The start of the week look abysmal as we nearly entered correction territory in US equities. The S&P plunging past the 8% down mark. All due to the devaluation of the Chinese Yuan late on Sunday, was this currency manipulation? Trump thinks so as the Yuan moved passed the 7 level to the USD (greenback). This caused a flee to safety and safe haven inflows which punched interest rates lower as global fear struck markets. The trade war possibilities transformed into a potential currency war scenario.

The VIX popped 25% and NYSE decliners led advancers by more than a 10:1 margin. Trump wants more aggressive rate-cutting and monetary easing and the futures markets priced in a 25 basis point rate cut in September, with another rate cut priced in by the end of 2019. Along with additional rate cuts in 2020.  It seems that only NRP will satisfy Trump in his attempt to take the reigns on this trade war with a weaker dollar.  Also, the entire German yield curve entered into negative territory for the first time.

China was labeled a currency manipulator by the US on Monday, which did not go well with the Asian superpower as they suspended the purchase of US agricultural goods.

Central banks too control of markets this week as Asian Central Banks surprised the markets with more dovish tones as equities attempted to rally after Monday’s rough start. The more than expected rate cut and dovish language helped global markets rebound this week on weaker volume. Wednesday’s outsized move lower in global interest rates was exacerbated by renewed worries of a full-blown currency war and an accompanying “race to the bottom” for central banks.

The US was not too accommodative of this global fear rising, President Trump was on the wire with little concern calling the US Fed incompetent as he has before. The man just wants a weaker dollar and lower rates so markets can rally and he can get reelected. The Fed is reluctant to do so, as it will jeopardize the economic conditions in the US. Trump shared his opinion on the dollar being overvalued and on Friday he mentioned, inadvertently that he does have the power to drop the dollar and he could if he wanted to.

The PBOC let the Yuan do its job and continue past 7 to the USD, while Trump and his administration immediately retaliated by postponing the licenses they were going to give US companies to restart a business with the telecom giant, Huawei. Trump also reiterated that September trade talks are still on despite all of this, however, he also mentioned that he does not think China is ready for a deal. This all occurring while tension grew in Hong Kong.

The protests that are planned in Hong Kong this weekend may occupy so much ground that it may stretch to the international airport. Hong Kong’s Chief Executive Lam acknowledged the resulting downward economic pressure is serious and her administration is considering implementing emergency measures to boost the domestic economy.

In terms of Brexit news, we saw the UK GDP print a negative number for the first time in 6 years and the GBP get obliterated.

In other global commodity markets, we saw gold break through the $1500 level for the first time in 6 years, which was moderately aided by the weaker USD. The USD did not drop that much but euphoria is spreading through the gold market and it seems a little overbought testing the $1520 level time and time again. The retail bus may be full on this trade and we could gold back in the $1470’s yet again while we anticipate rate cuts.

Oil too dropped amid China and Iran news, apparent buying of Iranian oil by China helped the price nearly break below the $50.00 level again. Saudi Arabia instantly felt the burn and stepped into jawbone markets. It was not just them but OPEC+ talking about more production cuts. We’ve seen this before. The US 2-10 year yield spread finished the week below 10 bps. In a volatile week the S&P ended down 0.5%, the DJIA lost 0.8%, and the Nasdaq fell 0.6%.

Here is a look of last week’s stock market on a daily basis (red vertical lines split days).

Currency manipulation

Stock Market and Sector Overview

Here is a break down of the weekly performance in various stock market sectors (top chart):

  • Energy stocks down 0.27%
  • Technology up 2.00%
  • Financials up 0.33%
  • Retail up 0.42%
  • Utilities up 1.20%

Overview of key markets last week (bottom chart):

  • Crude oil down 0.66%
  • S&P500 up 1.74%
  • Silver was up 2.82%
  • Gold up 2.15%
  • US dollar down 0.02%

Currency manipulation


Options Trade of the Week

With our FIVE trade taken out on a trailing stop after an early to mid-week equity rebound. We found ourselves in an interesting XLU (Utility Sector) Long position. This was originally planned as a hedge trade as other markets slumped we expected a rebound in utilities, which played in our favor on Monday and took off the rest of the week on strong equities. The middle of the week had a high volume on the rally candles. However, as we edged through the end, long wicks and dojis started to form. We are trailing stops but this may be a capitulation at this top. Our ultimate target is $61.50 and beyond to fresh all-time highs on Utilities.

There is a potential for long utilities due to the recent weakness in the equity markets, utilities are a hedge trade if equities keep dropping. The volume on the swings higher recently has been good but we are looking for a retrace into the $59-59.50 area for the long as momentum continues to drift up.
-Long Idea $59-59.50
-Options trade of at least 90-180 days of the time value
-Long Call strike at 59-60
-Short Call at 65 (skip this step if outright bullish)
-Stop below $58.50

Currency manipulation

Weekly Economic Calendar

Quiet week ahead in terms of high impact news. Not much high impact news out of the US, however, we can expect a few Trump tape bombs, trade news, Brexit news or monetary policy news for that matter.
Monday, no high impact events.
Tuesday, Average earnings index out of the UK. CPI data out of the US and wage price index out of Australia.
Wednesday, CPI data out of the UK, employment numbers out of Australia.
Thursday, retail sales data out of the US and the UK.

Currency manipulation

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