The deterioration of global risk sentiment continues apace, this is as bad a decline as we’ve seen for quite some time, and depending on where we close at the end of the month this could be as bad as it’s been since the start of the bull market rally in March 2009. For the record, it would take an additional decline of another 20 points or so on the S&P 500 to fully realise that statistic. Does it really matter though? This is quite enough as far as most would be concerned, the devastation wrought by the Chinese devaluation (for the layman, the Chinese economy is doing badly enough for the authorities to take the extraordinary step that they did) on the commodity complex first and then the wider equity market has rippled across the globe. As I’ve written many times in these blogs, corrections by themselves are by no means a bad thing for the longer term health of markets. The question I’ve been asked a few times in recent days is… is this the end? I would say no, it doesn’t have the feel of a market top, but this is certainly the sort of correction one might expect to see during the mature phase of a bull market. As such I think we are approaching levels where buying opportunities will crop up. Looking at my longer term chart I could easily see the S&P 500 approaching 1850 which would be a further 4-5% decline before any sustainable bounce, but I would not be shocked to see intermediary bounces before that happens. In summary, hang on to your hats, it could be a rocky road in the weeks ahead!
As we have noted all this year, the euro appears to have become the go-to safe haven currency, perhaps usurping the Japanese yen which for the last few decades has fulfilled that role (prior to that it was probably the Swiss franc). EUR/USD has all but hit 1.15, and the possibility exists that before all is said and done, and risk sentiment stabilises, we may see 1.18. But if I were still trading a book I would probably close my eyes and sell the bejeezuz out of EUR/USD at 1.18. In the meantime the euro has strongly outperformed the dollar, Japanese yen and pound sterling. This is the inevitable consequence of the ECB’s actions (read quantitative easing) to assist the recovery of the Eurozone economic area.
They say a picture paints a thousand words, the Chinese equity markets are down by more than 40% since early June. That’s a grizzly bear of a market! See the chart below, but note that the index is approaching solid support levels – the price range before the break out late last year. These are volatile markets for currencies so some violent swings are to be expected, but the general tone of weakening dollar, strengthening Japanese yen and euro, and rapidly depreciating emerging market currencies and also commodity rich currencies like the Australian dollar should continue to dominate until risk sentiment stabilises. As I said.. hang on to your hats…
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