under pressure for the usual reasons, namely oversupply; slack demand; and too much potential future supply. The Iran nuclear deal seems as if it is going to go through with minimal fuss and muss. That will peel away sanctions on Iran and allow oil from its reserves/stockpiles to hit the world markets sometime this fall. That will surely have a depressive effect on oil prices.

We are also coming into a light demand season as summertime gasoline use subsides and home heating oil season slowly lifts off.

Bonds came into focus today, as they must after a day such as we experienced yesterday. The U.S. Treasury Department auctioned $26 billion worth of 2-year notes, the first batch in this week's $90 billion debt auction. The offering met weak demand.

The bonds sold at a high yield of 0.663%, which was considerably lower than the previous auction in July. The bid-to-cover ratio, the other true indicator of demand, was at its lowest since October, booking in at 3.16.

The coincidence of the sale day was significant. Today, unlike Monday, was a risk-off day.

What about tomorrow? Keep your eye on Asia, naturally, but especially Hong Kong. While the flamboyance is pulsing out of Shanghai, Hong Kong is providing the meat and potatoes.

Wishing you as always, good trading,