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Sentiment turns bearish across all risk assets

The market is becoming increasingly concerned about the contagion risks associated with a large publicly-traded company from China defaulting on $300 billion of debt. Will the banks holding take a haircut and will that one insolvency event spread to other leveraged companies as China continues to regulate industries harder?

Market Wrap

I would usually start with a look at the forex heatmap to see which direction the flows ended going into the London close, but today the equity indices tell the story. The market is not feeling confident that there will be no repercussions from China’s 2nd largest home builder defaulting on its upcoming interest payments on the debt it owes. In fact, the only markets to not be affected today were closed due to holidays.

The buy the dip trade offered many profitable opportunities for almost a year when looking to the daily 50 ema as dynamic support as the trend is your friend until the bend at the end. We’re still not quite there yet, the daily rising 200 ema is a couple of hundred points below and we still haven’t taken out significant market lows, we’ve merely swept them. The close tonight will be key as well this week’s closing price. Not that anyone could seriously advocate for buying this dip, we should wait for a bullish reversal as the underlying market that has supported this rally could be taken away at the end of September when the new fiscal year begins for the US. Plus, we need to see what contagion, if any, emerges from Evergrande debt holders if they take a haircut.

The US dollar index showed that sellers remained up near the $93.45 level once again as early London flows into the global reserve currency did an about-turn at the US Open

.Due to the risk-off nature of the day gold, yen, Swiss franc and the TLT (US long bond ETF) caught a bid which may be the week's direction until the FOMC at least as China is on a bank holiday again tomorrow.

The stronger US dollar has pushed the other major crosses around and the GBPUSD is continuing its drift lower ahead of the Bank of England this week. Using two CCI indicators set to a short-term period and the other to a longer-term period can be a quick way to identify possible overbought and oversold signals. Combine them with price action and you may have a good trade identification process. The market is expecting no change in policy at the next MPC meeting on 23 September. The focus, as in the previous few meetings, is likely to be on the QE vote by the Committee, which will be joined by two new members – Catherine Mann, replacing Gertjan Vlieghe, and the new chief economist Huw Pill. There has been mixed incoming data, and the BoE is likely to reiterate that it continues to monitor labour market developments for signs of second-round effects that could lead to a more persistent inflation overshoot.


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