Stocks battered by headwinds from Asia

Falling demand from China and rising inflation in Japan are both having an impact on stocks and Treasury markets. Precious metals have also suffered from the sell-off, while crude and industrial metals warn of a global contraction.

Stocks

The top 7 technology stocks all fell, led by a steep plunge in Tesla (TSLA) and Nvidia (NVDA), two stocks with considerable exposure to China.

Top 7 Technology Stocks

The Nasdaq plunged 3.7%, its second 3.0% draw-down in July confirms selling pressure signaled by declining Trend Index peaks. Lawrence MacDonald:

The NDX went 17 months without a 3.0% drawdown. To us this means a lot. Looking back 20 years, these events come in patterns and clusters, NOT isolated events. This speaks to high volatility ahead.

Nasdaq 100 ETF (QQQ)

The S&P 500 recorded its first 2.0% draw-down in 357 trading days. Declining Trend Index peaks reflect selling pressure. Breach of support at 5400 is likely and would offer a target of 5200.

S&P 500

The S&P 500 Equal-Weighted Index ($IQX) broke support at 6800, offering a target of 6600.

S&P 500 Equal-Weighted Index

Declines were across the board, with both the Russell 1000 Large Cap ETF [blue] and Russell 2000 Small Cap ETF [pink] falling sharply.

Russell 1000 Large Cap ETF (IWB) & Russell 2000 Small Cap ETF (IWM)

Treasury Market

Two-year Treasury yields are falling in anticipation of an early rate cut by the Fed.

2-Year Treasury Yield

But 10-Year yields respected support at 4.20%, signaling a test of 4.5%.

10-Year Treasury Yield

Liquidity in financial markets is strong but rising long-term yields could come from Japanese selling in support of the Yen.

Japanese Yen

Jim Grant on the prospects for US and Japanese interest rates:

How the turntables have turned: as the Federal Reserve and Bank of Japan each prepare to render their respective rate decisions next week, recent events suggest a shift in the zeitgeist. Thus, former New York Fed president William Dudley took to the Bloomberg Opinion page Wednesday to lobby his former colleagues for a July cut, citing a weakening labor market along with ebbing inflationary pressures and moderating wage growth.

“I’ve long been in the ‘higher for longer’ camp. . . [but] the facts have changed, so I’ve changed my mind,” Dudley writes…..

Monetary crosswinds are swirling in the Far East. Futures assess the likelihood of a July BoJ hike from the current 0% to 0.1% range at 72%, up from 51% three weeks ago. Similarly, more than 90% of economists surveyed by Bloomberg “see the risk” that the BoJ will opt to pull the trigger, turning the page on its longstanding negative, now, zero-rates policy in the face of mounting price pressures.

To that end, core CPI grew a 2.6% annual clip in June, remaining north of the bank’s self-assigned 2% goal for the 27th consecutive month. On Friday, Tokyo’s Cabinet Office bumped its forecasted inflation rate over the fiscal year ending March 2025 to 2.8% from 2.5%.

“We expect underlying inflation to remain around 2% until early 2025, which we think will prompt the BoJ to hike rates both this month and in October,” writes Marcel Thielant, head of Asia-Pacific at Capital Economics, adding that pronounced currency weakness is placing upward pressure on the price level, as evidenced by a recent pickup in the “other industrial products” CPI component.

The prospect of simultaneous Fed and BoJ policy pivots duly resonates in the currency market, as the yen has snapped higher by 5% over the past three weeks to 154 per dollar after marking a near 40-year low against the buck. Hefty outlays from the Ministry of Finance in service of propping up the yen – estimated by Reuters at $38 billion in July alone – have added oomph to the present course correction.

“This week has seen more pronounced unwinding of carry trades, underscoring the concentration of short JPY positioning that is now facing intense pressure from Ministry of Finance intervention to support the [yen],” Richard Franulovich, head of FX strategy at Westpac Banking Corp, commented to Bloomberg this morning. “Local politicians have become more vocal about the economic dangers from unfettered JPY weakness,” he added.

