Black Monday Circles the Globe

Daily Analysis - 25/08/2015

Losses From the Asian Session Quickly Spread Across Global Financial Instruments

Losses in Asian markets have extended yesterday’s rout with the main benefactors proving safe havens as risk assets lose their appeal amid the resulting panic. Abundant volatility and deteriorating sentiment saw substantial downside experienced broadly by risk assets as investors question the omnipotence of Central Bankers.

Historic Volatility Sweeps Equity Benchmarks

The VIX volatility index which tracks volatility in the S&P 500 experienced one of the biggest two-day moves higher, rising 45.34% alone yesterday as markets reopened the week to chaos. Stocks were consumed by the losses that began during the Asian session with the Chinese Shanghai Composite plunging over 8% with European equity benchmarks plunging in excess of 4%. US equity indices closed down nearly 4% after the Dow Jones, S&P 500, and Nasdaq were each halted after substantial losses at the open caused a snowball effect. Flash crashes across over 4500 stocks saw the Dow Jones Industrial Average plunge over 1100 points before moderately recovering. Nevertheless, the explosion higher in volatility is hearkening back to the last financial crisis where swings of this nature were frequent occurrences. The Shanghai Composite is already down an additional -7.51% in today’s session, raising the possibility of further losses across global equities.

China Crashing Again

Chinese stocks have given up 15% since Friday alone as the unwind of equity exposure persists with the decline in margin trading debt which collapsed to the lowest level in 5-months. In another move intended to assuage markets of the People’s Bank of China’s commitment to stability, the Central Bank devalued the Yuan once more, adjusting the currency 0.20% lower versus the US dollar as other policy moves have limited impact. Liquidity conditions in China continue to create anxiety over the state of the economy as the Central Bank frantically tries to restore confidence in equity markets and prevent a massive outflow of foreign direct investment. While markets continue to hope an interest rate cut and bank reserve ratio requirement cut are waiting in the wings, these measures are not forecast to have an impact on sentiment which continues to crumble.

German GDP Hits Targets

Amid all the turmoil in global stock benchmarks and emerging markets, the Euro Area continues to show signs of growth, albeit slow expansion. This morning’s second quarter reading of German GDP saw the economy expand at 0.40%, growing at a 1.60% annualized pace and matching expectations. Fears about a potential slowdown facing the core Euro Area economies are not unfounded, but as the German’s continue to prove, is possible even if below sustainable long-term levels. The German economy continues to benefit from the weaker Euro with expanded easing measures forecast from the European Central Bank as the region potentially trends towards deflation territory. Further asset purchases will add liquidity to the system, keeping the Euro competitive especially with the devaluation happening across emerging markets. The German DAX is looking to open in positive territory after slumping -4.70% during yesterday’s session.

NZDUSD Head and Shoulders Bullish Technical Pattern

Risk assets are in the process of recovering following yesterday’s substantial losses which quickly engulfed global financial markets. The New Zealand dollar felt the impact of the short crash yesterday with the currency plunging versus the US dollar before recovering. After a moderate upside pullback, the NZDUSD pair has begun to display an emerging head and shoulders pattern exhibiting a strongly bullish bias to the upside. Ideal positions initiated as the right shoulder of the pattern forms should be taken near support at 0.6480, targeting resistance on the upside at 0.6545 with any move above the key resistance level indicating a potential upside breakout to be accompanied by renewed upward momentum. A move below the neckline at 0.6480 could indicate that the head and shoulders pattern has broken down with further downside in store for the NZDUSD pair.