marctomarket.com / by Marc Chandler / Dec 6, 2017
The swoon in equities, perhaps sparked by a rotation spurred by potential US tax changes, is continuing today. It is providing a risk-off mood, which is expressed in the foreign exchange market as a stronger yen. The most compelling answer of yen strength is not that investors are buying yen as a haven. Japanese stocks are among the worst of the major markets over the past five days, ensured by today’s nearly 2% drop by the Nikkei. Nor, of course, are Japanese interest rates attractive. Rather the yen’s strength reflects unwinding trades use the yen to finance the purchase of other assets, like equities. As the equities are sold, the yen is bought back.
We see the speculative directional plays as secondary in importance. Speculators in the CME futures had accumulated the largest gross short yen position in a decade in the middle of last month and were already reducing it, though the dollar pushed through JPY113 at the start of the week, the high since November 17.
The S&P 500 fell for the second day in a row yesterday and closed on its lows, just above the support we noted near 2628. It will likely push through there in the early going today and test the 2600 area, which marks the low from the end of last week, the 20-day moving average and congestion from the end of last month. Below there an unfilled gap from the higher opening on November 21 may draw prices. The bottom of the gap is near 2585.