Financial Markets

Monetary easing continues, with the Chicago Fed Financial Conditions Index declining to -0.58% on July 19, signaling rising liquidity in financial markets.

Chicago Fed Financial Conditions Index

Dollar & Gold

The Dollar Index continues to test support at 104, despite strengthening long-term Treasury yields.Dollar Index

Gold fell to $2,375 per ounce, signaling a test of long-term support at $2,300. Respect of $2,300 remains likely and would be a long-term bull signal for gold.

Spot Gold

Silver fell to $28 per ounce, signaling a bear market driven by falling industrial demand. Expect a test of support at $26.

Silver
Industrial demand for silver is falling as Chinese solar manufacturers face severe overcapacity:

China should push struggling solar manufacturers to exit the market as soon as possible to reduce severe overcapacity in a sector that’s vital to the energy transition, according to a major industry group. Central and local government, financial institutions, and companies should coordinate to speed up industry consolidation, Wang Bohua, head of the China Photovoltaic Industry Association, said at a solar conference in Zhejiang province on Thursday. ~ Bloomberg

Crude Oil

Nymex WTI crude ticked up slightly but is unlikely to reverse its steep down-trend, headed for a test of support between $72 and $73 per barrel.

Nymex WTI Crude

Low crude prices are likely to lead to falling inflation, increasing pressure on the Fed to cut interest rates.

Industrial Metals

Copper and aluminum continue in a strong down-trend as Chinese demand falls.

Copper & Aluminum

Iron ore has so far respected support at $106 per tonne. The steel industry faces similar overcapacity to other industrial metals and has only survived so far by exporting steel, driving down prices in international markets.

Iron Ore

But resistance is growing. Iron ore is likely to plunge if international markets, like India below, erect barriers to Chinese dumping.

Indian Steelmakers Suffer from Chinese Steel Exports

Conclusion

Financial market liquidity is strengthening but stocks and Treasury markets are being battered by headwinds from Asia.

The Bank of Japan is expected to hike interest rates at its next meeting in response to rising inflation caused by the weakening Japanese Yen. The result is likely to be bearish for US Treasuries, driving up long-term yields.

Falling demand from China is likely to impact on revenues from Western multinationals with large exposure, leading to a correction in stocks as growth prospects fade.

The probability of a rate cut at the next Fed meeting grows increasingly likely. Inflationary pressures are declining — as crude oil plunges in response to weak global demand — and economic headwinds are rising.

Gold and silver are likely to diverge. Silver is likely to enter a bear market as industrial demand from China fades, while gold is likely to benefit from safe-haven demand as the global economy contracts.

Industrial metals are already in a bear market which is likely to worsen as international resistance to China exporting its overcapacity grows.

Acknowledgements

Aussie Dollar & Yen break support

Dollar strength is affecting not only gold and commodities, but even the strongest of the currency crosses.

The Aussie Dollar broke support at $0.92 against the greenback, warning of a correction. Expect support at $0.89. Reversal of 13-week Twiggs Momentum below zero, however, suggests a primary down-trend — confirmed if primary support at $0.87 is penetrated. Recovery above $0.925 is unlikely, but would indicate a false break.

Aussie Dollar

The greenback similarly broke through resistance at ¥105.50 against the Japanese Yen. Rising 13-week Twiggs Momentum above zero signals a primary up-trend. Reversal below ¥105 is unlikely, but would warn of another test of ¥104.

USD/JPY

* Target calculation: 105.5 + ( 105.5 – 101 ) = 110

The Euro is already in a primary down-trend against the Dollar. Declining 13-week Twiggs Momentum, below zero, confirms a strong down-trend. Expect support at $1.2750/$1.2800, but a rally is unlikely to break the descending trendline and resistance at $1.31.

Euro/USD

* Target calculation: 1.35 – ( 1.40 – 1.35 ) = 1.30

Euro, Yen plunge against Dollar

The Euro broke support at $1.33, signaling a further decline against the Dollar with a target of $1.30*. Falling 13-week Twiggs Momentum, below zero, warns of a strong down-trend. Recovery above $1.35 is most unlikely, but would suggest that the down-trend is slowing.

