MrTopStep's Index Futures Recap

MrTopStep’s Index Futures Recap – Wednesday January 13th

Last night on the globex open, the S&P futures traded at 1922.50, and caught an early bid into the Asian open, and maintained higher prices after the Chinese economic release, making a high at the 1945 area and topping there and chopping in that area during the European session, trading nearly 7 handles off that high into the U.S. cash market open.

At the US regular trading hours open, the S&P was traded at 1939.00 and maintained its pattern over the last few sessions of attempting to find a new high and then selling off as the 1943.25 high failed and offers began to flood the market, and the equity indexes never looked back. Going into the afternoon, every bounce had failed, and the situation began to look concerning as the futures were breaking the recent standard of higher lows, and pushing back toward Tuesday’s RTH and globex lows, smashing through those levels, on down to Monday’s 1892.50 low, took that level out, and pushed on down to 1878.00, more than 60 handles from the cash session open. The rally into the final hour fell short of driving any significant bullish momentum as sell programs took the market lower in the final minutes in the face of a market-on-close imbalance of 170 million to buy, leaving the S&P just 3 handles off the lows.

Overnight the Chinese import/export numbers beat expectations, for which the bar was set fairly low; and in the U.S., economic data was virtually nonexistent. Heading into tomorrow, noteworthy on the calendar will be the Bank of England decision as well as some early numbers in the U.S. with the cash session remaining relatively quiet as far data announcements are concerned.

Given today’s close below Monday’s low, technically the futures still maintain a bearish bias as now the 1861.00 September low could come into play, as well as potentially the 1831.00 low from August.

From Goldman Sachs

In our view, the recent volatility in the China equity markets is unlikely to have a meaningful spillover effect into the credit markets, similar to what we saw during the Chinese equity market volatility last year. What concerns us is the intensification of capital outflow pressures, with the risk of a larger than expected depreciation and rising credit stresses.

We do not think that the depreciation of the RMB is likely to have a meaningful negative impact on Chinese corporates’ credit profiles, based on an analysis we carried out on listed company leverage. Our concern is that the negative impact on risk assets from a larger than expected RMB depreciation could spill over to risk sentiment in the China credit markets, although that is not our base case, as we expect a modest depreciation of the USD/CNY to 7.0 by the end of this year.

From a credit fundamentals perspective, we do expect credit stresses to rise, affected by a combination of slowing growth, weakness in commodity prices and high levels of corporate leverage. This can be seen in non-performing loans (NPLs) in China’s banking sector, which reached 1.5% in 2015H1 according to data from the China banking regulator, up from 1.2% at the end of 2014 and 1.0% at the end of 2013. But we do think that this will be a long NPL cycle, with periods of “forbearance” as policymakers seek to underpin growth.

As such, we remain comfortable with China credit risk but would seek to avoid the riskier segments, namely the lower-rated IG names and the commodities and energy-related sectors

From Bank of America

February WTI crude oil futures breaks $30 a barrel for the first time since 2003. Now momentum is diverging signaling a short term sign of strength after price tested support below the psychologically significant round number of $30.

Our bearish view last published on December 7th eyeing $32 was reached and $28 remains. According to Market Profile, we see the next major level at $28.00. The weekly chart pictured next presents what may be a longer term bullish divergence.

Long term bullish divergence forming. It takes time for a 3 troughed weekly bullish divergence to develop and it is attempting to form here. We are watching closely as this can be a significant indication that crude oil is nearing the bottom. If crude oil bounces, then it would be the third time in a row a low is made with less downward momentum. Then the question becomes can crude remain above $30 and is a bottom really forming.

From Soc Gen

In our opinion, the low price of oil is a major threat in almost all assets in all markets”, – said Keith Jax, an analyst at Societe Generale. – “This year, cheap oil will be the main factor responsible for the expected defaults and even if the apocalyptic predictions of 25/20/10 $ a barrel will not come true, the damage is already done. This ensures that in 2016 the world’s foreign exchange reserves will continue to decline. Yesterday I attended an event organized by Albert Edwards. He advised investors to stay away from the developing countries as long as their foreign exchange reserves did not start to rise.

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Danny Riley of MrTopStep has been asked to make an appearance on the radio at 7:55 a.m. CST and 11:55 a.m. CST Friday at www.rmastars.com. Danny is hoping that all of his followers will come out and listen to him as he discusses relevant market news and timely commentary on the S&P 500 and all tradeable markets.