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Trading  | August 27, 2018

It has been a quiet overnight session as UK markets are closed for holiday, with last Friday’s post-Jackson Hole surge that sent the S&P to a new all time high pushed risk momentum higher, and sent world stock markets to their highest level in more than two weeks on Monday as reassuring comments from Fed chief Powell, an easing in trade war jitters and a bid by China’s central bank to stabilize the yuan lifted risk appetite.

Still, the yuan failed to hold onto gains as the market took into account the possibility of an escalation in the U.S.-China trade war, while the peso rose as the U.S. and Mexico are said to be close to resolving their Nafta differences. President Trump tweeted that a trade deal with Mexico could be reached soon, while there were separate reports which noted that US and Mexico were said to be poised for an agreement on NAFTA as soon as this Monday. In addition, there were comments from Mexico Economy Minister Guajardo that sides were practically in the final hours of negotiations. Conversely, Mexico Foreign Minister Videgaray said work on NAFTA with US has not finished and there had been source reports on Friday that Mexican President Elect Lopez Obrador’s stance on oil was said to be keeping US and Mexico from securing a NAFTA deal.

Comments from Powell at the Jackson Hole symposium on Friday affirming that the U.S. central bank was sticking with its strategy of gradual rate hikes to protect economic growth sparked a rally in stocks that gathered pace as a new week swung into gear. Helping to brighten the mood, U.S. and Mexican trade negotiators were reprotedly on the verge of reaching a deal in bilateral trade agreement as part of NAFTA, with Mexican Economy Minister Ildefonso Guajardo saying on Sunday talks have “continued to make progress”. The talks will resume on Monday and a positive outcome is expected to ease concerns about an escalation in global trade tensions.

“The (NAFTA) talks add to the sense that while the U.S. is still bogged down in its trade conflict with China, it is perhaps more willing to compromise elsewhere such as with Mexico and the EU,” said Ulrich Leuchtmann, head of FX and emerging market research at Commerzbank in Frankfurt. “It’s decreasing the risk of a global trade war.”

U.S. futures were set to open at a new all time high, with European equities rising across the board following big gains for most Asian gauges. A British holiday overshadowed the European session, and trading activity was depressed.

Europe’s Stoxx 600 Index climbed as almost every industry sector advanced, despite abysmal volumes were about one-third of the 30-day average. A stronger-than-expected German business sentiment survey added to the upbeat mood in Europe, with stock markets in Paris and Frankfurt up 0.4 percent each. Britain is closed for a public holiday.

Germany’s Ifo business index rebounded back to 103.8, far stronger than the 101.8 expected. A surprisingly strong Ifo index suggesting that concerns about a global trade war among company executives in Europe’s largest economy have eased, and implying substantial upside potential to German GDP. “The growth party is all set to continue,” ING says. The euro pared an earlier drop after the Ifo report.

“We have low volumes today, but the biggest risks the market were discounting were trade wars, so any reduction in trade war risk such as NAFTA talks or even Trump trying to find bilateral deals with everyone, has pushed U.S. shares to new records and will support markets,” said Angelo Meda, head of equities and a portfolio manager at Banor SIM in Italy. “The global economy is on track, there’s less trade war risk, the only cloud on the horizon is Italy,” Meda added, referring to upcoming budget talks in the weeks ahead.

The biggest movers on Monday were in Asia, with shares in Hong Kong, China and Japan all surging after recent efforts by the Chinese central bank to shore up the yuan culminated with Friday’s announcement by the PBOC that the Yuan “counter-cyclical factor” will be revived in its daily fixing to support the currency. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1.1 percent and Japan’s blue-chip Nikkei closed at a 10-week. That left the MSCI All-Country World index at its highest level since Aug. 9.

A strengthening in the Chinese yuan, one causality of heightened trade tensions, also boosted sentiment in world markets. The onshore yuan hovered near the strongest level in more than two weeks after China said Friday a change in the daily fixing process has been reintroduced this month, lending support to the currency. The onshore yuan was little changed at 6.8206 per dollar at 4:57pm in Shanghai, after rising as much as 0.19% earlier. The PBOC strengthened the daily reference rate by 0.29% to 6.8508, far stronger than the average estimate of 6.8563. The offshore, CNH, dropped 0.04% to 6.8083 per dollar after rising 1.3% Friday, most since January 2017.

“China just seems to be stabilizing its currency and we’re getting used to that fact now, so we’re not looking at an ever-weaker CNY, which could raise issues,” said Robert Carnell, chief economist and head of research, Asia-Pacific at ING, adding that “it reduces the scope for outflows”.

