Volatility Spikes as China Announces Retaliation

08/23/2019 1:02 pm EST

Focus: MARKETS

Bill Baruch

President and Founder, Blue Line Futures

The trade war was joined by China, announcing retaliatory tariffs on the United States, reports Bill Baruch.

E-mini S&P (ESU)

Yesterday’s close: Settled at 2922.25, down 7.00

Fundamentals: Get ready: Fed Chair Powell gives his keynote address at Jackson Hole at 9:00 am CDT. In a rangebound week across all markets, this is clearly what traders and investors alike have been waiting for. We expect volatility to pick up, but why? Equity markets rallied into the July 31 rate cut as expectations mounted for the onset of a cutting cycle. However, they left unsatisfied as Fed Chair Powell called the cut only a “mid-cycle adjustment”. This was just the start and the knockout punch came after President Trump reinvigorated trade war fears by threatening to raise tariffs on China Sept.1; the S&P 500 sold off as much as 8%. The landscape has seemingly stabilizing, and markets are attempting a recovery. But what was stable picture overnight has become just the opposite with both narratives now coming to the forefront. At 7:00 am CDT, China announced its plans to levy tariffs on $75 billion of U.S goods set to begin on Sept. 1 and Dec.15 ranging from 5% to 10%. They also highlighted the resumption of auto tariffs.

Focusing solely on the Fed, committee members this week expressed a less dovish rhetoric. First 2019 voting members Boston Fed President Rosengren and Kansas City Fed President George who both dissented in July argued for evidence of a slowdown before additional cuts. Non-voting alternate members Philadelphia Fed President Harker and Dallas Fed President Kaplan also expressed hesitance in acting again. The odds for a September cut have made a 180; a 25-basis point cut is no longer a foregone conclusion. Not only has the probability of 50-basis points completely dissipated from its height three weeks, but as of yesterday there was a 10% chance the Fed leaves rates unchanged. Of course, after the China trade war announcement this morning we are seeing the 25-bps become fully priced-in once again (as we are writing). While we expected Fed Chair Powell to be more in-line with his “mid-cycle adjustment” comments, a less-dovish rhetoric, this news could have him hitting the edit button.

Technicals: Price action early yesterday ping support levels with the NQ achieving major three-star support at 7611.75-7636.25 with a low of 7654 before recovering to 7743-7748 just as we talked about in the Midday Market Minute and then extending those gains to major three-star resistance at 7789.50-7808 this morning with a high of 7762 just before the China tariff news.

Crude Oil (CLV)

Yesterday’s close: Settled at $55.35, down 33¢

Fundamentals: Crude oil took a swift punch to the gut, getting tagged for as much as 3.5% on news China will levy tariffs on $75 billion worth of U.S goods on Sept. 1 and Dec. 15 ranging from 5% to 10%. In particular. this appears to apply 5% to U.S Crude imports on Sept. 1, hence why crude oil is taking this news worse than any other market. In an otherwise rangebound week, this roils sentiment and opens the door for lower action into the weekend as traders are no longer focused on Middle East geopolitics. Still, traders should keep an eye on the broader risk-appetite; if stocks selloff today, crude could get ugly.

Technicals: Crude failed to hold the $56.25 pivot yesterday to remain constructive on the week. Price action was already in trouble before today’s trade war news by staying contained below $55.44 resistance overnight. Now, it is sharply below last Friday’s weekly settle, and this turns the tape near and intermediate-term bearish.

Gold (GCZ)

Yesterday’s close: Settled at $1,508.5, down $7.20

Fundamentals: The battle at $1,500 continues and the bulls, thus far, are winning. Still, the main event of the week is about to occur; Fed Chair Powell’s keynote address at Jackson Hole at 9:00 am CT. Golds has battled magnificently given that four Fed members, two 2019 voters, have exuded a more hesitant approach to cutting rates and we have seen the odds for the Fed to leave rates unchanged in September hit a high of 10% overnight. Given, this was before China escalated the trade war with news, they will levy tariffs on $75 billion of U.S goods. This comes just before what could have easily been a less dovish and even hawkish speech by Fed Chair Powell and begs the question whether President Trump and China are in cahoots to achieve rate cuts. For now, gold loves the news and is trading higher by 0.5%.

Technicals: We remain bullish gold if it stays above major three-star support at $1,484.50. Gold is doing everything bulls could hope for.

Bill Baruch provides technical levels on all markets throughout the week at BlueLineFutures.com.

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