Stock Selloff Equals Currency Rally!

Today’s Pfennig for your thoughts…

Good day, and a Marvelous Monday to you!

Well, stocks got the stuffing knocked out of them on Friday, didn’t they? Whew! That was an ugly session, and I just kept going back in mind to October 1987. The Friday before the crash, stocks took one to the chin, and everyone kind of brushed it off, but it was the appetizer for the Monday crash.

Now, I’m not indicating that today we could see a crash, I have no idea, I’m just telling you about the October 1987 history…

But this stock rout isn’t confined to just the U.S. stocks, folks.  Chinese stocks have been getting routed for some time now, and they started this rout in global stock markets, but when the almighty U.S. Dow Jones loses 531 points, people around the world say, Uh-oh!

So, a quick look at the global stock markets shows me nothing but red numbers from Friday, and not small red number either! And not that I want to spend all day talking about the global stock sell off, but stock futures this morning are down 350 points.

Why have I chosen to start the day talking about the global stock market sell off? Well, because it’s what’s fueling the rally in the euro. And the euro being the Big Dog, has really taken a bite out of the dollar strength in the overnight trading folks.

It all started on Friday, remember, when I told you about how the Big Dog, euro, had finally gotten off the porch to chase the dollar down the street? Well, as the rot on the stock market’s vine began to be exposed, the Big Dog began to stretch out and take on the dollar even more. This morning, the euro is up more than 1-cent and is within spittin’ distance of reaching 1.15!  That’s right, I said 1.15!

So, what’s gotten into the Big Dog? Well, all this stock selling is beginning to give the market participants a rash, thinking about how the Fed won’t hike rates next month with all this going on, and if the Fed isn’t going to hike rates, then why would the dollar be so strong?

And so, the reversal of dollar strength is showing up first in the euro, as I’ve always explained it would, given that the euro is the offset currency to the dollar.

And isn’t it sweet to see that these two risk assets have split up? We no longer have that “risk on” , “risk off” crap to deal with. it’s each asset trading on their own fundamentals. YAHOO!

So, let me take you back to last year. Yes, it was in the 4th QTR of last year, and there was all this talk about a rate hike or two for the Fed in 2015, starting in March 2015.

I wrote to you then, and threw a cat among the pigeons, by telling you that I didn’t believe the Fed could hike rates in 2015, and instead, I said by the end of summer things could be so bad that the Fed instead opts to do another round of QE to protect stocks.

I threw that out there, and got no reaction from anyone. But I’m sure you all were writing that down so you could throw it back at me when the Fed hiked rates in 2015.  But here we are, nearing the end of summer, and what does it look more like to you at this point. A Fed rate hike?  Or another round of QE?

Of course, last year, I had no idea that the stock sell off would be a global one, that China started. I was strictly looking at the U.S. situation. Remember what I also said at that time, and that is that when the Fed opted for another round of QE after talking about the need to hike rates for over a year, that their credibility with the markets would take a blow, and that won’t be good for the dollar.

So, it does appear that we certainly have this ship pointed in the right direction for all this to come to fruition. No I won’t take any delight in seeing this happen, I’m not one of those kind of people, but what I am is someone who sees stuff, and talks about it. It’s always right out there on my sleeve. And yes, sometimes I see stuff that doesn’t come along for a while and people forget that I even said what I said.

So, the rot in the Chinese markets has left the currencies from countries that do BIG Business with China in the dust. Currencies like: Australian dollars (A$), N.Z. dollar/kiwi, Singapore dollars (S$), S. Korean won, Indian rupee, and Russian ruble among the major trading partners, are all seeing red on red on red. You live by the sword, you die by the sword, right?

And U.S. Treasuries, gold, euros, francs, yen, to a lesser extent, pound sterling, have been the preferred destinations of those leaving stocks. The U.S. Treasury 10-year yield is 2.00% this morning and touched below that figure once this morning, so I would think it would continue to push the yield drop envelope further.  I already talked about euros, but wanted to pass on this thought.

On Friday, I talked about how the Big Dog, euro, had gotten off the porch the last couple of days and gotten back to chasing the dollar down the street.  When I did the currency roundup on Friday morning, the euro was 1.1280. Later that morning, The U.S. Markit PMI’s printed (manufacturing index).

You may recall me saying that I thought we could look for the index to remain flat at 53.8, but. the index fell to 52.9 this month. That was the wink and nod to traders to begin to sell more dollars, and they did, and soon the euro was 1.13.

Now we could celebrate the euro’s recovery and what seems to be a lofty level considering where it was last week at 1.10. But let’s not lose sight of the fact that the euro a year ago, was 1.33.  Yes, a year ago, but even then it was falling and had fallen from 1.37 earlier in 2014.  So, I just wanted to remind you to not get too lathered up because the euro traded to 1.14. It has a long way to go to get back to 2014 levels.

But, and I hear you saying. Chuck, you should be happy that the euro wrapped a tourniquet around the bleeding and has recovered some, as it was looking like it would trade to parity there for a while. And you would be correct, I’m just trying to curb the enthusiasm, until we see the Fed do something counter to what they’ve been telling us they would be doing by now, for when that happens it will be back up the truck time.

So, gold, which had seen 5 consecutive days of gains, is actually selling off this morning by $6. But that doesn’t bother me too much, as it would be normal for an asset to go on a 5 consecutive day rally and then take a step back as profit taking sets in.  So, look at it as an opportunity to buy at a cheaper level than at the end of last week, for that’s exactly what it is!