Euro/USD

* Target calculation: 1.35 – ( 1.40 – 1.35 ) = 1.30

The recent rally of the Euro against the Russian ruble has faltered. An economic contraction and rising tensions over Eastern Ukraine both contributed. The Euro remains in an up-trend and recovery above RUB 49 would suggest another attempt at the previous high of RUB 51. But failure of support at RUB 46 would signal a primary down-trend. 13-Week Twiggs Momentum oscillating close to zero reflects current uncertainty.

Euro/Rouble

Vladimir Putin is attempting to exploit fault lines in the US/European alliance, targeting the powerful European farming and motor industry lobbies. Unauthorized incursions into Ukrainian territory by his white-painted “aid convoy” are another example, where the infringement is so apparently inoffensive that Angela Merkel will find it difficult to convince her European allies to escalate sanctions further. Failure to react will merely embolden Putin to conduct further minor infringements in defiance of the EU, confident in their response, until the Ukraine suffers “death by a thousand cuts”.

Putin

Only if the US/EU adopt an aggressive escalation, as suggested here on Defence & Freedom, are they likely to contain Russian aggression.

“…a defensive and reactionary game plan makes one predictable. The very existence of a crisis should be understood as a hint that someone used this predictability to predict the outcome of a produced crisis — and arrived at the conclusion that it’s a good idea. Aka failure of deterrence.”

Japan

As with the Euro, the Japanese Yen is also weakening against the Dollar. The Greenback broke resistance at ¥103.50, signaling a rally to test the 2013 high. Follow-through above ¥104 would confirm. Rising 13-week Twiggs Momentum above zero strengthens the signal. Reversal below ¥103 is unlikely, but would warn of another test of primary support at ¥101.

USD/JPY

Australia

The Aussie Dollar, however, is holding its own — ranging between $0.92 and $0.95 against the US Dollar. The narrow band and 13-week Twiggs Momentum holding above zero both suggest continuation of the up-trend. Breakout above $0.95 would suggest a target of $0.97. Reversal below $0.92 is unlikely at present, but would warn of a decline to the band of support between $0.87 and $0.89.

Aussie Dollar

The ASX 200, retracing slightly from resistance at 5650, is also influenced by strong foreign investment flows. Indications are predominantly bullish, including 21-day Twiggs Money Flow forming troughs above zero. Follow-through above 5660 would signal another advance, with a medium-term target of 5850. Reversal above 5550 is unlikely, but would warn of another test of primary support.

ASX 200

* Target calculation: 5650 + ( 5650 – 5450 ) = 5850

Japan: Nikkei falls as Dollar weakens

The US Dollar is testing support at ¥102 to ¥103 against the Yen. Breach of the rising trendline would strengthen the warning from a bearish divergence on 13-week Twiggs Momentum. Reversal of Momentum below zero would suggest a primary down-trend. Recovery above ¥104 is less likely, but would offer a target of ¥110*.

Nikkei 225

* Target calculation: 106 + ( 106 – 102 ) = 110

A rising Dollar/Yen exchange rate would assist Japanese stocks. The Nikkei 225 is testing support at 15000 after penetrating its rising trendline. Bearish divergence on 13-week Twiggs Money Flow warns of selling pressure. Reversal below 15000 would indicate a strong correction, while a Twiggs Money Flow cross below zero would warn of a primary down-trend.

Nikkei 225

Weakening yen boosts Japanese stocks

The US Dollar retreated to test new support at ¥102 to ¥103. Respect is likely and would signal an advance to ¥110*. A rising Dollar/Yen exchange rate will assist Japanese stocks.

Nikkei 225

* Target calculation: 106 + ( 106 – 102 ) = 110

The Nikkei 225 retreated below its new support level at 16000, but respect of the rising trendline would confirm a healthy up-trend. 13-week Twiggs Money Flow holding above zero suggests healthy buying pressure. Reversal below 15000 is unlikely but would indicate a strong correction.

