Bias is Down For Indices

STOCK INDEX FUTURES

Global equity markets overnight were lower with the exception the TOPIX which reversed a trend of declines with a gain of 2.3%. From Asia China’s Evergrande has stirred uncertainty again with its failure (subject to debate) to pay an interest payment in Hong Kong yesterday. While the $305 billion debt by the Chinese real estate company is reportedly the largest real estate company debt tally in the world that number is not so large that the Chinese government will be unable to handle the dismantling of the company. Certainly, world financial markets are on edge, but local and provincial governments reportedly receive 40% of their revenues from real estate sales and therefore China is likely working behind the scenes to stop any contagion before it gathers momentum. A busy day of Fed commentary will include Fed Chair Powell, Cleveland Fed President Mester, Fed Governor Bowman, Fed Vice Chair Clarida and Kansas City Fed President George speaking during morning US trading hours while Atlanta Fed President Bostic will speak during the afternoon.

S&P 500: The equity markets typically “hate” uncertainty and there is plenty of uncertainty arising from the Chinese real estate company fiasco, disappointing US weekly jobless claims, escalating supply chain issues from backed up ports, and treasury yields bordering on 3-month highs. However, there does not appear to be a major negative catalyst headline to escalate initial negative sentiment into an anxiety “event”. Nonetheless, the bias is down with key support seen at 4400 and then again down at 4385.75.

CURRENCY FUTURES

DOLLAR: While the dollar fell back from this week’s highs yesterday, fundamental conditions in the market this morning seem to favor the bull camp. Bullish fundamental news is seen in the form of uncertainty from China, yesterday’s disappointing US jobs data, and the prospect of German money seeking the safety of US treasuries ahead of their Sunday election. Therefore, we see support in the December dollar index at 92.96 and would not rule out a rally today up to 93.44.

EURO: The euro recently has not concentrated its trading focus on the “recovery currency” theme but that theme today could apply pressure to the currency. Furthermore, the likelihood of a further shift left in the German government from the election Sunday provides an added measure of political pressure on the currency. Additional pressure on the euro is seen from very disappointing German manufacturing, services, and composite PMI readings for September. Therefore, we see downside targeting of 1.1733 and then again down at 1.1700.

YEN: It is a very negative sign for the Yen to have broken out to the downside in the face of a situation where money fleeing China could have flowed into Japan. In fact, the initial Evergrande headline scare prompted a sharp rally in the Yen but that focus appears to have dissipated. Near term downside targeting in the December Yen is now seen at 90.35.

SWISS: With the Swiss holding within the upper portion of the past 7 days trading range, the currency holding up in the face of yesterday’s disappointing US claims figures and the dollar seemingly poised for flight to quality lift off the Chinese situation, the Swiss could have been under significant pressure today. However, the Swiss is likely finding support from German money flowing out of the country and given the potential ramifications of a Chinese financial contagion, it is also likely that some classic historical type of global financial flight to quality support will continue to flow toward the Swiss. Unfortunately, the dollar is likely to garner most of the flight to quality buying but we suspect the Swiss will hold support of 1.0794.

CANADIAN DOLLAR: Seeing the Canadian hold near 6-day highs suggest that the currency may tighten its positive correlation with the dollar into the final act of the Evergrande saga. Limiting the Canadian on the upside is ongoing uncertainty from the election counting process, but the significant range up move yesterday certainly serves to put the bear camp back on its heels.

INTEREST RATES

The action in the treasury markets this morning partially confounds the bull camp, as a downside breakout in the face of escalating uncertainty from the Chinese real estate fiasco would ordinarily have supported prices. Perhaps the markets are sensing a slow glacial shift in US money policies and the “bullish resiliency” of the Bond market is finally dissipating. In fact, upticks in both claims reports yesterday would have ordinarily resulted in a significant range up breakout move but instead prices failed to make a higher high versus the Wednesday high! However, the treasury markets remain very volatile with yields yesterday approaching 3-month lows and yields this morning approaching 2 1/2 month highs! Overnight, treasury yields reached the highest level since August 12th in the long bond, but it is possible that money leaving Germany ahead of the German election on Sunday (fearful of a leftist shift in their government) will be attracted by yields offered in the US. While some traders are suggesting the weakness in treasury prices is the result of traders leading off on-the-subject of “tapering”, that sentiment might be premature given the situation in China and daily US infections this week hovering above 120,000. However, there could be some light shed on the tapering issue with 3 Fed speeches today likely to present the Fed’s intention to guide the markets through tapering without concentrated anxiety and volatility. The North American session will have one major economic report of importance in the form of an August reading on US new home sales that are forecast to have a minimal downtick from July’s 708,000 annualized rate.