U.S., European Equities Rise While Shanghai Continues Slip

Led by energy stocks, the Dow and S&P 500 rose around 1.00% today, reversing the struggles and narrow-range volatility they’ve experienced recently. The NASDAQ was also up. In Europe, the DAX and CAC were both up a touch more than 1.00%.

The U.S. seems to be navigating its way through a tricky though not devastating earnings season. Europe, of course, seems ever more on course as it leaves (we hope) its Greek problem behind.

Shanghai is another matter. The Monday-Tuesday combined loss clocks in at –10%. While today’s trading in Asia slowed the descent, be prepared for a longer decline that could bring the Chinese equities’ main market close to the 3000 level, which is probably a more realistic level. That would divorce Shanghai from the mad, mad, mad speculation that began this spring.

Shanghai finding a proper level can only be good for other equities around the world, and so will naturally make an impact on the S&P 500, which we will continue to look at for a trading opportunity.

We are not confident that the plunge in crude oil is over. Rather today it is trading on topical issues. The immediate issue driving the rise today is the expectation that U.S. inventories will decline by about 300,000 barrels.

That’s scarcely a drop in the bucket in a world that is producing around 2.5 million surplus barrels per day. But, traders can be touchy, and there was a fair amount of short covering and some bargain buying.

"Essentially, we see prices staying lower for longer, but that is a function of crude supply response, primarily from the U.S., which remarkably has not shown any signs of slowing at the moment," said Virendra Chauhan, an analyst at consultancy Energy Aspects, in a discussion in the Reuters Global Oil Forum. 

Regardless of what you’re trading now, or thinking of trading, we will be keeping an eagle eye on the Fed meeting now under way. It will release its preliminary comments and hold the usual press conference tomorrow afternoon in Washington.

It’s hard to say if trading in gold today was simply short covering execution or if traders are building in a farther horizon for a Federal Reserve rate hike. Regular trading generated a small rise in gold, an up-move that experienced some denting because of U.S. dollar strength.

Many analysts have settled on the idea that China’s equities woes and a commodities slump will make it less imperative that the Fed should raise rates.

We are thinking, however, that the Fed is contemplating the rate hike as a preemptive move designed to give them some maneuvering capability should they need to again have to step into the breach created by the incoherent fiscal policy the central bank must contend with.

With rates near zero right now, should conditions arise where a rate cut is required, well, the Fed will not have any options except to implement negative rates. Negative rates essentially charge commercial and investment banks a fee for not lending money.

“A negative interest rate means the central bank and perhaps private banks will charge negative interest: instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank. This is intended to incentivize banks to lend money more freely and businesses and individuals to invest, lend, and spend money rather than pay a fee to keep it safe.” (http://www.investopedia.com/terms/n/negative-interest-rate-policy-nirp.asp#ixzz3hD5Otv9u)

The world has to be very careful in the next few years to make sure that when the next “cyclical” recession occurs, there are tools in the toolbox to counter it aside from negative rates, which have their own set of problems and pitfalls.

Wishing you as always, good trading,