Global markets tumbled in the context of the continuing fall of the Chinese Stock Exchange, providing high volatility conditions on Forex and commodities markets, in addition to leading indices and stocks.
The 19-nation EUR currency has strengthened 4.2% in August, on course for the biggest gain since April. Currency traders don’t believe that the Federal Reserve in the U.S. will raise interest rates in September which would prop up the USD. In addition, another factor in EUR support, is risk aversion to emerging markets since China’s surprise move to devalue its currency on August 11th. This is a sort of “flight to safety” phenomenon that allowed the EUR to climb 0.5% to $1.1445 at 06:46 a.m. in London, a level not seen since Feb. 5th. Equities worldwide have lost more than $5 trillion in value since China devalued the Yuan. Hedge funds and significant speculators have reduced their stakes in lower EUR against the dollar to the lowest since June according to the Commodities Futures Trading Commission. The probabilities that the commission attributes to a rate hike in the U.S. on the part of Chair of the Board of Governors of the Federal Reserve System, Janet Yellen, is 28%, down from over 50% before China devalued its Yuan.
U.S. Equities declined sharply by 3.2% to 1970.89 on Friday alone, amid a worldwide selloff, as investors’ worries negatively impacted the S&P 500. It was on Friday that the index capped its 5% decline of the year, spending the past 7 months stuck in a trading range that is unprecedented in duration. A confluence of economic distresses including growth in China, weak commodity demand, emerging market currency and bonds weakness, & fed rate hike uncertainty all contributed. When the Eurozone and China are experiencing strong downtrends, the U.S. does not remain an island of safety yet it usually outperforms. Interestingly, the 50 companies in the S&P 500 with the highest share value were down 5.7% over the last three months through July, five times as much as the broader market. That is the worst underperformance since 2011 and came right before the broader index produced their biggest selloff in in four years according to data from Bank of American & Bloomberg. According to the source, approximately $94 billion has been pulled out of equity mutual and ETFs (Exchange Traded Funds) in 2015, potentially setting up as a record year for withdrawals. The index has gone without a 10% correction for almost four years, the third longest stretch ever, to provide further perspective.
Apple (NASDAQ:AAPL)
Apple stock, the number two stock on the S&P 500 in terms of average number of shares traded per day, has tumbled 20% from its February peak. This fact does not normally portend the beginning of a broad market crash, since greater losses in the most popular shares versus broader indexes, suggest that euphoria, a state that generally terminates bull markets, has not arrived yet. Historically, Apple stock has seen fundamental support at 10 times earnings which would suggest a floor in the high 90s from its Friday closing price of 105.76. That was the case when margins were declining while presently gross margins are mildly expanding. Analyst are strongly divided when it comes to price targets; from a high of $195 to as low as $85. Nevertheless, with the iPhone 6/6+ still selling briskly in Beijing, with its successor rolling off the assembly line, with new stores opening across the world, with Apple Pay and streaming music, Apple should have tailwinds going forward. Buttressing that notion, is the board of directors’ decision to earmark $140 billion to buybacks where $90 billion was spent by the company last quarter allowing for $50 billion remaining to power the stock forward.
