Heiken Ashi Dow Jones Chart & Economic Reports 9.01.2015

After China refrained from expected stimulus moves over the weekend, global markets went into hysterics on Monday morning. Chinese stocks went negative on the year, helping to trigger a mini flash on at the New York open, sending the S&P 500 into its first correction in three years. China fears hit emerging markets again, exacerbating tensions in the market that were already on edge about the uncertainties surrounding an impending Fed rate hike. Chinese stimulus finally materialized after the Shanghai market closed on Tuesday, helping to reverse US stocks that morning though they retested the Monday lows by the end of the session. The fever broke on Wednesday as Chinese stocks stabilized, and bargain hunters began pouring in, sending most global equity markets higher through the back half of the week. Trading volumes remained very heavy during what is normally a quiet late August week and currency and commodity markets experienced wild volatility spikes as well. By the end of a week that shook complacent markets, the DJIA ended with a 1.1% gain, the S&P500 was up 0.9%, and the Nasdaq added 2.6%.

With markets on fire, all eyes were on Beijing to do something (chatter favored a big, meaty RRR reserve ratio cut) before the open of trade on Monday to stop the bleeding. China’s policy response did not impress: regulators said China’s national pension fund was now authorized to invest in the stock market, and the stock slide continued unabated. The action was so bad that Apple CEO Cook was compelled to release a statement to help calm markets saying the company was seeing strong growth in China in July and August, with iPhone activations up over recent weeks. No further extraordinary Chinese actions arrived during the Asia session on Tuesday and the Shanghai tanked another 7.6%. With the smell of fear everywhere, the PBoC finally stepped in with a 50 basis point RRR cut and lowered key deposit and lending rates, in a move that seemed to be timed to trap the short sellers that the government has been railing against.

Massive volatility once again called into question the ability of market infrastructure to function efficiently and effectively in times of heightened stress. The NYSE opened Monday amid price dislocations that harkened back to the 2010 Flash Crash. Historically liquid market bellwethers opened down as much as 20% in some cases, before buyers swooped in and prices gapped higher, never to get near those opening lows again. At those opening levels the DJIA was down over 1,000 points, while the VIX volatility index was unable to get reliable data until 30 minutes later, when it opened above 50, the highest level in the fear gauge since 2008. The eye popping volatility was not just limited to the equity markets. Currency markets went haywire on Monday as well when three big figure ranges were seen in the USD/JPY and EUR/JPY. Talk of carry trade unwinds and recalibration resulting from potential changes in central bank outlooks resulted in excessive selling in the Greenback. By Friday the Euro fell more than 550 pips from the week’s 1.1712 high while the USD/JPY rallied 3 big figures from a 1.1818 low. Emerging markets and their respective currencies remained notably weak as macroeconomic trends and political concerns continue to weigh on sentiment.

The second reading of US Q2 GDP was much improved, rising to an annualized rate of +3.7% from the advance reading of +3.2%. The surprise gains were concentrated in private domestic spending, which was revised higher to +3.3% from +2.5% prior. Note that import and export growth rates were both revised slightly lower from the advance data.

July economic data published this week continued to look pretty strong, with one exception. New home sales rose at an annualized rate rising to +507K from June’s slightly revised rate of +481K, for a 26% y/y growth rate. Supply remains an issue, with the stock of new homes still half of what was on offer at the height of the boom years, but still at its highest level since 2010. In the advance durable goods report, both the headline and key capital goods orders crushed expectations. Capital goods orders saw their second straight increase and the biggest gain in over a year. The exception was the July PCE report, where the key core y/y figure dropped to 1.2% from 1.3% in June. The slight deceleration adds to the Fed’s headaches, as it strengthens the perception that inflation levels are headed in the wrong direction.

Fed speak was rampant ahead of a weekend packed with central bank speeches at Jackson Hole. Overall the comments indicated that while the market turmoil would factor into the FOMC’s considerations, September remains live for a possible rate hike depending on the data, and even if they don’t act next month, its unrealistic to think the Fed will push liftoff to next year. Kansas City Fed President Esther George said there would be sufficient time before the September meeting to assess the impact of volatile markets, and reiterated that it has been her view for a while that the US is ready for rate hikes. Moderate Fed President Lockhart was more cautious, warning in two speeches that he was less positive about a September hike given what’s going on, but that the Fed would most likely raise rates this year. Even the dovish New York Fed President Dudley said that while a September rate hike might look less compelling now than it did a few weeks ago, normalization could very well look more attractive by the time of the September FOMC meeting if the data pans out. Finally, Fed Vice Chair Fischer said on Friday he was watching in particular how China’s devaluation unfolds, but that there is still a pretty strong case to be made for a September rate hike. Fischer noted the Fed still has two more weeks of data to observe before making a rate decision.

Poised on the ledge of $40/bbl as trading opened on Sunday, WTI crude futures plunged to an intraday low of $37.75 on Monday as the dollar weakened and equities burned, settling at $39 that day, the lowest level since March 2009. Brent bottomed out on Monday around $42. The snapback began almost immediately and prices rallied through Friday’s close, breaking a 10-week run of declines, driven by short covering. Prices gained 10% on Thursday alone, the biggest one-day rise since the rally off the bottom in March 2009. Both the weekly API and DoE reports showed big, unexpected crude inventory drawdowns, and Venezuela was reportedly clamoring for an emergency OPEC meeting to address falling prices (reports suggest Gulf OPEC states still believe the price declines will help lower market oversupply, despite plenty of evidence to the contrary).

Coal names saw very strong gains this week as troubled industry players disclosed reorganization plans and investors picked over the bones of the beleaguered sector. Walter Energy filed plans for reorganization under Chapter 11 bankruptcy and Peabody Energy hired Lazard to help advise in the restructuring of its $6.3 billion debt load. Just a week ago, Arch Coal began a debt exchange with its creditors in order to avoid filing for bankruptcy. At its best levels, BTU was up 50% on the day, but has come off those levels. ACI is up 25% on the day. Arch gained more than 100% on the week, while Peabody was up about 40%. Elsewhere, activist investor Carl Icahn picked a bottom in Freeport McMorran, disclosing a $1 billion position in the copper mining giant.

Best Buy had an excellent week, gaining 20% over last Friday’s close after the firm’s second-quarter results firmly topped consensus expectations on solid y/y growth in both net income and revenue. Apparel retailers Abercrombie & Fitch reported a positive surprise with a small profit versus expectations for a loss in its second quarter, and while comps remain negative they appear to be moving off their worst levels, which helped the stock achieve double digit percent gains on the week.

The biggest deals this week came in the energy sector, with Southern Company reaching a deal to buy AGL Resources and Schlumberger snapping up Cameron International. Southern will pay $8 billion in cash for AGL, or $66/share, a 38% premium to the close. The deal gives Southern a large network of natural gas transport pipelines, complementing its gradual move away from coal and toward natural gas and renewable power generation. Schlumberger grabbed flow equipment specialist Cameron for $14.8M in cash and stock. Monsanto abandoned its unsolicited $45 billion bid to acquire Swiss agribusiness giant Syngenta after some large Monsanto holders aired their objections to the deal. Heath care was not left out: there were press reports that medical device name Abbott was preparing to make a $25B bid for St. Jude, but Abbott quickly rebutted the report. On Friday, there were also reports that Ariad has been in talks to be acquired by Baxalta as part of a plan by the larger firm to ward off an approach from Shire.