by Pinchas Cohen
Key Events
US equities ended a two day slide yesterday. However, while the S&P 500 Index etched out a gain, it was led by defensive sectors. Utilities advanced 1.19 percent, followed by a 0.57 percent rise in Consumer Staples stocks. Most of the sectors that generally demonstrate investor faith in the economy fell, led by a 0.59 percent decline for Energy stocks, followed by a 0.34 percent slip in Industrials and a 0.03 percent dip for Technology shares.
Global Financial Affairs
This morning, Asian stocks dropped across the board. Japan’s TOPIX gapped down to extend a three day slide, as investors appear to have developed a sudden fear of heights after the Japanese equity index reached a 25-year apex.
China’s Shanghai Composite formed a powerful bearish Engulfing Pattern, which may be developing a much larger H&S top, after three economic releases earlier today—industrial production, fixed asset investment and retail sales—suggested the Asian giant's economy is slowing.
A selloff in China’s sovereign bonds resumed. Its 10-year yield to pierced through the 4 percent milestone for the first time in more than three years, though today’s trading formed a bearish Shooting Star, suggesting the pessimism may be exaggerated. That technical signal jibes with data released today showing October’s dip was just temporary, and China’s economy should resume its momentum at a solid rate and is on track for its first full-year acceleration in seven years.
European stocks, including the STOXX 600 Index, have been trying to make headway against the headwinds from the east, as investors continue to digest their opening entrée, the ongoing prospect of US tax reform. However, they await the second course, a slew of appearances by global central bankers at an ECB conference today, including the ECB’s Mario Draghi, the Fed’s Janet Yellen, the BoE’s Mark Carney and BoJ’s Haruhiko Kuroda . Kuroda said yesterday that not only does the BoJ have no intention of removing accommodation, it will also persist with “powerful monetary easing," in a sharp divergence to other major central banks in order to meet expectations for inflation.
Investors may also be leaving room for dessert: US inflation and retail sales reports will be released on Wednesday. Both have the potential to impact interest rates come December.
Following equity market declines—after stocks reached multi-decade highs in Japan and US indices hit more than 50 record highs this year alone—some investors are preparing for added risk and volatility. CalPERS, the California Public Employees' Retirement System pension fund, which is the largest such entity in the US and among the biggest in the world is slashing its stock holdings while doubling its bond holdings. This bearish positioning echoes yesterday’s leadership by defensive stocks.
As well, the 10-year US Treasury yesterday formed a bearish Hanging-Man. A sell signal for this asset would be provided with the confirmation of a close below its lower body. So far, it's been struggling at the very bottom of the Hanging Man’s real body. A confirmation would signal a decline, which has the potential to complete a much more serious, H&S top.
The pound extended yesterday’s 0.55 percent gap-down drop, as political pressure continue to weigh on PM Theresa May. Her administration’s scandals have reached a comparable level to those coming from the White House, providing stiff competition. It was fitting, then, that she accused Russian President Vladimir Putin of meddling with UK elections and generating fake news.
Venezuela, which has one of the world’s riskiest sovereign debt credit ratings, was declared in selective default by S&P Global Ratings after the South American country missed two interest payments on its debt. The nation, home to the world’s largest oil reserves, owes investors about $200 million. It failed to make those payments at the end of a 30-day grace period which expired over the weekend. In a statement, S&P said it lowered the country’s rating to SD.
The troubles in Venezuela may be the fundamental driver behind the commodity's bullish falling flag whose upside breakout would signal another near-$4 advance.
Up Ahead
- This week’s data includes GDP reports for Japan, Germany, Italy and the euro area, CPI for the U.S., U.K. and Spain, along with Aussie jobs and wages.
- BOE officials address the bank’s future on Thursday, while Draghi speaks a second time Friday. A string of Fed appearances may further illuminate the FOMC’s commitment to a December hike.
Market Moves
Stocks
- Euro Stoxx 50 contracts fell less than 0.1 percent at 8:24 a.m. Frankfurt time.
- S&P 500 Futures were little changed. The US index gauge added 0.1 percent on Monday.
- The Nikkei 225 closed flat while the TOPIX lost 0.3 percent in a fourth day of consolidations.
- Hong Kong’s Hang Seng Index was flat, while the Shanghai Composite slid 0.5 percent.
- Australia’s S&P/ASX 200 index dropped 0.9 percent and the KOSPI in Seoul slid 0.1 percent.
- The MSCI Asia Pacific Index fell 0.3 percent in a third day of losses.
Currencies
- The Dollar Index dropped 0.14 percent to 94.39, slightly rebounding after piercing the H&S bottom’s neckline, the line connecting the previous two lows, still considered part of the downtrend.
- The British pound was at $1.3119 after losing 0.6 percent.
- The yen was flat at 113.63 per dollar.
- The euro was little changed at $1.1675.
- The Aussie dollar hit a four-month low of 76.10 U.S. cents in trading Tuesday, after losing 0.5 percent during the previous session. It hit 76.39 U.S. cents after figures showing improving business confidence, but dialed back after the China data.
Bonds
- The yield on 10-year Treasuries was steady at 2.40 percent.
- Australia’s 10-year yield gained three basis points to 2.65 percent.
Commodities
- West Texas Intermediate crude slid 0.3 percent to $56.58 a barrel.
- Gold was little changed at $1,276.59 an ounce.