Nikkei 225

* Target calculation: 16000 + ( 16000 – 15000 ) = 17000

Nikkei 225 retreats as Yen falls

Japan’s Nikkei 225 retreated below support at 16000 and is testing the long-term trendline. Breach of support at 15000 would warn of a test of primary support at 13200, while recovery above 16000 would suggest a primary advance to 17500*. A rising Dollar/Yen exchange rate would strengthen the bull signal.

Nikkei 225

* Target calculation: 15000 + ( 15000 – 12500 ) = 17500

Aussie Dollar tests support

The Euro is testing support at $1.3350 against the greenback after a false break above the February high of $1.37. Penetration of the secondary trendline warns of a correction. Rising 13-week Twiggs Momentum, however, continues to indicate a primary up-trend. Breach of $1.3350 would test primary support and the long-term rising trendline at $1.31. Recovery above $1.37 is less likely, but would signal a fresh advance.

Euro/USD

* Target calculation: 1.38 + ( 1.38 – 1.34 ) = 1.42

The greenback completed a higher trough against the Yen, offering a target of ¥101. Breakout above ¥101 would signal a fresh advance to ¥105. Recovery of 13-week Twiggs Momentum above 5% would complete a trough above zero, continuing the primary up-trend. Reversal below support at ¥96 is unlikely, but would test primary support at ¥94.

USD/JPY

* Target calculation: 1.01 + ( 1.01 – 0.97 ) = 1.05

The Aussie Dollar also weakened against the greenback, retracing to medium-term support at $0.93*. Respect would signal continuation of the up-trend; follow-through above $0.97 would confirm, offering a target of parity*. Recovery of 13-week Twiggs Momentum above zero would strengthen the signal. Breach of support at $0.93 and a Twiggs Momentum peak below zero, on the other hand, would test primary support at $0.89. The RBA needs a weaker Aussie Dollar and will do all it can to assist the decline.

Aussie Dollar

* Target calculation: 0.975 + ( 0.975 – 0.95 ) = 1.00

Forex: Euro breakout, Aussie strengthens

The Euro broke through its February high of $1.37, signaling a long-term advance to $1.46*. Troughs above zero on 13-week Twiggs Momentum indicate a healthy up-trend, but expect retracement to test the new support level. Reversal below support at $1.34 is unlikely, but would warn of another correction.

Euro/USD

* Target calculation: 1.37 + ( 1.37 – 1.28 ) = 1.46

Sterling is testing medium-term support at €1.175. Penetration of the rising trendline warns the trend is weakening and failure of support would signal a correction to primary support at €1.14. Reversal of 13-week Twiggs Momentum below zero strengthens the warning. Recovery above resistance at €1.20 is unlikely, but would signal an advance to €1.225*.

Sterling/Euro

* Target calculation: 1.20 + ( 1.20 – 1.175 ) = 1.225

The greenback is pretty directionless against the Japanese Yen, reflecting indecision. Declining 13-week Twiggs Momentum warns of trend weakness. Breakout above ¥101 would signal another advance, while breach of support at ¥96 would indicate a reversal.

USD/JPY

Canada’s Loonie is back at parity against the Aussie Dollar. Expect some support at this level. A breach of the descending trendline would alert us to a potential rally, as would reversal of 13-week Twiggs Momentum above zero.

Canadian Loonie

The Aussie Dollar encountered resistance at its target of $0.97* against the greenback. Short retracement would indicate strong momentum, while respect of the new support level at $0.95 would suggest a healthy up-trend. Failure of support is unlikely, but would warn the up-trend is weakening.

Aussie Dollar

* Target calculation: 0.95 + ( 0.95 – 0.93 ) = 0.97

The Aussie Dollar is strengthening against its Kiwi neighbour, breaking resistance at $1.14 to signal another test of $1.16. Bullish divergence on 13-week Twiggs Momentum favors a primary up-trend. Breakout above $1.16 would complete a double-bottom reversal with a target of $1.20*. Reversal below $1.14 is now unlikely, but would warn of another decline; confirmed if primary support at $1.12 is broken.

