The S&P looked like it was starting to shake off some of the weakness associated with all the Greek headlines. After a solid finish on Monday’s close, the ESU15 rallied 13.50 handles all the way up to 2078 on Globex, and then sold off a little, opening 14.50 handles off the Globex high at 2063.50. The ESU then fell all the way down to 2035.00, down 41.50 handles from the Globex high, and down 28.50 handles from the days open, falling just shy of Sunday night’s 2035.25 low. The reversal had the feeling of an even larger decline, or selloff, but the sell program exhausted itself and the futures rallied back up to the 2063.00 area. Since the Sunday Globex low the S&P futures traveled up 43.50 handles and back down 42.75 handles in just 36 hours.
GLOBAL VOLATILITY
It was a volatile overnight and day session that started out doing big volume, and finished the day on big volume. Yesterday’s total volume was 2.5 million contracts traded with 270,000 of the total coming from Globex. Big pickups in ES volume are generally an indication of increased volatility, and clearly yesterday’s big selloff and big rally fit that picture. But while the Greek credit crisis drags on it’s not the only thing driving the markets. Asia has been in “crash” mode for over a month, and last night the Asian majors fell sharply, deepening concerns about overheated markets and China’s ability to stop the decline.
The losses are staggering; the Shanghai Composite fell -5.9% at 3507.19, after losses of as much as -8.2% earlier Wednesday. The index has lost -32.1% since making it’s high in mid-June. The Shenzhen Composite fell -2.5% at 1884.45, down a whopping -40% from its high last month. Hong Kong, which has until recently held better than the Chinese benchmark Hang Seng Index closed down 5.8%, wiping out all of its gains for the year.
Last night, U.S.-traded Chinese stocks plunged the most in four years as the rout that wiped $3.2 trillion from the value of mainland equities spreads. I am an avid follower of the Chinese markets and based on how much they went up over the last year, the “bubble” type sell off comes as no surprise. Additionally, I do not think the sell off is close to an end.
ALCOA KICKS OFF THE EARNINGS SEASON
Alcoa (AA) kicks off the second quarter earnings season today. The aluminum producer is expected to report 2Q earnings of 23 cents a share according to a consensus survey done by FactSet. Overall the earnings season is expected to see weak profits for the quarter. Like always Wall Street analysts are talking down potential profits but unlike many of the past earnings seasons, where there were low expectations and the earnings came out better, this earnings season could spell problems for the S&P. With Greece trying to walk away from its creditors, and a likelihood of a slowdown in Asia and Europe, this could end up a very tricky earnings season. The earnings slowdown could end up to be another headwind facing the US markets, and the Federal reserve, as it attempts to raise rates for the first time since 2008.
FOMC
Today’s Fed minutes could help shed light on the central bank’s thoughts on the timing of its first rate increase, but with China and Greece imploding, raising rates at this time may be hard to do. Given the dovish growth forecast and threats to the US economy from a potential slowdown in China, and the ongoing disputes with Greece and its European creditors, we still maintain there will be no rate hikes in 2015. The minutes are due out at 1:00 CT, at the same time, San Francisco Fed President John Williams will give a speech on the economic outlook.
Traders have been begging for volatility over the last 6 months and now that it’s here, it seems like all the big up and down moves in the S&P could be leading to an even larger decline. Only time will tell…
In Asia 11 out of 11 markets closed lower, and in Europe 6 out of 12 markets are trading higher this morning. Today’s economic calendar includes MBA Mortgage Applications, EIA Petroleum Status Report, 10 Yr-Note Auction, San Francisco Federal Reserve Bank President John Williams outlook speech in Los Angeles, and the FOMC Minutes.
VOLATILITY
Our View : That sell off yesterday was scary, but it stopped and held just 3 ticks above Sunday night’s Globex low. I’m not sure how something can look so bad and then look so good. Our call yesterday was to sell the early rally and buy weakness, which was right on, but I gotta admit, I never thought the ES was going to sell off so much. As for today, the ES was down 30 handles from yesterday’s high and up 21 handles off its overnight low. Our view is again to sell the early rallies and buy weakness.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 11 of 11 markets closed lower: Shanghai Comp. -5.90%, Hang Seng -5.84%, Nikkei -3.14%
- In Europe 6 out of 12 markets are trading higher: DAX 0.39%, FTSE 0.64%, MICEX -1.75%, GD.AT -% at 7:00 am CT
- Fair Value: S&P -7.92, NASDAQ -9.90, Dow -92.72
- Total Volume: 2.5 mill ESU and 5.3k SPU traded
- Economic calendar: MBA Mortgage Applications, EIA Petroleum Status Report, 10 Yr-Note Auction, John Williams speaks and the FOMC Minutes. >
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