In currency markets, the dollar steadied against its peers: the Bloomberg Dollar Spot Index initially fell as Powell said Friday that the “gradual process of normalization remains appropriate” given the pace of U.S. expansion. He added there were no clear signs of inflation accelerating above 2%.

“It looks like the dollar bulls were a bit disappointed, even more so given that positioning was slightly long USD heading into Powell’s speech,” said Stephen Innes, Singapore-based head of trading for Asia Pacific at Oanda Corp. “It’s not like he was dovish, he just wasn’t hawkish enough to move the Fed rate hike dial. This sitting Fed is not about to overreact to cyclical strength in the economy.”  And sure enough, after some early weakness, the BBDXY rebounded, erasing all losses, and was mostly unchanged as of 6am ET.

The Yen rose, with the USDJPY flirting with 111.00, after Japan Chief Cabinet Secretary Yoshihide Suga was asked at his regular press conference about comments he made last week in Hokkaido on Japan’s expensive mobile phone bills. Suga said there’s a need to swiftly consider and implement solutions on mobile bills given the various issues surounding them; he said that steps are needed to provide an easy-to- understand, acceptable service for users, through promoting competition among providers. The comment sent Japanese telecom stocks sharply lower, with shares in Docomo, KDDI and SoftBank tumbling after the remarks with KDDI falling as much as 1.5%.

The Euro was initially weaker, after Italy’s Prime Minister Giuseppe Conte said his nation can’t adhere to EU budget rules amid the clash with European partners over migration. He said that the government will start the process of blocking the next EU budget. Turkey’s lira dropped with volatility rebounding, ending a week of relative calm as Turkish markets opened after public holidays.

Elsewhere, bund futures sold-off aggressively after the far stronger than expected German IFO report, with curve bear steepening, while US Tsys were mixed in low volume trading.

Commodities felt the pressure from a strengthening dollar, WTI (-0.4%) and Brent (-0.4%) continue to retreat from Friday’s advances. Gold is subdued following the largest percentage gain in 15-months on Friday. Elsewhere, Shanghai base metal prices rose, while zinc rose for a sixth consecutive day as Chinese inventories languish at their lowest in a decade. The threat of tariffs in US crude is said to have spurred some buyers in China to purchase more crude from Libya, according to Platts.

It’s a quiet Monday session, with the only expected data the Dallas Fed. American Woodmark and Heico are among companies reporting earnings.

Market Snapshot

  • S&P 500 futures up 0.2% at 2,882.75
  • STOXX Europe 600 up 0.2% to 384.31
  • MXAP up 1.1% to 165.46
  • MXAPJ up 1.1% to 535.91
  • Nikkei up 0.9% to 22,799.64
  • Topix up 1.2% to 1,728.95
  • Hang Seng Index up 2.2% to 28,271.27
  • Shanghai Composite up 1.9% to 2,780.90
  • Sensex up 1.2% to 38,695.31
  • Australia S&P/ASX 200 up 0.3% to 6,268.87
  • Kospi up 0.3% to 2,299.30
  • German 10Y yield rose 1.1 bps to 0.356%
  • Euro down 0.04% to $1.1617
  • Italian 10Y yield rose 6.2 bps to 2.878%
  • Spanish 10Y yield unchanged at 1.394%
  • Brent futures down 0.3% at $75.61/bbl
  • Gold spot down 0.1% at $1,204.02
  • U.S. Dollar Index up 0.04% at 95.19

Top Overnight News from Bloomberg

  • Federal Reserve Chairman Jerome Powell said the strength of the U.S. economic expansion justifies gradually raising interest rates, paving the way for a hike in September and possibly another this year
  • The U.S. and Mexico are poised to resolve their bilateral Nafta differences as soon as Monday, creating an opening for Canada to rejoin talks covering $1.2 trillion in annual trade
  • German business confidence rose for the first time in nine months as companies’ concerns about rising trade tensions seem to have bottomed out
  • The U.S.’s trade war with China is about to get uglier. After a long, hot summer spent weighing risks and firing warning shots, the hawks in President Donald Trump’s administration have gained the upper hand — and they’re set to unleash a fall offensive
  • Italy will start the process of opposing the EU’s next budget after the bloc’s member states failed to follow through on a deal reached in June for handling the flood of migrants, Deputy Prime Minister Luigi Di Maio said
  • The greenback’s decline may disappoint speculators, who boosted net long positions to the highest since January 2017 in the week ended Aug. 21, the latest data from the Commodity Futures Trading Commission show
  • Prime Minister Shinzo Abe launched his bid for a historic third-straight term as ruling party president, attempting to put months of scandal behind him and become Japan’s longest-serving premier
  • Indonesia’s central bank, faced with a deepening currency rout, won’t let an upcoming presidential election prevent it from raising interest rates if necessary