Kiwi Dollar

* Target calculations: 1.16 + ( 1.16 – 1.12 ) = 1.20

Forex: Aussie breakout

The Euro is consolidating in a narrow band below $1.36. Upward breakout above $1.37 would signal a fresh advance, with a long-term target of $1.47*. The trough above zero on 13-week Twiggs Momentum indicates a healthy up-trend. Failure of support at $1.34 — and penetration of the rising trendline — is unlikely, but would warn of another correction.

Euro/USD

* Target calculation: 1.37 + ( 1.37 – 1.27 ) = 1.47

Sterling broke short-term support at €1.18, warning of another correction to primary support at €1.14. Recovery of 13-week Twiggs Momentum above zero continues to favor a primary up-trend. Breakout above resistance at €1.20 is unlikely, but would signal an advance to €1.24*.

Sterling/Euro

* Target calculation: 1.19 + ( 1.19 – 1.14 ) = 1.24

The greenback respected support against the Japanese Yen at ¥96. Breakout above ¥101 would signal another advance. Declining 13-week Twiggs Momentum, however, continues to warn of a weak up-trend and breach of support at ¥96 would indicate a reversal.

USD/JPY

* Target calculation: 96 – ( 100 – 96 ) = 92

Canada’s Loonie respected support at $0.96, suggesting another attempt at resistance of $0.9750. Breakout would complete a double-bottom reversal with a target of parity*. Bullish divergence on 13-week Twiggs Momentum also favors a primary up-trend. Reversal below $0.96 is unlikely, but would signal another test of the primary level at $0.9450.

Canadian Loonie

* Target calculation: 97.5 + ( 97.5 – 94.5 ) = 100.5

The Aussie Dollar broke through resistance at $0.95, signaling an advance to $0.97*. Retracement to test the new support level at $0.95 is likely. Respect would confirm the primary advance; failure of support — though unlikely — would warn of another test of $0.93.

Aussie Dollar

* Target calculation: 0.95 + ( 0.95 – 0.93 ) = 0.97

Against its Kiwi neighbour, the Aussie Dollar respected resistance at $1.14, suggesting another test of primary support at $1.12. Bullish divergence on 13-week Twiggs Momentum, however, continues to favor a primary up-trend. Recovery above $1.14 — and the descending trendline — would signal a test of primary resistance at $1.16. Breakout above $1.16 would complete a double-bottom reversal with a target of $1.20*. Until then, breach of primary support remains a threat and would warn of a decline to $1.08*.

Kiwi Dollar

* Target calculations: 1.12 – ( 1.16 – 1.12 ) = 1.08

Forex: Euro and Aussie rise as Dollar weakens

The Euro respected support, on a brief retracement to $1.34/$1.3450, before following through above the last two week’s high — signaling a test of the February high at $1.37. Breakout would offer a long-term target of $1.46*. The trough above zero on 13-week Twiggs Momentum indicates a healthy up-trend. Respect of resistance is unlikely, but would warn of another correction.

Euro/USD

* Target calculation: 1.37 + ( 1.37 – 1.28 ) = 1.46

The greenback is heading for a test of primary support at ¥96 after breaking short-term support at ¥98 on the daily chart. Failure of support would offer a target of ¥92*. Reversal of 13-week Twiggs Momentum below zero would also warn of a primary down-trend. Recovery above the descending trendline is unlikely at present, but would indicate a rally to ¥100.50.

USD/JPY

* Target calculation: 96 – ( 100 – 96 ) = 92

The Aussie Dollar has so far respected support at $0.93 against the greenback. Follow-through above $0.94 would suggest an advance to $0.97; confirmed if resistance at $0.95 is broken. Reversal below $0.93, however, would warn of a correction to primary support at $0.89.

Aussie Dollar

* Target calculations: 0.95 + ( 0.95 – 0.93 ) = 0.97

The Aussie continues to test support at $1.12 against its Kiwi neighbour. Tall shadows (wicks) for the last two weeks indicate selling pressure. Failure of support would offer a target of $1.08*. Recovery above the descending trendline is less likely, but would suggest an advance to $1.20; breakout above $1.16 would confirm, completing a double-bottom reversal.

Kiwi Dollar

* Target calculations: 1.12 – ( 1.16 – 1.12 ) = 1.08