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A Raft of Bad Data Sends Global Stock Prices Higher

A Raft of Bad Data Sends Global Stock Prices Higher

2015-10-16 13:01:00
James Stanley, Currency Strategist
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Summary:

  • A rough week of data has propelled global stock prices higher, as hopes of ‘looser for longer’ reign supreme across global markets.
  • Chinese data has been especially painful, and Chinese GDP on Monday morning (Sunday night in the US) could set the tone for risk trends throughout the week.
  • The prevailing thought is now that the Fed is backing off of a 2015 rate hike; but we don’t yet know that for sure. Fedspeak next week could provide significant volatility.

1. It’s been an interesting week across global markets, with the big events being the massive drop in the US Dollar (which likely isn’t yet over, as outlined by our own Christopher Vecchio this morning) combined with the disappointing data prints around-the-world. This was the first full week that Chinese markets were open after the Golden Week holiday, and we saw quite a bit of news out of the economy. We've also seen the second largest buying spree in silver in 12 years, as pointed out by our own Jamie Saettele.

On Monday, we heard of fresh stimulus announcements that could be positioned as a form of ‘Chinese QE.’ This is an extension of a pilot program in which banks can pledge a variety of assets like other bank loans as collateral with the Central Bank. The pilot had been running in Shandong and Guangdong, but in the announcement on Monday we found out that this program was going to be rolled out to nine more provinces, including Beijing and Shanghai.

But this was followed by a blowout print on Tuesday that saw Chinese imports decline by more than 1/5th, a -20.4% contraction while exports disappointed as well. This is more than evidence of slowdown in Asia, this is a direct illustration of contraction: Such a dramatic drop in imports spells problems for producers that export to the economy, and this week we’ve heard from plenty of American companies blaming an Asian-slowdown on their missed Earnings announcements. This isn’t likely to stop anytime soon as we’re in the midst of earnings season in the US.

On Wednesday, we got even more disappointing Chinese data as inflation came in below expectations, printing at 1.6% v/s an expectation of 1.8%. While this isn’t nearly as big of a miss as the trade data from the day before, this is very discouraging for those 7% growth targets that the Chinese economy is clinging on to. The Chinese government targets 3% inflation (versus the Fed and ECB targeting 2%) and we can now add the Chinese economy to the growing list of lackluster inflation/negative inflation/deflation theme. We’ve already seen deflation out of Japan, Europe and Germany.

The net result of all of this data: Chinese equity markets (and many around-the-world) have throttled higher; likely under the presumption that more easing is coming down the road, particularly in the form of interest rate cuts and cuts to bank reserve requirements for the Chinese economy.

We get the big print out of China on Monday morning (Sunday night at 10PM EDT in the United States): Chinese GDP. The expectation is for a 6.8% print, just below the 7% target of the Chinese government, and big misses or beats of this number can inspire significant volatility. If we do happen to see a big miss, fully expect more announcements to follow later in the week of additional stimulus measures, or perhaps even rate or reserve-requirement cuts.

The most attractive venue for trading this theme has been, without a doubt, in Gold. As this convergence of bad news around the world has hit global markets, expectations for rate hikes out of the United States have been getting kicked further and further into the future. And to be sure, this was likely the most dominating pressure point when global markets were selling off over the past six weeks, as we outlined in Are Global Markets Losing Confidence in the Fed.

Gold prices have put in some significant strength this week, and after throttling through multiple resistance levels we’ve seen a temporary pause in the up-trend as prices have resisted at the 50% Fibonacci retracement of the most recent major move. The price zone at $1,170 could be pivotal moving forward as this was the previous swing-high and a critical point of resistance. If prices can move back towards this prior point of resistance today or early next week, this could offer a top-side entry that could be really attractive in a ‘looser for longer’ type of environment.

