Market News & Analysis
End of Month Flows may be Moving Markets
Joe Perry August 29, 2019 4:09 PM
Earlier today, China released comments saying that it won’t respond to the US tariff hike immediately (however they didn’t say they wouldn’t do it later). With that, S&P500 moved 30 handles higher, from 2880 to 2910, WTI moved higher from 55.50 to 56.40, USD/CAD moved lower (in conjunction with the oil move) from 1.3315 to 1.3280, and Gold moved lower from 1559 to 1544. Stocks higher, Crude Oil higher, and Gold lower. These are moves one would expect to see from a headline out of China such as this.
As the US walked in this morning, one may have expected some continuation. Although it is still early in the US session, something different occurred, as Crude, USD/CAD, and Gold reversed aggressively. As a matter of fact, USD/CAD retraced the whole move!
Source: Tradingview, City Index
Why did this happen? There was no news release to cause the reversal. However, when markets move for no apparent reason, such as today’s commodity markets open, that doesn’t mean there isn’t a reason. One reason may be that at times, especially near end of the month, certain market players, such as pension funds, endowment funds, and hedge funds need to “rebalance” their books. This means that if a fund loses to much in one instrument and makes more in another instrument, they need to rebalance the fund so that they have the same percentage of funds allocated to the same instruments as they did at the beginning of the month. A good example this month has been selling bonds and buying S&P500. The rebalancing may be more enhanced because of lack of participation during quieter end of months, such as August.
This may have been the case today in Crude on the open. For rebalancing purposes, funds may have had to come into the market on the open and sell commodities. For example, Crude on the open moved from 56.41 down to 55.85 (therefore causing the aggressive move higher in USD/CAD). When the selling was done, price reversed, and it resumed the move higher.
Source: Tardingview, City Index
Be aware and be ready for volatile moves that appear to come out of nowhere over the rest of the week. It be just be rebalancing, but it may be enough to take out your stops! One way to diminish the effect of this in your trading is trade smaller size with tighter stops.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.