Saturday, August 29, 2015

Chinese Medicine Not Impressing Dr. Copper

by Dan Norcini
Trader Dan

Dr. Copper apparently does not approve of the prescription ordered by the Chinese authorities to stem the slowdown in that nation, namely another 25 basis point interest rate reduction and a lowering of bank reserve requirements.
The red metal cannot sustain any upside action for long before sellers emerge to whack it again.
[...] This is number one of my THREE BIG C’s, Copper, Crude oil and Cotton.
So what exactly are the other two C’s telling us?
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Black Monday? Panicked Faces Yet to Come. Mike “Mish” Shedlock

Oil Surges To $45 After Saudi Troops Invade Yemen

For the 3rd day in a row, crude oil prices are spiking as the short squeeze morphs into a war premium. Heberler reports that Saudi ground troops have entered Northern Yemen and seized control of two areas in the Saada province. WTI is now above $45...
As we noted previously, boots have been on the ground there (and tank tracks) since early July...

But, as Haberler reports, forces seize control of two areas in Yemen’s Saada province in the first actual ground offensive by The Saudis...(more)

Everything you’ve heard about China’s stock market crash is wrong

This week’s Chinese stock market implosion has been widely viewed as a reaction to the Chinese government’s devaluing the yuan on Aug. 11—a move many presume was a frenzied bid to lower export prices and strengthen the economy.

This interpretation doesn’t stand up to scrutiny. First, Chinese investors haven’t been investing based on how the economy is doing, but rather, based on what they think the government will do to prop up the market. The crash, termed “Black Monday,” was more likely a reaction to the central bank’s failure over the weekend to announce a widely expected cut to the bank reserve requirement since previous cuts in February and April had boosted stock prices. The government eventually caved and announced a cut on Tuesday (Aug. 25).  (more)

There's A 47% Chance Of A Recession, But It's Not Worrying These Analysts

In a new report, Bank of America analyst Ethan Harris discussed the recent market action in response to China and looked at the probability that the S&P 500’s decline is indicative of a recession on the horizon in the United States.
Despite a relatively high score on the firm’s recession probability indicator, Harris urges traders not to panic about the possibility of a recession.

Rate Hike Coming

Despite the injection of fear into the markets during the past week, Harris does not believe that the FOMC will allow stock market turbulence to influence its decision to raise rates on September 17. The latest employment numbers indicate a very strong labor market, and the FOMC has been emphasizing a strong jobs market as the key to its eventual target of 2 percent inflation.
In addition, the U.S. GDP growth rate of 3.7 percent in Q2, as well as Bank of America’s projected 2.8 percent Q3 GDP growth rate, indicates that the underlying U.S. economy is strong, regardless of the movement of the recent shakiness of the S&P 500.

Not Completely Disconnected

Although there is no direct link between equity market movement and underlying economic strength, there are ways that the stock market indirectly influences the economy. However, Bank of America determined that only 2 cents out of every $1 of financial market wealth goes to new consumption.
“Using our model, we estimate that the S&P 500 would need to decline to an index level of 1600 (implying another 20 percent drop from today’s level) and stay there to shave off a full one pp from household spending growth,” Harris added.

Recession Watch

The firm’s recession probability model is currently indicating a 47 percent chance of a U.S. recession sometime in the next 12 months. However, Harris cautioned that the indicator is prone to false signals. He included an old Paul Samuelson quote about using the stock market to predict recessions: “The stock market has called nine out of the last five recessions,” Samuelson famously joked.

The Bank of America recession indicator peaked at around 59 percent back in 2011 without any subsequent recession.