Today certainly appears to be a corrective move both domestically and abroad following yesterday`s dramatic near record-setting selloff in the equity index markets. With the Dow down nearly 1200 points at one time and the S&P 500 off nearly 150 points, the market was headed for the single worst day in history before some furious buying staved off that dubious title.
China's plunging markets were the impetuous for the decline but the Peoples Bank of China (PBoC) did step in overnight and cut rates and bank requirements in an effort to stabilize investors concerns and add money supply to the lagging economic giant. The 5th rate cut since November and the 3rd easing of bank requirements, along with the significant devaluation of the yuan by 2% just a few weeks ago, has investors concerned that the powers that be are throwing everything they can at the wall and just hoping something really sticks. The next several sessions should show whether or not any real investor confidence returns in a vote of confidence to the central bank’s ability to maintain their 7% growth target for 2015.
The U.S. equity and commodity markets are sharply higher as it seems that the action by the PBOC was met with welcome arms for the time being. Gargantuan corrections are afoot with the Dow up 600 points and the S&P 500 up 75 handles.
The currencies have experienced some of the greatest volatility in memory with the biggest movers being the fall and now rise of the U.S. Dollar and the massive rallies in both the euro currency and the yen yesterday followed by today's significant plunge. Metals briefly experienced a bit of a flight to quality bid but have not received the attention they once garnered in this type of volatility. Fixed income markets were equally raucous to the upside yesterday with trading in the 30-year bond reaching the 163 handle before catering lower with it now trading back in the 158 handle.
That leaves us with the energy markets and how they will handle this injection of volatility. Obviousl, crude oil has been leaking consistently to the downside before this massive occurrence put further pressure on the WTI contract, sending it to 7-year lows in the high $37 range. A close today above yesterday's high could signal a key reversal in the beaten down contract but follow through will most certainly be predicated on stability in the equity world. Mid-week inventories after the close which could inject some fundamental factors into the price discovery. This would seem like a great opportunity for new longs to take a position with qualified risk measures in place. Currently the WTI contract is up over a dollar with an eye to what could be an explosive rally should the overall market continue with its meteoric correction.
The same appears to be true with natural gas as a 5 cent rally could easily become ten at these significant sub 2.70 levels. It seems that these energy markets were oversold going into yesterdays event as evidenced by the decline being nowhere near the level of decline achieved elsewhere like equities and fixed income yields. It’s as if they had to go down in spite of the oversold nature potentially being the leaders higher once the China crisis is no longer leading the price discovery.