Big corrective gains in the equity markets are the story so for today's market action. Several factors have led to the move higher including but not limited to; oversold market conditions, stability in Chinese markets and Yuan trading higher, Fed speak and very strong U.S. economic data.
The stability of the Chinese market, in all reality, is the single largest factor in the rebound yesterday afternoon and this morning. When one considers that the only real reason for this correction was the collapse of the Chinese equities then it become readily apparent that the moment that the emergency measures put in place by the Peoples Bank of China start to have a stabilizing effect on their markets, ours would soon follow.
Couple that fact with the Fed speak from Dudley stating that the September rate hike possibilities may have lost some of the momentum based on this event and you have the making of a nice recovery. However, after listening to the entire Q&A with Dudley live yesterday, I came away with a different opinion than that of the mainstream media. It seems that the one sentence about the Sept. rate hike being less compelling is being taken a bit out of context.
First, he did make that statement when backed into a bit of a corner about the recent market turmoil, but followed the statement with thoughts on why the Fed should move rates based on data dependence further stating that the recent turmoil could have some affect on that equation but it certainly would not be the driving factor. Nonetheless, the sound bite was in and it has been widely reported as the rationale for the rally. It is more important to focus on the rest of his comments that ranged from uber-strong recent U.S. data, core inflation stability and strong job creation.
The data for the U.S. got stronger just this morning as well with the revised GDP estimates jumping to a whopping 3.7 % and initial claims dipping below expectation again. It would seem that the FOMC would pay more attention to this type of data rather than a market correction based on a Chinese run on the market. At any rate, we have to consider that if the market continues to recover from here and the data remains this stellar, then the case for a September rate hike remains powerful. After all, we are only talking about going from 0 to .25% right?
Energies have stabilized and shown strength based on several factors independent of the market turn around. Obviously, the pegging of the WTI to the equity markets is chiefly responsible for this move higher today back above $40 per barrel. However, I think it is equally important to note that when the biggest declines in equities hit, the crude had already taken the majority of the decline lower and seemed very reticent to continue the free fall even with the massive bearish volatility across the market. The bottom could have been set with WTI as the demand dip reported yesterday in the refined products was most likely transitory based on the unscheduled closing of the Whiting refinery and should, when averaged out, still show very strong downstream demand. Continued drops in inventories that were seen yesterday in the WTI should outweigh the modest gains in gasoline as the market looks toward a corrective move modestly higher.