European futures are trading lower after another heartbreaking economic data released in Asia. The Chinese flash market manufacturing purchasing index slipped into a contraction territory and this is going to amplify the selling pressure on equity markets. The reading came in at 49.5, below the separation zone of 50, which separates the contraction from the expansion zone. This is the first time in seven months that the index has slipped in a contraction territory.
The overall sentiment in the market is once again very bearish and more shorting attitude is creeping up amid traders. Christmas has come very early for bears who must love the smell of fear in air which is driving the Bulls back in their cave, given the rout we are experiencing in oil prices, and Russian rubble which is much stable now after the last nights news.
Oil traders have increased their short positions massively and this followed the news which came out over the weekend. The UAE has confirmed that the OPEC members may not even blink their eyes even if the Crude Oil price falls below 40. Although, the zone between $30-40 is what we call a Buffet buying zone, has made traders to increase their short position with the target price of $40. There are many questions over so called the US shale oil, which has break even point between $60-65. Given where the price is trading now, I think it is only a matter of time before they receive a knock on their door from their lenders demanding repayments. The spill over impact is far more than only oil companies as it also includes the banks and the hedge funds who are holding their debts and when their borrower cannot afford to pay them back, we could be on the horizon of another wave of job cuts and credit bubble burst. Not to mention the deflation part of the equation which is going to make it more difficult for the U.S. Government to control its debt and given that they have not seen any success in reaching their inflation target, the pressure is on massively.
Last night Russian central bank has surprised the investors by raising their interest rate to 17%,a currency defending strategy which makes the game more expensive for speculators who are punishing the currency because the country could fall into recession. The currency has strengthened its position since the announcement as short trades were pushed out. Although it is big news for currency perspective but from macroeconomic perspective, we do believe that the contraction in the Chinese economic data news is bigger and that should take a priority on trader’s dashboard.
Bank of England has released their stress test results and said three banks have to raise their capital. One would have to appreciate the parameters for these stress test as the bank has assumed higher unemployment, crash in housing pricing and 28% sell off in equity market. It was extremely bold move when the bank has put aside their own forward guidance in assessing these stress tests and has assumed the interest rate rise of 4% from its current level. Although, the BOE has consistently confirmed that their rate hike will be gradual. The stress tests done by the BOE are much more robust and reliable as compared to the ones carried out by the European Central Bank. The three banks will have to raise more capital and could bring fresh money to work and thus representing an opportunity for those who were not onboard so far.
Disclaimer: The above is for informational purposes only and NOT to be construed as specific trading advice. responsibility for trade decisions is solely with the reader.