The 5.8% decline in the Shanghai Composite, the $2.50 decline in crude oil to $65.80 ($7.00 decline since Friday) and broad losses in govt bond yields are amid the many manifestations of deepening risk aversion in the aftermath of disappointing US consumer confidence and Colonial Bank’s failure, which is the 5th largest bank failure in the US. Markets shrugged the first increase in US industrial production in 9 months and focused on renewed declines in US consumer sentiment. The resilience of the US consumer is paramount in stabilizing waning US corporate revenues.
FACT: Although over 61% of S&P500 companies beat their Q2 earnings estimates, about 75% reported lower sales. This means that exceedingly low estimates and aggressive cost-cutting were the two main factors in propping earnings season. At which point will recovering US demand must come to the rescue of falling sales and dissipating profit margins is the question for the current quarter. Hence, the importance of US consumers and their employment prospects stands more relevant than recovery in industrial production
Sterling Signal More Losses Renewed declines in UK house prices as measured by Rightmove have intensified sterling’s selloff as compounded by overall risk aversion and last week’s dovish statements from the Bank of England. Sterling drops below its 50-day MA (currently $1.64) for the first time since March—when the Federal Reserve announced the purchases of US treasuries, an event that triggered the 4-month sell-off in the US currency and simultaneously cemented an intermediate bottom in GBP. But now that the Fed has signalled slower Treasury purchases at the same time that the extended its quantitative easing, sterling is set to break below this key technical level, extending losses towards $1.6250 and $1.5800. Last week’s BoE dovish justification to expand QE not only stated inflation would undershoot the 2% target in 2 years, but also stated the possibility of sub-1.0% inflation as early as autumn. The week’s CPI and retail sales data are considered viable fundamental catalysts for prolonged GBP losses.
Many have called attention to the Shanghai Composite’ failure to recover above that 1-day 5% decline of June 27. Today, the index is 17% below its all time high, reaching 7-week lows. The subsequent impact on emerging market bourses is gradually weighing on commodities, making energy the biggest victim.
Plunging Oil Prices are considered to be the more significant price action for any notable recovery in the US currency to take place. While many did see previous pullbacks in gold, equities and bond yields over the past 3 weeks, oil prices remained generally supported partly due to sustainable gains in emerging market bourses. But with the prolonged losses in EM and broadening losses in metals, the ensuing sell-off carries the technical properties required for extending losses towards $63.9500 and the key support of $58.00—38% retracement of the rally from the $33.49 low to the $73.40 high.
Maintaining our CAD-negative stance as oil prices accelerate their losses and equities broaden selling into G-5 indices. But interventionist rhetoric from CAD officials and deteriorating figures from Canada (payrolls and housing starts) have also accelerated selling in the loonie. Wednesday’s July CPI figures will likely validate the case for the BoC’s quantitative easing as annual CPI remains below 2.0%.
Regards,
Eric Chang
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