The Sound of a Dead Cat Bounce

We look at the consequences of the crushing turnaround in stocks and what currencies are most vulnerable. The US dollar was the top performer Tuesday but its gains were slashed late in the day. The focus will be on Asian stocks in the hour ahead but the RBA's Stevens is also on the docket.  in Ashraf's Premium Insights, 4 trades hit their final targets over the last 36 hrs; - EURUSD (opened Friday), USDCAD (opened Jul 15), USDJPY (opened Aug 20) & CADJPY (opened Jul 8) for a total of 720 pips.  1 trade remains in progress, currently +120 pips.

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Yesterday we speculated about the Fed staying dovish and the PBOC cutting rates at any moment and the second part of that equation was delivered after a 7.6% drop in the Shanghai Composite. “How markets react to those [central bank] moves will be extremely telling” we wrote.

The tale has now been told. The 80 point intraday reversal in the S&P 500 is the largest since 2008 and the market closed on the lows.

Ultimately, what we do is listen to the market and the message is loud and clear. The stock market has lost confidence in central bankers and the global economy. The data is secondary at this point because it's backwards looking. The Richmond Fed provided more evidence that US manufacturing is taking a hit from the dollar while consumer confidence was upbeat and housing remains solid.

Aside from Wednesday's US durables goods release, the main theme now is continued US dollar vulnerability on expectations that the Fed will take rate hikes off the table. The first hint might come in US trading with Dudley to deliver a speech at 10:00 ET, 15:00 BST. BoJ's Kuroda follows 9 hours later.

Another trade that stood out was USD/CAD rising to an 11-year high despite a bounce in oil prices. The Fed and PBOC are in focus but the chance of a BOC cut in October and QE down the line is rising exponentially. That the pair could rally 200 pips from the lows on Tuesday even with oil prices higher is a clear sign of CAD weakness.

Up next we get to see if the PBOC action can stabilize Chinese stocks. The cut in rates, the stamp tax and the RRR was about the best markets could have hoped for. It will take a monumental effort to turn around Shanghai stocks and we now doubt this will be enough.

The other main item on the agenda is a speech from Stevens at 0005 GMT. He must surely be listening to the signals from China and any hints or fears about global growth will be met with Australian dollar selling.