Prepare for Volatility: Markets to Open Much Lower

Steve Kanaval |

2016 is coming in like a Lion and much of the action is taking place prior to US Markets opening. Markets are re-pricing over night based on selling pressure from a weak China and Korean Hydrogen Bombs. U.S. based portfolio managers walk in each morning with markets on the edge. Day six of 2016 has already seen large price swings, head fakes, and immediate tests of support levels established in late 2015.

Today's open will test support across U.S. based Indexes at the open (based on pre-market action) and the markets look like they can come totally unglued. So pull up your socks, we are heading to a volatility party. If we look at some support levels in basic Index S&P500 (SPY) 196.00 is support to watch, and Apple (AAPL) has support levels at $92. We need to watch how we trade around these levels. They are all being tested in pre-market action. Technical levels become critically important during times of extreme volatility, and this move will be no different.

Here are some catalysts so we can make sense of this decline. Below is a round up of things to watch:

Stocks were divergent in Asia. Shanghai rose two and a quarter percent because of buying by official Chinese accounts. In contrast Hong Kong was down one percent, while Australia lost 1.2% and the Nikkei fell one percent. European indexes are on offer this morning, with the DAX and Footsie both down about one and a half percent. US stock futures are down one and a half to two percent.

*There was a seismic event earlier today in the area around North Korea’s nuclear testing facility. North Korea claims the ground shook because of a successful test of its first hydrogen bomb; they say it’s the “H-bomb of justice”. There is great skepticism about whether it was a hydrogen bomb or not, but in any case the region, including China, has condemned the effort. The UN Security Council has called a meeting to discuss the matter.

*The People’s Bank of China set the Yuan’s daily reference rate at the weakest level versus the dollar in almost five years. The official, or on-shore Yuan weakened to around 6.5460 per dollar and that is when the China sold the dollar to stop the slide. But the off-shore Yuan went all the way to 6.70 to the buck, the most Yuan per dollar for the off-shore currency since September 2010. According to some participants the spread between the on-shore or “official” currency price and the off-shore price widened to 0.1628, the widest spread on record; there is concern this is the result of capital flight from China.

*The December reading of China’s service sector Purchasing Managers Index is 50.2, according to Caixin. That’s one point lower than the month before and the weakest level since July 2014.

*The final December reading of the Euro Zone’s services PMI was revised three tenths higher to 54.2. In France the services index was revised down two tenths to 49.8; but in Germany this index was revised up six tenths to 56.0, the best mark in a year and a half.

*The November reading of the Euro Zone’s Producer Price Index is -0.2% on the month and -3.2% on the year; both results matched the forecasts.

*The December reading of the UK services PMI is 55.5, down four tenths from the month before and one tenth under the estimate.

*US mortgage applications were down 11.6% in the week ended January 1; applications were down 4.3% in the week ended on Christmas, according to the Mortgage Bankers Association. Applications for Purchases were down 11.1% in the latest week after falling 4.3% in the prior week. Applications for Refinancing were down 12.4% last week and down 27.8% the week before.

*ADP is set to announce at 7:15am CST its estimate for the net change in December of private sector nonfarm payrolls; it is expected to be an increase of 198k. The November reading of the US Trade Balance is due out at 7:30am CST, it is forecast to be a deficit of $44.0 billion. The December reading of the ISM Nonmanufacturing Composite Index is due out at 9:00am CST it is expected to be a tenth higher than the month before at 56.0. Also due out at 9:00am is the November reading of Factory Orders, estimated to be -0.2% month on month. And one other 9:00am report, the final November reading of Durable Goods Orders, which was originally said to be unchanged on the month, while the Orders ex-transportation were reported to be -0.1%.

*Fed Vice Chair Stanley Fischer is set to be interviewed on CNBC at 7:30am CST.

*The weekly report on energy inventories is due out at 9:30am CST. Stocks of Crude Oil are forecast to increase 500k barrels, Gasoline inventories are expected to rise 1.8 million and the estimate for Distillates is 2.0 million.

*The minutes from the December FOMC meeting are due to be released at 1:00am CST.


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