China Calms The Markets. For Now...

And now… today’s Pfennig for your thoughts…

Good day, and a Tom terrific Tuesday to you!

Well, that was some first day of trading for the year yesterday wasn’t it? The U.S. Dow lost 276 points. and the two winners were gold and U.S. Treasuries. As a flight to safety certainly was on the table for the firsst day of trading in 2016.

Will this pattern remain in place? I think it will for at least a few days to start 2016 trading. I really think that the markets are going to get back to relying on data to drive their decisions, which means that maybe, just maybe, fundamentals will finally return in earnest in 2016.

This morning we have the dollar in control of the currencies, with just about every currency losing ground vs. the dollar, as the flight to safety extends into a second day.  The Japanese yen certainly has had an exciting end to the year, and beginning of the new one, as it has rallied strongly.

Apparently, some traders still are under the impression that Japanese yen is a “safe haven currency”. The only other currency that is carving out a gain vs. the dollar this morning is the Canadian dollar/loonie.  So there’s a strange pair for you. Yen and loonies, but that’s the billing this morning.  I don’t expect the yen rally to last very long, and would look at this strong move in yen as an opportunity. Because you know me, and the words that a wise trader once taught me: you buy into weakness, and sell into strength.

Of course that idea has some deviations to it. For instance, you wouldn’t want to buy into the weakness of the Dow yesterday, you would want to wait to see if there’s more weakness, and eventually you would see where the good spot to buy into that weakness would be. My friend, the Great Mogambo Guru, is famous for saying, “This Investment Stuff is Easy, Wheee!”

What I’ve found over the years, is that investors start out doing the right thing, but then get into bad habits. And remember this other thought that a different wise man taught me: “It’s only a profit when you take it”.

The Eurozone CPI (consumer inflation) is the Big Kahuna today, and should be printed very soon, maybe even before I finish the letter today.  You may recall that last month’s Eurozone CPI wasn’t as strong as most thought it would be, although it was better than a year ago.

This time around I expect more disappointment, in the number, even though it will be better than a year ago. You have to remember that  year ago, the Eurozone was mired in a deep recession with negative CPI prints. Beating last year’s numbers are no big feat for the Eurozone, and when the current CPI disappoints, well, you get euro weakness.

And that’s what we’re seeing this morning. Traders aren’t waiting around to see the actual print, and are jumping the gun, and being “Sooners”  with their selling of euros ahead of the print! Why not that long ago, the euro touched 1.10 and looked to be exiting the woods, but now the single unit is right smack dab in the middle of the woods again.

Well, I mentioned the Canadian dollar/loonie above as being one of the couple of currencies carving out gains vs. the dollar today.  It appears that the loonie rally is tied to the rebound of the Aussie and New Zealand dollars.  The Aussie dollar (A$), and N. Zealand dollar/kiwi are still down on the day, but they have recovered from a position that was not pretty. The A$ was at one point overnight, the worst performing currency, and now it’s just down a small amount.

What caused the turn around?  It appears that the “risk assets” got a boost this morning, when it was announced that China had injected 130 billion renminbi into the nation’s money markets. This move by the Chinese secured a stabilization of the Chinese stock market, and has basically gotten everyone to “calm down”.

The Chinese stock market selloff has been HUGE folks, and it appeared at one point to be on the path of no return. It’s still going to see some nasty days, ahead, with all the outflows taking place in China right now. Like the rats getting off the ship!

Sorry about that. but I love that song! Now, getting back to the Chinese move to calm the markets overnight. It now appears to be spreading quickly throughout the currencies that are affected or related to China. I already mentioned the commodity currencies of Canada, Australia and New Zealand, and then we have the related currencies like the Russian ruble and Indian rupee.

Well, of those two, only the Indian rupee is rebounding. In fact, the rupee rebound had seen a very large drop yesterday, so the rebound this morning is nice to see.

Do you see a trend here?  I’m not talking about how these markets were all moving because of what was going on in the U.S. folks. I’m talking about how these markets were all moving because of what was happening in China! Has China taken over as the “hub of markets” from the U.S.?

Well, maybe today it has, but think about this – it starts with a day, then a couple of days, then a week, then a month, and the next thing you know, it’s all about China and not the U.S.  That’s how a country loses the reserve currency, folks. I would keep an eye on this development as it may not take as long, as it used to, for things do move more quickly these days don’t they?

See there? I was correct! The Eurozone CPI did print while I was still writing!  Here’s the skinny folks. Eurozone December CPI remained unchanged to November, at 0.2% month on month and 0.9% year on year. So, I was also correct in saying that the monthly number would disappoint as the expectation was 0.3%… And the euro is getting sold at an even quicker pace than earlier.

Now, why would that be, I can hear you saying? Well, grasshopper, it’s all about stimulus. And whether or not the Eurozone economy needs more or less.  Of course if it were up to Chuck, the Eurozone economy would get neither!  These Central Banks like the European Central Bank (ECB) and the Fed, continue to play with the economies of their respective countries, and to not such stellar results. But they play any way. That’s the skinny for the euro today…

Well, while I’m talking data we might as well, get to talking about the U.S. ISM yesterday. I’ve pointed this out before, but for those of you new to class. The ISM is our PMI, which every other country calls it, and it’s an index that’s used to measure the pulse of manufacturing in a country. Any index number above 50 represents expansion and any index number below 50 represents contraction.

Manufacturing output, durable Goods output, Factory orders, Industrial production, CAPEX, and Capacity Utilization are the important data prints that tell us how the country is doing with economic growth.  And this piece, the Manufacturing Index has been in a free fall since hitting 58.1 in August of 2014, and hitting a multi-year low (2009) of 48.2 in December, marking two consecutive months of below 50 prints for Manufacturing.

This is not good folks. Not for the U.S. economy it isn’t!  And getting back to all those data points I mentioned above. those are the real meat and potatoes of an economy folks. Defense spending, Research and development are nothing but, well, I’ll stop there before I say something that gets me into trouble.

The readings of all these data points that I’ve mentioned above have been really weak for over a year now, and with the Manufacturing Index in a free fall for over a year now, you have to stop and scratch your head and wonder why the Fed is hiking rates, right?

Today’s Data Cupboard only has a couple of data prints for us, and one is just a regional manufacturing index for the state of New York, and the other is the vehicle sales for December.

Recall that last month I talked on end about these car sales, and it appears that December was no different from previous months with HUGE numbers of cars being sold. And looky there! Just when I talk about the meat and potatoes of an economy, we’ll see Factory Orders, Durable Goods Orders, and CAPEX (capital goods expenditures) all this week, as we head to Friday, and the first Jobs Jamboree of the year.

Remember, I’m not going to let the Jobs Jamboree interfere with the other things I have to talk about on Friday, for I don’t care about the trumped up, BLS cooked books number of jobs created any longer!

Gold is up $5 this morning, marking a two-day rally to start the year, which is the first time that has happened in a few years now. Bloomberg tells me that gold has seen an average 4.4% climb in January of the past decade..  Nice to know, eh?

Besides that, Platinum and Palladium have also performed nicely the last two days.  But getting back to gold for a minute. I have to say that I mentioned this in the Sunday Pfennig last Sunday, that I thought that all the bad stuff that’s in store for 2016, that it should be a good environment for gold.

And to further that thought, I think that this is the year that the difference between paper prices for gold and what’s happening in the physical markets will have a battle, with the physical changes winning. Think Shanghai Gold Exchange as being a major player, and so on.

That’s it for today. I hope you have a Tom terrific Tuesday!


Chuck Butler
for The Daily Reckoning

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