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Thursday, September 29, 2016

Daily update 9/29 IMF's SDR change on Oct. 1

The market was doing its recently normal version of struggling after yesterday's up day when news of Deutsche Bank hit the wires.  Deutsche Bank shares drop after report that some hedge funds have reduced exposure  That sent stocks tumbling.  The IMF says Deutsche Bank may have the most systemic risk in the world.  Officials are coming out of the woodwork saying everything is just fine.  That sounds a lot like the "subprime problem is contained" remarks from Bernanke.  The stock has cratered to all time lows.  When the stock of a company as old as Deutsche Bank hits all time lows you have to be at least a little worried that there are big problems.  While I don't believe they will let the bank totally fail it seems likely there will be haircuts to be distributed around.  Some of those haircuts could also cause trouble.  The pundits on TV were out saying not to worry it is not like 2008.  The problem is that when Bears Sterns failed in March of 2008 and had to be gobbled up by JPM people said not to worry.  That turned out to be a domino that ended up with the Lehman failure.  While the world looks extraordinarily calm at the moment all hell could break loose in the near future.  Dollars seem to be in major demand in Europe suddenly.


The comment is not mine.  However, it looks like it applies doesn't it.  Maybe everything is not wonderful.

SPX rallied off the low, but is back below the 20 and 50 DMAs.  It closed slightly below yesterday's low.  The breadth was -78% so there was considerable selling.  New highs were 100.  There was an urgency to get out as a look at the 1 min NYSE tick chart shows.

The red bars show when the tick reading was -1000 or below.  Most days there are no red bars.  Notice they were still selling right into the close.

The futures poked their head below the lower trendline this afternoon, but came back in.  After hours they are down a bit more and are below the lower line again.  I wonder where they will be by morning.

The red count crossed above the green, but remains below 50.  The bears are trying to take control again. 

The bulls need to show up tomorrow or the bears will probably take control back.  The bank news hit after Europe was closed so markets over there did not get a chance to react.  Will fear spread across the globe overnight?  It certainly could.  I believe there is cause for concern.  If there is a run on the bank it won't last long.  I am lousy at predicting human behavior so I can't really say whether that will happen or not.  Keep in mind Oct. is coming up and we all know how markets can panic that month.  I think we will know a lot more tomorrow after we see what happens around the world.

A reader noted I had not discussed the IMF's SDR change in the blog and was curious if it was important.  I had read a few things on it, but I do not know much about currency markets.  I have seen a few doom and gloom ads lately claiming the demise of the dollar on Oct. 1.  I believe the exact opposite will happen.  Lets take a closer look.

The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. As of March 2016, 204.1 billion SDRs (equivalent to about $285 billion) had been created and allocated to members. SDRs can be exchanged for freely usable currencies. The value of the SDR is currently based on a basket of four major currencies: the U.S. dollar, euro, the Japanese yen, and pound sterling. The basket will be expanded to include the Chinese renminbi (RMB) as the fifth currency, effective October 1, 2016.

Notice the total value of SDRs in circulation is only about $285 billion.  There are many trillions of dollars in the global economy.  SDRs are a drop in the bucket.  The announcement of the change to include the RMB came on Nov. 30, 2015.  Lets take a look at the dollar chart.

The announcement caused a big move down in the dollar the first trading day.  The market has had plenty of time to adjust.  I suspect this adjustment is what has been holding the dollar index down.  I think this could be a case of sell the rumor and buy the fact.  The volatility of the dollar is declining in recent weeks indicating positioning is likely complete.  The 500 DMA has been solid support since first touched last spring.  Instead of the dollar crashing as the gloom and doom crowd is suggesting I expect the dollar to continue its bull market.  The selling involved with the weight change looks complete to me.  However, there are still $9 trillion (or more) of dollar denominated foreign debt that should be a constant demand still out there.  There might be a down day on Monday as the news of the change hits the wires, but shortly after that I think the dollar will rally and break out above that down trendline.


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