When the Big Dog, euro, gets off the porch to chase the dollar down the street, the little dogs, follow. And that’s exactly what’s going on this morning, as the currencies from Norway, Sweden, Poland, Hungary, and the Czech Republic are among those with nice gains vs. the dollar this morning. It’s just those pesky currencies from the countries that do Big business with China that are hurting this morning.

But not the Chinese renminbi. The gain for the renminbi last night was very small, only 20 ticks, but, it was a gain vs. all the rot on the other currencies in the region. I still think that the markets and the Chinese leaders are still making an adjustment to the devaluation/depreciation that was done last week.

I’m really surprised that this is continuing, I would think that by now it would be done and we move on. And when we move on, I really suspect that the renminbi will be losing ground.

Why do I say that? Because their economy is circling the bowl folks, that’s what should happen to a currency when the respective economy circles the bowl!

I’m surprised that the pull from the Big Dog, euro, has outweighed the pull from the drop in the price of oil below $40, for the Norwegian krone. The Canadian dollar, Mexican peso, Russian ruble and Brazilian real weren’t so lucky and saw the drop in the price of oil bring their values down.

The Mexican peso has gone past the 17 level, and it was just a few weeks ago, that I made such a big deal out of the fact that the peso had gone past the 16 level. The peso is getting its tail kicked and being asked for its name later.

I mentioned above that the Japanese yen is rallying alongside the euro this morning, and has ever since the euro began this rally late last week. And looky there! The euro just crossed 1.1500!  Somebody put a governor on that currency, for it is moving too far, too fast!

Well, the U.S. Data Cupboard doesn’t have much for us today. Way back near the beginning of the letter this morning, I mentioned that the Markit PMI (manufacturing index) disappointed with a fall from 53.8 to 52.9 in August.

One month of a drop doesn’t make a trend, just like one swallow doesn’t make a summer, but. when an economy is 6 years out from the end of the recession (supposedly, and I disagree, but that’s for another time), and it has had all colors of stimulus during that time, but the economy still can’t muster at least a flat reading on manufacturing? I would say that’s a tell-tale sign folks that things just aren’t right here.

I hope you got a chance to read the Sunday Pfennig, as the Big Boss Frank Trotter, gave us his thoughts on what he calls an “uneven economy”.  Here’s a snippet from the Sunday Pfennig:

While I am a huge fan of Pollyanna, right now, I’m more in the Debbie Downer camp. The plot of my story examines the uncertainty with weak economic growth embedded in direct market indicators all the way out to the horizon, and with some extreme risks positioned like highwaymen in strategic hideaways along the way. Here are some of the obvious indicators that I follow, with prices as of Aug. 16, 2015.

BTW, I just love it when Frank has the opportunity to give us his thoughts in a Sunday Pfennig, I bet he becomes a #1 book author in the future.

Tomorrow, we’ll see some data from the U.S. Data Cupboard, with the S&P/CaseShiller Home Price Index for June, New Sales, Consumer Confidence, and a regional manufacturing index from Richmond. But today, the dollar is on its own, and it doesn’t look like it is faring too well at this point.

Oh, and guess what? This Thursday the Fed’s Jackson Hole boondoggle begins. I remember around 5 years ago, it was at the Jackson Hole boondoggle that St. Louis Fed president, James Bullard announced the next round of QE. And we have that same opportunity this week. Hmmm…

Gold has gained back that $6 early morning loss and is flat on the day right now, probably getting ready to head higher, but I guess we’ll have to wait-n-see.

Longtime readers will recognize that I have such affection for the BLS, right? HAHA!  So, when dear reader, Bob, sent me the link to this story, he probably knew that I would be doing my grandfather’s Irish Jig when reading this. He found it on the internet and the source was the Washington Post. So, you can find it there if you like:

Jonathan Schwabish at the Urban Institute catalogues the damage: In 2013, the Bureau of Labor Statistics (BLS), the principal agency charged with producing information on the labor market, received $41 million less from Congress than the president requested. Statistics on mass layoffs – an important source of information about the behavior of businesses facing sharp reductions in demand – were eliminated.

In 2014, facing a gap of nearly $22 million, BLS pulled back on the Quarterly Census of Employment and Wages, a vital pillar supporting our ability to know detailed information on how many jobs and businesses the economy is supporting and how much workers are earning.

The same year, BLS continued to produce information on import and export prices – from which we know how the United States is performing in international markets – by the skin of its teeth.

For fiscal 2016, which begins in October, the Senate wants to cut BLS’s budget. In a letter sent last month to the chairman of the Senate Appropriates Committee, the director of the Office of Management and Budget laid out the consequences: “Under the bill BLS would have difficulty continuing to operate its core programs and would need to permanently eliminate surveys as a result.

Chuck again. boy would that put me in a good mood, to see the BLS out of the surveys business!

Now I have to warn you, that if you go to read the whole article, you’ll find that the writer is “pro-BLS” and wants the Fed to have the best information they can get to make their economy influencing decisions.  Somebody get this guy that wrote this piece some wool, so that he can pull it over his eyes.

That’s it for today. I hope you have a marvelous Monday!

Regards,

Chuck Butler
for The Daily Reckoning

P.S. The Daily Pfennig is first published everyday, right here.

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