Technical Analysis by Hiwayfx

[HiWayFX]

The Market Chaos Is All Because of China

First, on Monday, US stocks had a flash crash-like open where the S&P 500 plunged out of the gates, only to recover for the rest of the regular trading session, and plunge further near the close. Today most media outlets and stock analysts were optimistic with headlines such as "Stocks Have Their Biggest Rally This Year," before the Dow and S&P crashed at the close again.

15-minute chart of S&P 500 Index
Given the lower and lower trading volumes on US exchanges since 2008 and the start of QE, the closing price action must be considered as the most important price action of the day. Day after day the market shows it's hand only in the last hour of trading and sometimes even the last minutes. This is why analysts are constantly getting it wrong, because the market usually does something entirely different at the end of trading, and also because futures markets stay open an additional 15 minutes past the cash market close.

Mohamed El-Erian summed it up well on his Facebook page today;
Today’s reversal in US stocks was particularly worrisome because it came after a seemingly perfect sequential setup: (i) Stabilization in Asian stock markets (outside of China); (ii) monetary policy stimulus by the PBoC, China’s central bank; (iii) a strong bounce in Europe; and (iv) a solid start and mid-session for US markets.
Basically the same thing is happening in China's economy as happened in 2008 with the US economy. And back then, when the US caught the flu, the whole world caught a cold. With China being the world's second biggest economy after the US, we will likely see European and US markets continue to roughly follow the situation in China.
Today, China is having the long-awaited hangover of a credit fuelled boom which was aided and spun higher by the Chinese government itself. In 2008, this is the same thing that happened in the US. What followed was a desperate and quickly conceived plan to prop up the economy with further credit stimulus (quantitative easing and interest rate cuts).
If history is rhyming, then the next chapter in this story is for the communist party in China to take similar steps, and cut borrowing costs and stimulate credit markets with cheap money. Given the current experience of quantitative easing in the West, this is a process which will likely stretch out years into the future and will distort and manipulate markets for years to come.

 

[HiWayFX]

Brent climbs by over $1 on crude stock draw, US economic data

Brent crude climbed by more than $1 a barrel on Thursday on an unexpected fall in U.S. crude inventories and a rally in global equity markets, but a stronger dollar capped gains.
Front-month Brent, the global oil benchmark, had gained $1.03 to $44.17 a barrel by 0225 GMT, having ended down 7 cents at $43.14 on Wednesday.
U.S. crude's front-month contract rose 91 cents to $39.51 a barrel, after settling down 71 cents, or 1.8 percent, at $38.60 a barrel.
"The local region is ... shrugging off some of the currency impact, instead pricing in the draws on inventory and a better than expected industrial outlook," said Michael McCarthy, chief market strategist at CMC Markets in Australia.

U.S. crude inventories fell 5.5 million barrels in the week to Aug. 21, the biggest one-week decline since early June, data from the Energy Information Administration showed on Wednesday. That was in line with the industry group the American Petroleum Institute's late-Tuesday report.
Analysts had expected an increase of 1 million barrels.
Wang Tao, a Reuters market analyst for commodities and energy, said Brent crude may approach resistance at $44.64 per barrel again, as its bounce from the Aug. 24 low of $42.23 seemed to be incomplete.

In other financial markets, a rebound on Wall Street helped soothe investors' tattered nerves, while the dollar rallied as risk aversion eased.
Regaining confidence after a sharp rebound on Wall Street where investors had been hit by worries over China's faltering economy, London copper futures also strengthened on Thursday.
Data released on Wednesday showed U.S. non-defence capital goods orders excluding aircraft, which is a proxy for business investment, increased 2.2 percent in July, the biggest rise since June last year and handily beating expectations.
"This suggests that business investment has continued to pick up at the beginning of the third quarter following a solid finish to the second quarter," ANZ said in a morning note on Thursday, referring to the U.S. core capital goods order data.

 

[HiWayFX]

EUR/USD: wave analysis

The euro is correcting, a growth in the pair is expected. Assumingly, the third wave of the senior level 3 continues forming. Locally, the first wave of the junior level i of 3 in a form of a diagonal with extended fifth wave seemed to have finished, and a correction within wave ii of 3 started, which at present reached 50% Fibonacci (1.1260). If the assumption is correct, the pair continues growing towards 1.1850, 1.2000 after the correction ends. A critical for this scenario is the level of 1.0804, the breakdown of which would allow the pair to fall to 1.0600, 1.0500.

