The Rooster Call: Defensive Attitude Based on China Slowdown

Hit the Mark Trading’s Brief Review of Overnight Market Action Setting the Tone for the Trading Day

Good morning, traders! We should approach the day with a defensive attitude in light of continued evidence of slowing in China. We need a positive off-set and that might be today’s USA PMI reading issued at 9:45AM ET. The PMI report takes on enhanced importance due to the current side way price action in S&P 500. Bulls need help.

Chinese HSBC Manufacturing PMI dropped in March to 48.1 from February’s 48.5. Readings below 50 signal contraction. I think the market is divided into to camps on China…the idea the central government will announce a massive stimulus versus a camp believing the end is nigh.

It’s not just the slowing PMI in China. A fog is lifting exposing the massive debt levels caused by banks supporting old “rice bowl” state industries trying to make a go of private capitalism. The old state run industries produce to produce…not necessarily producing for demand. It’s more of a “keep the workers working” idea. All of this required loans. These loans spread across entire industries. The Chinese “miracle” consumed ever more raw materials as massive infrastructure projects were undertaken. All of this required loans, first from the World Bank, then the Chinese central bank, and finally private lenders as the economy heated up.

Fast forward to present…the Chinese government is saying the game cannot continue. Debt defaults are now allowed at least selectively. What this means to traders is simple…if you take away the largest consumer of raw materials, the price of raw materials (i.e. copper and iron ore) falls. The Chinese have also stock piled massive amounts of agricultural commodities. All of this storage requires loans to service. If these loans are called, a change in stock pile policy could ensue affecting agricultural goods.

Why not let the game continue? The Chinese government is concerned about inflation and the effect on the population if consumer spending slows. The Chinese government has reversed policy on strengthening their currency allowing the Yuan to fall. If the currency continues falling, market forces will gather thinking an even worse economic environment will unfold. This is why many feel the Chinese government must issue yet another massive stimulus…a seemingly yearly event.

Your barometer on China is the currency and copper. Why is China important? This is the second largest economy in the world. You have to be watching from the perspective of global risk.

Separately, Euro zone PMI remains above 50 and that’s a good thing. Markit conducts the PMI survey, stating the Euro zone “continued to enjoy its strongest spell of growth since the first half of 2011 in March.” (Financial Times). German PMI is robust, but the reading fell from 56.4 to 55. Germany is the economic power house of Euro zone. Euro has fallen on the Germany PMI overnight.

Today’s Reports and FED Activity

09:00AM ET – FED Stein speaks
09:45AM ET – PMI Manufacturing Index Flash
13:45PM ET – FED Fisher Speaks

Overnight/Pre-Market

  • Gold is lower again testing/breaking support on daily chart. Silver follows.
  • Brent consolidates.
  • USA crude consolidates.
  • Natural gas super quiet (see my comments below).
  • Grains are waiting for the March 31 stocks reports and planting intentions.
  • Bonds incrementally lower.
  • US dollar incrementally higher.
  • Euro below 1.3800. Next stop 1.3700? Day traders should monitor.
  • Yen incrementally lower.
  • ES / YM / NQ / TF incrementally higher awaiting USA market open
  • The USA President meets with European leaders. The market might remain on edge until a statement is released regarding Russia. Just be aware.

Day Trader Bench Marks

Intraday ES Floor Pivots – Using 24 hour electronic market hours 1800-1715 ET.

R3: 1892
R2: 1884.50
R1: 1870.75

Main floor pivot: 1863.25

S1: 1849.50
S2: 1842
S3: 1828.25

Intraday Euro Floor Pivot – Using 24 hour electronic market hours 1800-1700 ET.

R3: 1.3858
R2: 1.3833
R1: 1.3813

Main floor pivot: 1.3788

S1: 1.3768
S2: 1.3743
S3: 1.3723

Think About This!

There’s money…and then there is BIG money. BIG money has been quietly pushing an agenda for opening greater export amounts of USA natural gas on the world markets currently limited by law. On Tuesday, a USA Senate committee will discuss the impact of opening up greater USA natural gas exports helping Europe against the threat of Russia cutting supply. Two House committees will also hold hearings. The Ukraine event is perfect cover for pushing the natural gas lobby agenda.

If the USA exports greater amounts of natural gas, it guarantees several things…first, an immediate pop higher in USA natural gas pricing to meet world pricing. This is a huge boom for natural gas explorers, processors, exporters as well as natural gas pipeline services.

Second, USA consumers, manufacturers, and electrical utilities will pay higher prices for domestic natural gas. This is the least concern of politicians, in my opinion. The energy component of inflation will tick higher. Raising the price of natural gas is a life-line to the declining USA coal business. And let us not forget raising the amounts of natural gas exports helps the administration meet USA export goals. This is a bi-partisan political win.

You should be watching any government developments on natural gas. Start your research efforts now for the long term. Preparation a key to success.

Have a great trading day!

To learn more from Martin, visit HitTheMarkTrading.com to join his mailing list and receive blog updates.