My Market Observations

What a difference a week made!

Publish date: Sat, 09 Jul 2022, 10:49 AM
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I watch and trade markets based on observation and logic. Leave the emotion and ego at the door and you will survive!

Another topsy-turvy week in the markets but with a good end to the week!. The week started as have previous weeks with massive sellers swamping both stocks and commodities markets in earnest. However a temporary bottom and sharp reversal was witnessed on Wednesday as the markets made a sharp reversal from multi monthly bottoms to close higher. CPO futures touched a bottom of RM3735 on Wednesday but managed to close higher for the day at RM4057 and extended the gains to close the week at RM4163. Similar patterns were observed in the grain markets on CBOT and also US stocks which also bottomed on Wednesday and reversed course to close higher for the week. 

What was the reason for the massive turnaround on Wednesday?

One of the big turnaround for the markets came after news came out about a China's proposed USD220bil stimulus package to be financed by a special bond sales in the second half of the year This is an unprecedented acceleration of infrastructure funding aimed at shoring up the country's beleaguered economy. Commodities rallied huge on the  in European trading hours following the news with copper gaining  over 3% on the London Metal Exchange on the news. The news also sparked a massive rally commodity markets including the crude oil markets and the CPO futures in the afternoon as well. Crude oil had touched a low of USD95.10 on Wednesday but closed higher for the week at USD104.80 on Friday.

Also helping allaying the recession fears were comments made by St Louis Fed President James Bullard on Thursday. Bullard sees a good chance of a 'soft landing' in the economy and also backs a 75 basis point hike when the Federal Reserve meets at the end of July. His words carry a lot of weight as he is also a voting member of the FOMC policy setting committee.

When bad news is good news

It was quite a refreshing change this week to see the markets reacting positively to bad news unlike price reaction to data in previous weeks. This weeks saw some huge economic data released like the Non Farm Payrolls and Jobless Claims data which were mostly a miss versus expectations. However the big difference is that the US equity markets rallied on the news as opposed to previous weeks 'price reactions to negative economic date.

Another closely followed matrix is the gauge of price volatility known as the VIX index. It measures the fear and volatility in the stock markets and it was down 13% for the week at 24.4. The long term median of the VIX trades closer to 20 but it was trading over 30 for the better part of June 2022.

Are we out of the woods? 

Probably too early to call a bottom at this stage but this week has been very constructive. Market bottoming is a process and common signs that traders look for include extreme price action like we saw on Wednesday followed by massive reversal days. The key market event to look for will be the FOMC meeting at the end of the month and seeing the interest guidance going forward. Also look for a potential retest of market lows in the weeks ahead to see if the price supports hold.

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