 

[HiWayFX]

GBP/USD: waiting for important news

Today, starting from 11:30 am (GMT +3) a bunch of important news for July – August is due in the UK. If positive forecasts are confirmed, the Pound is going to continue its upward dynamics, yet correctional. Later in the day, from 3:55 pm (GMT +3) important news are due in the US. The most important publication for this week, however, is the data on NFPR, which is due on Friday.
Markets are expecting the Fed to increase its interest rates this month. At the same time, a possible delay in the interest rates hike in the UK due to low inflation in the country would increase the pressure on the GBP/USD pair.
Today, a high volatility is expected, which should be taken into consideration when making trading decisions.

Support and resistance
The pair broke down important support levels at 1.5600 (38.2% Fibonacci), 1.5550 (ЕМА200 on the daily chart), 1.5520 (ЕМА144). On the daily, weekly and monthly charts OsMA and Stochastic turned to sales. On the 4-hour chart, the indicators give a buy signal confirming the correction continuation, which can last to the levels of 1.5500, 1.5550. If fall continues, the next targets can be the levels of 1.5230 (23.6% Fibonacci), 1.5100, 1.4600 (2015 lows).
Support levels: 1.5350, 1.5230.
Resistance levels: 1.5500, 1.5520, 1.5550, 1.5600.
Source: Claws&Horns

 

[HiWayFX]

Will the Global Economy Ever Return to Growth?

The ECB announced yesterday not only that the growth of the Eurozone will remain subdued and inflation will remain below target, but also that they will increase quantitative easing and may extend the end of the program as well.
The Euro of course tanked on the news, but this is most alarming because of how there is nothing anyone can do in the world to promote growth and inflation. Not one central bank has been successful at it. And many believe that the Fed will err by raising rates this month even though the US economy is not that strong.

There is a whole list of factors contributing to a renewed financial crisis, with China's collapse being the most obvious one. The recent huge movements in global stocks are one sign that something is wrong in the global economy.
In his monthly letter to investors, Bill Gross shows little confidence that there is anywhere safe to hide in the financial world, not stocks and not even bonds. Your best bet, he says, is staying in cash and getting a return of your capital than getting a return on your capital.
Finance based capitalism with its zero bound interest rates has now produced global imbalances that impair productive growth and with it the chances for “old normal” prosperity. Whether you are tall or short, or your portfolio big or small, they’re not going up as much as you hope they would over the foreseeable future.
Besides this, there are other factors that mean the current market volatility will stay around for longer:
Fiscal policies
Sovereign debt levels (Greece)
Financial bubbles (elevated equity prices due to QE)
FX volatility (due to distorted money markets)

 

[HiWayFX]

Prime Factors That Could Hinder the German Economy

The driver of Europe's economy is going to be facing huge tests of it's staying power.
China's slowing economy and crashing stock market, along with Volkswagen's diesel engine scandal are sure to put strain on the nation's finances. Data has showed this week that the manufacturing sector and purchasing activity have already suffered.
On Monday, Germany's Services PMI showed a fall to 54.1 in September, which was lower than economists' expectations. More worryingly, August factory orders were shown to have fallen 1.8% versus an expected rise of 0.5% yesterday. On top of all that, depressed energy prices have countered the ECB's quantitate easing program, which was designed to stoke inflation. With rates below zero, and the ECB pretty much out of options besides further easing, there doesn't seem to be strong economic growth on the horizon.
Fallout from VW Scandal

The impact of a hit to Volkswagen's business cannot be underestimated. The German automotive industry accounts for about 10% of GDP, and a large part of that industry focuses on the export market. Data due for release on Thursday should show the effect on exports from the Chinese slowdown, when German exports and trade balance will be reported for the month of August.
Data from Bloomberg shows that domestic growth is on course and should help to offset external factors:

Bloomberg Intelligence’s new real-time tracker of underlying activity points to annualized growth of 2.18 percent in September, suggesting that the German economy expanded in the third quarter at about the same pace as in the previous period. GDP rose 0.4 percent in the three months through June. The European Commission predicted in May that growth would accelerate to 2 percent next year from 1.9 percent in 2015.