February 16

Zhou and OPEC Whipsaw the Shorts

Peoples Bank of China governor Zhou Xiaochuan followed through on his weekend comments with a sharply higher fix for the Yuan, sending it 1.35% higher on its biggest daily upswing since 2005. Zhou talked up the Yuan over the weekend in his first comments in months saying that there is “no basis for devaluation” and “China will not let market sentiment be dominated by these speculative forces”. Hedge fund manager Kyle Bass has been all over the financial media in the last two weeks pounding the table on his massive Yuan shorts.

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On the other side of the world news trickled out of OPEC that Saudi Arabia and Russia that there will be a meeting in Qatar on Tuesday to discuss possible production “freeze” given Iran’s pivotal first shipment of oil into the European market since nuclear sanctions were lifted. Oil rose 4% on Monday after a 12% rally on Friday on prior jawboning about supply cuts.

US markets were closed for on Monday for President’s Day, but S&P 500 futures rose 1.5% after Friday’s 2% rally. The retail sales data released on Friday showed the control group survey that excludes oil and autos rose 0.6%, the strongest rise since May 2015. These three developments have caused a sharp squeeze higher in risk assets, especially bank stocks as the so called “Doom Loop” has been interrupted. The Wall Street Journal dubbed the term using it to define the circular reference of weak growth, negative rates and pressure on bank stocks.

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The psyche of most speculators will probably remain to sell rallies, and the first level of significant resistance is at SPX 1940 which was the high after the Bank of Japan implemented negative rates two weeks ago. It will be key to keep all of these topics in mind as the week gets underway in earnest: US economic data, Yuan fixings and OPEC commentary. If these factors can continue to align to push risk higher shorts will be caught out. Under these circumstances A US Dollar rally is likely to return if stocks stabilize and markets slowly begin to reprice rate hikes into the 2016 calendar year.

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