Gold Technical Analysis (click below for larger image)

A Raft of Bad Data Sends Global Stock Prices Higher

Created with Marketscope/Trading Station II; prepared by James Stanley

2. Here Comes the ECB: It’s amazing the difference that a few months can make…

Earlier in the summer, much of the world was debating ‘Grexit’ scenarios and the potential dissolution of the European Union; only to be replaced by many calling the Euro a ‘safe haven’ currency a few months later as Chinese markets began facing turbulence. But, the Euro was probably not being used as a safe-haven, and more likely we were seeing carry trades unwind as risk-aversion picked up in the global economy.

The logic of such a situation makes perfect sense: As Mario Draghi announced European QE last year, investors sold Euros in anticipation of an upcoming QE program. US Dollars were a very attractive candidate for selling Euros, as the Federal Reserve had already ended QE and had begun talking up this September of 2015 rate hike, and as European QE came online this only served to extend the down-trend in the pair. This offered one of those beautiful situations of divergent monetary policy where the FX trader can simply sit in the trend and add to the position on pull backs. This lasted for a while, a little over ten months to be exact, as the EUR/USD dropped by ~3500 pips. But after bottoming in March, EUR/USD began creeping higher.

Does this mean that the down-trend is over? No. But this does mean that what we know now is probably already factored into price. And as the Fed backs off of rate hikes, we’re going to need additional reasons to sell the Euro to see the down-trend in the pair come back; as in, if the ECB announces more QE, there is reason for EUR/USD to move lower… and as the European economy grapples with deflation despite the fact that QE is running full-throttle, the odds of this happening increase nicely.

With the ECB meeting on Thursday, we may hear more on this theme…

The technical setup in EUR/USD is not ready for trend-resumption yet. We’re still working on a 7-month plus bear-flag formation (shown below). One operative way of timing such a move is with SSI, or the Speculative Sentiment Index. Should the European Central Bank make overtures towards additional stimulus, this is when we can see sentiment flip as that down-trend goes back into resumption. We outlined this strategy in the article, Is the Euro Downtrend Ready for Resumption; but until this criteria is met, we’re trading in a bear-flag.

When Will the EUR/USD Down-Trend be Ready for Resumption?

A Raft of Bad Data Sends Global Stock Prices Higher

Created with Marketscope/Trading Station II; prepared by James Stanley

3. The Primary Driver Across Global Markets Continues to Be Central Bank Support: If the moves over the past two months proves anything, it’s that Central Bank support continues to be the primary driver behind global risk trends.

The Fed’s hawkish-hold in September spooked markets: The prospect of tighter monetary policy in the United States while much of the rest of the economic world faced difficulty was enough to add fire risk-off trends.

But the further we moved away from the September Fed meeting, and more bad data that we saw out of the global economy, the less likely investors felt that we’d actually see anything anytime soon. At this point, a 2015 rate-hike is pretty much priced-out of most markets with March 2016 appearing as the next most likely meeting for a hike. But we don’t know this yet, and we haven’t heard this directly from the Fed. If the Fed does, in fact, back off – those trends of USD weakness are likely to shine, especially in avenues such as Gold. But should the Fed continue talking up this aggressive stance towards rate hikes, we could quickly and easily see ‘risk-off’ trends reverse.

We hear from Lael Brainard of the Fed on Monday, followed by Jeffrey Lacker later in the day. Tuesday sees Mr. William Dudley followed by the head of the Fed herself, Ms. Janet Yellen at 11 AM. And then Jerome Powell speaks on Wednesday at 1:30 PM to close out the Fed speak for the week, and Thursday brings on ECB and Friday sees Canadian CPI.

Next week will likely be active. For now, the S&P is continuing to trade higher, and the 2021 resistance level that we’ve been pointing out over the past few weeks (that also functioned as the September FOMC swing-high) is now coming in as intra-day support.

S&P 500 Technical Outlook (click below for larger image)

A Raft of Bad Data Sends Global Stock Prices Higher

Created with Marketscope/Trading Station II; prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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