August 1 Daily Market Review
Daily Market Analysis by OptionRally
Financial Market Overview
The markets got slammed yesterday after the President of the European Central Bank, Mario Draghi, failed to back up his recent pledge ‘to do whatever it takes to save the Euro’. Following this assertive comment, which Draghi made towards the end of last week, investors became so hyped- up that they were sure that the ECB would deliver policy statements on Thursday capable of bringing the European debt crisis immediately under control. In contrast, Draghi advised that the ECB was presently only in the stage of preparing itself to start purchasing Spanish and Italian bonds on the open market and would not be ready to do so until the start of September at the earliest. He also emphatically stated that he expected the governments of the Eurozone to first commit their bailouts funds to support this important objective before the ECB would intervene. Many investors were so disappointed by this negative response that they felt they had by led up the garden path and made fools of by Draghi.
This may or may not be a valid viewpoint but what can definitely be concluded from this sorry episode is that Draghi has not yet mastered the technique of conveying his intentions to the markets and could well take lessons from the Fed Chairman, Ben Bernanke, on this subject. This is because whereas the markets fluctuated violently yesterday, they hardly moved following the Fed equivalent statements on Wednesday. US economic data released yesterday disclosed that the number of new claims filed for jobless benefits by US citizens climbed less than market expectations. This result added credence to the National Employment Report published on Wednesday advising that the US private sector had created over 160,000 jobs in July beating economists’ predictions. The markets will now focus on the all-pervading US non-farm payrolls due for release today which is expected to show that 100,000 new jobs were generated last month and that the unemployment rate remains unchanged at 8.2%.
The bedlam caused by the President of the European Central Bank, Mario Draghi, yesterday can clearly be seen by studying the directional movements of the EURUSD. After the ECB had initially advised that it was maintaining its interest rates at their current levels, the pair soared by nearly 150 pips to a daily high at 1.2403. However, as soon as Draghi began his press conference shortly afterwards disclosing that the ECB was not instigating any immediate remedies for the European debt crisis, the EURUSD plunged by almost 200 pips to a daily low of 1.2132 before rallying to a close at 1.2179. With a strong bearish bias dominating the pair resulting from the Draghi chaos, sell the EURUSD if price drops below 1.2147.
Although the UK economy has been showing signs of increasing distress over the last month, the Bank of England (BoE) opted to leave its interest rate unchanged and not to introduce any further monetary easing. With the imminent threat of devaluation removed, the British pound surged by almost 140 pips against the USD with the GBPUSD hitting a daily higher of 1.5678. However, after the markets learnt that Draghi’s idea about ‘doing whatever its takes’ meant doing absolutely nothing, annoyed investors quickly flocked to safe-haven assets driving the pair downwards to a daily of low 1.5488 before rallying to a close at 1.5509. After market sentiment received a blow from Draghi, a bearish bias now has a strong hold over the GBPUSD. Consequently, sell the pair if price slumps below 1.5478.
Earlier during yesterday’s session, the Australian strengthen against the USD with the AUDUSD rocketing by over 100 pips to hit a six month high at 1.0577. After Draghi informed the markets that the ECB would not take any action to resolve the European Debt Crisis until the start of September at the earliest and then only after the Eurozone governments had acted, the USD gained considerable support in its capacity as a safe-haven asset. As a result, the AUDUSD plunged by nearly 150 pips to a daily low of 1.0437 before undertaking a moderate rally to close at 1.0455. A large wick (High to Close) was formed on the rightmost candlestick during this process which is indicative of intense selling pressure. As such, consider selling the AUDUSD if price plummets beneath 1.0426.
The pair traded a large range yesterday of over 200 pips from a daily low of 0.9691 to a high of 0.9897 after Mario Draghi added nothing extra to what investors already knew and a far cry from ‘doing whatever it takes to save the Euro’. The movements of the Swiss France are highly correlated to those of the single currency and this feature was evident yesterday when the CHF tracked the Euro higher with the USDCHF plunging by almost 120 pips. The Swissie then weakened during the Draghi conference in unison with the Euro as the USDCHF surged by over 200 points to its daily high. Analysts are now predicting that the CHF is prone to further weakness, especially if the pair can break above its psychologically important 0.9900 level. As such, consider buying the USDCHF will price can sustain a clean break above 0.9888.
The price of Gold took a hammering yesterday after the ECB failed to back its emphatic rhetoric with any meaningful action. With the US Federal Reserve also kicking the can down the road on Wednesday, there is a real danger now that a strong bearish bias could take control of the directional movements of this commodity. This is because as gold rallies when global banks activate new quantitative easing, there is now little ammunition in the offering to provide the precious metal with a boost. With the ECB and the Fed falling short of the mark in the last two days, the only bastion of hope remaining for gold is that today’s US labor report will produce a worse-than-expected result prompting the Fed to rapidly intervene. With a bearish sentiment now exerting pressure on the gold markets, sell this commodity if its price slips under $1,585.65 per oz.
The drop in the price of oil resulting from disappointing ECB news was limited on Thursday by the impact of North Sea supply restrictions. With a bearish sentiment exerting control over oil, sell this commodity if its price slumps under $85.95 per barrel.
Knight Capital was in turmoil yesterday after the company was deemed responsible for a technological glitch that affected the trading performance of over 140 stocks on Wednesday. The firm, which is rated as one of the biggest market movers in America, witnessed its shares plummet by over 70% since this problem first arose two days ago wiping out over $400 million of its market capitalization. As a result, Knight Capital was engaged in a dire battle of survival yesterday as it now faces possible takeover bids and even bankruptcy. Insider sources are advising that the company has just about 48 hours to regain its clients’ confidence.
The plight of Facebook deepened yesterday as its shares slumped below $20 to hit new lows. Executive departures, a pending lockup expiry and an uncertain future are weighing heavily on the firm.
Although the stock markets suffered yesterday following the Draghi revelations, shares of both Apple and Google are still inspiring investors with those of the former climbing by 0.16% to $607.79 while those of the latter slipped by just 0.54% to $629.25. With both companies defying the general trend, buy Google if its share price breaks above $632.05 and purchase Apple if its share price jumps higher than $608.45.