Asian equity markets began the week positive across the board following the record closes for the S&P 500 and Nasdaq Comp on Friday in US, where Fed Chair Powell reiterated a gradual approach at the Jackson Hole symposium and with sentiment also underpinned by hopes of a looming NAFTA-related agreement between US & Mexico. ASX 200 (+0.4%) and Nikkei 225 (+0.9%) were positive from early trade although gains in Australia were capped as financials lagged, while Tokyo stocks coattailed on early currency moves to reclaim the 22800 level where it eventually peaked. Elsewhere, Hang Seng (+2.2%) and Shanghai Comp. (+1.9%) led the broad heightened-risk appetite after the PBoC’s currency stability efforts and with the Hong Kong benchmark the outperformer as nearly all its constituents traded in the green. Finally. 10yr JGBs were flat with demand kept subdued amid gains in riskier assets and with a lack of Rinban operations by the BoJ.

Top Asian News

  • China’s Top Regulator Has Its Eye on Share Pledges, Online Loans
  • Noble Group’s Shareholders Vote in Favor of Restructuring at SGM
  • ZTE Leads Telecom Rally After Report on 5G Spectrum Distribution
  • Mahathir Bans Foreigners From $100 Billion Property Project

European equities are mostly higher (Eurostoxx 50 +0.2%) with the exception of the FTSE MIB (-0.4%) weighed on by domestic financial names. UK is away on bank holiday while German and French equities are performing well with the DAX supported by German auto names. Over in France, heavyweight Kering (+2.1%) lifts the index. All sectors are currently in the green while consumer discretionary outperforms on auto strength. Volkswagen (+1.7%) was reportedly one of the investors Tesla’s bankers had lined up in the event Tesla went private. Elsewhere, Bayer (+0.3%) shares shrugged off reports that its (and J&J’s) drug Xarelto did not meet its main goal.

Top European News

  • Italy Vows to Veto EU Budget After Nations Ignore Migrants’ Deal
  • Merkel’s Call for Assertive Europe Sets Up Busy EU September
  • Metro Edges Closer to Takeover as Investors Build Stake
  • Brilliance Jumps as Bernstein Fuels BMW Venture Optimism


  • EUR – The single currency has rebounded from sub-1.1600/129.00 lows vs the Usd and Jpy respectively, while cementing gains above 0.9035 vs the Gbp in wake of Germany’s August Ifo survey that beat consensus on all counts and was accompanied by upbeat comments from the institute’s economist. However, the Eur still looks top heavy around chart resistance levels, like the 55DMA at 1.1615 and with big option expiry interest at 1.1625 (2.4 bn) also capping the upside.
  • TRY – Little respite for the Lira after the Turkish holidays as a fleeting glance above 6.0000 vs the Usd only seemed to give sellers additional psychological volition to flog the currency anew. Indeed, Usd/Try rallied to just shy of 6.2000 before the CBRT ‘intervened’ via its daily FX depo to stem the tide, as investors re-establish bearish positions on all the well documented and still prescient negative factors.
  • JPY – Also relatively constrained, albeit back under 111.00 vs the Usd and hemmed in by the 55 DMA (circa 111.01) and offers ahead of 111.50.
  • MXN – The EM outperformer as NAFTA talks are said to be nearing a conclusion and deal could be announced as soon as later today, Peso just off peaks vs its US counterpart around 18.7625.

Commodities are feeling the pressure from a strengthening dollar, WTI (-0.4%) and Brent (-0.4%) continue to retreat from Friday’s advances. Gold is subdued following the largest percentage gain in 15-months on Friday. Elsewhere, Shanghai base metal prices rose, while zinc rose for a sixth consecutive day as Chinese inventories languish at their lowest in a decade.

US Event Calendar

  • 8:30am: Chicago Fed Nat Activity Index, est. 0.5, prior 0.4
  • 10:30am: Dallas Fed Manf. Activity, est. 30, prior 32.3

A revolutionary initiative is helping average Americans find quick and lasting stock market success.

275% in one week on XLF - an index fund for the financial sector. Even 583%, in 7 days on XHB… an ETF of homebuilding companies in the S&P 500. 

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