The day of the tumble

Automated trading and cumulated stop losses? Human error? Some real cause of (yet) unknowns nature? At this point no one really knows what was the cause of a huge sell-off yesterday on Wall Street, sending major indices towards February’s lows, selected blue chips by as much as 20-40% (!) down, reverberating on currency and commodities markets, only to erase the most of the move within an hour.

At that point, reports suggest reduced liquidity combined with heavy stop-losses. Indeed, there were substantial supports seen as potential reverse points for the correction: Jan’s highs (of 1148 pts. for S&P500 futures) and uptrend line (1123 pts.). However, even with stop losses at those points, the jaw-dropping crush seems suspicious. Therefore, the SEC will investigate this case. One thing seems certain. The consolidation around local highs we described on [link=http://www.xtb.com/strona.php?komentarz=14352]Tuesday morning [/link] once again resulted in a sell-off.

What might happen now? If not the sudden reversal and a plausible scenario of some sort of accident, one could anticipate a major correction, a one that would place a question mark on the bull market so far. However, the buyers activated not much above Feb’s lows, offering a belief in a sustainability of the bull market (a belief supported by recent upbeat earnings season and generally solid macroeconomic picture). Forgetting intra-session lows, the downturn measured my daily closes still doesn’t exceed previous corrections in a significant way. Asia’s reaction (mostly moderate losses) also suggest that things might return under control. However, at that point nothing could be ruled out. Things in Europe could turn in any direction. Also a close of the week will offer some important clues.

[srodtytul]USDJPY sharply down, bounces up from 88,00[/srodtytul]

Uncontrolled ride down on Wall Street had to impact currency markets. Interestingly, the move had (relatively) moderate impact on the EURUSD signaling reduced downward potential as the pair (moving to 1,2517 at the lowest point) is moving closer to the 2008/09 lows of 1,2454 and 1,2322. Major swing was present on the (relatively calm recently) USDJPY – the pair usually prone to increased stock market nervousness. Interestingly, the pair had some downward potential as it failed with the test of 94,77. As a result of the tumble it moved to March’s low of 88,12 (actually diving to 87,95) only to bounce back above 92,00. The activation of the buyers at March’s low suggest a chance for the continuation of the upward move (supported by the fundamentals) in the longer-term, although yesterday’s tumble certainly complicates this picture. Another side-effect of the crash was a sell-off in relatively illiquid emerging currencies markets.

[srodtytul]Gold feasts on market fears[/srodtytul]

Increasingly evident presence of the fear-factor benefits gold, even as the EURUSD slides down, boosting the gold price in the euro terms. As the industrial commodities lost ground yesterday, gold continued the advance, moving closer to the 2009 high of 1225 USD per ounce. This level may be a significant test for the precious metal, but a potential success or a reversal depend more on the developments on the global markets than a situation on gold itself. Interestingly, this time a rebound on the EURUSD (if it was a result of the turnaround in Europe) could be negative for gold’s USD price, at least in the short-term.

[srodtytul]Events to watch – earthquake aftermath, payrolls [/srodtytul]

The tumble on Wall Street had little to do with the fundamental situation but it fits well into the European contagion and may exacerbate it simply because of increased volatility and uncertainty. Therefore, it is yet another call for the European politicians (and perhaps the ECB and in extreme case, the Fed and the US politicians as well) to offer extraordinary measures on top of the aid package for Greece. Those measures should come along with a declaration of additional austerity measures not only from Greece but from the whole PIIGS group at the very least. Depending on the arrival of such measures, there might be a rapid rejuvenation of yesterday’s pains or a further aggravation. Under such circumstances, the payrolls report (8.30 ET, 14.30 CET, expected rise in employment of 200k) might have a reduced market impact.

Przemysław Kwiecień

Chief Economist

X-Trade Brokers Dom Maklerski S.A.

[email protected]