After several few weeks of uneasy quiet following the June and July disruptions international markets, on Monday, began showing signs of volatility that finally erupted into equity and commodity sell-offs that spilled into the currency markets. This is the kind of turmoil that results from investor psychology and is beyond the control of central banks and policy makers.
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Tue 25 August
UK CPI y/y (expected: 0.0% previous: 0.0%)
US Consumer Confidence (expected: 92.8 previous: 90.9)
Wed 26 August
US Core Durable Goods Orders m/m (expected: 0.3% previous: 0.6%)
Thu 27 August
US Prelim GDP q/q (expected: 3.2% previous: 2.3%)
US Unemployment Claims (expected: 275K previous: 277K)
Fri 28 August
US Goods Trade Balance (previous: -62.3B)
Stock markets are experiencing a sell-off not seen since the 2008, and commodities (including bitcoin) continue selling off in unison. The volatility and illiquidity being experienced in markets has been brewing for several years as worrying economic phenomena were simply ignored or kicked down the road in preference of keeping equities in their painful advance. We now see the results of this complacency.
The current sell-off started as a result of repricing of global growth prospects during the past three months. Acceleration resulted from the fear that policy makers may not be able to respond sufficiently quickly and effectively, for example, as the Fed and other central banks keep delaying policy responses – indicating their own uncertainty.
Central banks have depleted their ammunition of money printing and low interest rates after years of applying these policies with little success and diminishing returns. Investors began looking for a response from the emerging economies – representing both the source of global growth, as well as major financial concerns. The mighty China’s policy makers, last week, proved unable (as all policy makers ultimately are in the market organism) to halt their equities sell-off or to promote growth.
Cold realization dawned and the sell-off became disorderly on Monday when classic deleveraging forces (forced generalized selling by volatility-sensitive investors and over-committed portfolios) kicked in. The result low liquidity, volatility and contagion.
The US S&P 500 Index fell 3.9% to a 10-month low on Monday. The CBOE volatility index (VIX) shot up by 50% for the first time since the 2008 credit crisis. Nasdaq trading was forcefully halted, followed by the Dow and S&P Futures – halted for the first time in history, by the way.
Oil prices plunged more than 6% on Monday to 6-and-a-half year lows. US Crude futures traded at $38.73 per barrel and Brent crude futures dipped to $42.23 on Monday.
Brent hit a low of $36.20 after the 2008 financial crisis, but has fallen more than 66% from last year’s high near $115.
Investors (large institutions) mostly fund their investments in risk currencies, typically, by borrowing low-yielding euro or yen. Hence, when these large players sell equities, the value flows to the “funding currency”. This is why we are seeing both the EUR/USD and USD/JPY having moved to seven-month extremes.
The euro spiked to $1.1715 and the yen strengthened to 116.15 JPY to the dollar.
During today’s Asia-Pacific trading session, both currencies have retreated. The euro pulled back 0.7 percent to $1.1531 while the yen slipped to 120.02 JPY to the dollar.
The Australian dollar, dependent on a strong Australian resource sector – in turn dependent on Chinese growth – was repriced by the market:
Peter Gorra, head of foreign-exchange trading at BNP Paribas (New York) told Bloomberg:
You’re talking about sovereign currencies moving that much, you’re not talking about equities – it’s quite unusual. The spreads are naturally going to reflect the illiquidity in the market.
The mainstream media typically tries to ascribe market reactions to news events. The belief is that there must be some verifiable outside event to which investors are reacting. All kinds of convoluted explanations are forthcoming – everything including failure of certain key players to say certain things are offered as reasons – everything except the true reason for market behaviour: psychology and social mood.
As I have been advocating for the past year, we are witnessing the final stages of an era of global credit expansion. The current sell-off, like 2008, is merely a symptom of the onset of contraction. Growth and production slump first. Then credit becomes more scarce. Finally, the defaults begin and only then will we see the full force of a protracted sell-off.
Readers may be interested in a full explanation of the coming era of credit deflation, as well as what can be done to ensure financial survival. Free resources are available in xbt.social’s article series: Fiat, Credit, Deflation and Bitcoin.
A double top in gold does not look promising.
More of the same? Talk about delusion…
This analysis is provided by xbt.social.
Global Economic Outlook is published every Monday on CCN.LA Readers can follow Bitcoin price analysis updates every day on CCN.LA
The writer trades Bitcoin. Trade and Investment is risky and subject to probability and market changes. CCN.LA accepts no liability for losses incurred as a result of anything written in this report.
Charts from TradingView, financial data & cartoon from Investing.com, image from Shutterstock.