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Market Wrap
The Canadian dollar has held on to it relative strength well today but there is a definite shift into the safety of the Swiss franc and Japanese yen ahead of further missed payments by the distressed Chinese homebuilder Evergrande and the BOJ policy rate decision tomorrow. The SNB take their turn at giving the markets an update on their policy rate decision ahead of the Bank of England on Thursday.
The markets are currently not showing much fear with every equity index green for the day bar the Nikkei225 goes to show how resilient these markets can be. For me it is all about the US debt ceiling and less about Evergrande. Yes, there could be a slight risk of contagion, but the banks have known that the company has been in the doghouse for a long time, so they have been able to mitigate that problem. If there is a credit crunch or some other liquidity event as China regulates different sectors more, we could get a cumulative effect of companies going insolvent which could cause more trouble. For now, the markets appear to be liking the news out of the US which has reported the House Democrat stop gap bill would fund the US government through December 3rd and suspend the debt ceiling through to December 16th, 2022. The US house will debate and vote on the bill.
Using the chart of the SPY which is an S&P500 based ETF for the pure reason you can clearly see the US session and the gaps that occurred over the last couple of trading days. The big on in the middle of the chart was yesterday’s risk off gap, where selling occurred right up until the close. The sellers had remained in control for most of the US session but in the last hour the table turned. Today that follow through to the upside during the Globex session meant the SPY gapped higher. Usually when I see that happen in a bear market, I expect the retail traders who were long in the Globex session to buy more at the open only to get trapped long, in what I call the Gap and Trap trade. Today however, the first part of the trade setup occurred but support and more buying pressure came in when the price action found yesterday’s volume point of control (VPOC), which is the level that traded the most amount of volume yesterday. We still may get a sell off, but the likely hood now is that we stay in this range and then possibly close yesterday’s gap on a more dovish fed FOMC tomorrow.
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The US dollar had traded lower today on the DXY but looks like it may close near the opening print. The major crosses are still showing some US dollar bearishness, especially the USDCAD which traded below yesterday’s lows but has since bounced. The EURUSD is flat for the day but the AUDUSD following on from the RBA in the overnight session is trading lower into the London close.
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