Forex Signals: Crude prices fluctuate wildly along with other risk assets yesterday

S&P 500 (Sep 11) INTRADAY

Review It was a dramatic day for global stock markets yesterday with the strong rally following initial euphoria of news that Warren Buffet has bought $5bln of Bank of America stock was reversed by a German ?flash crash? that saw the Dax drop 5% in 15 minutes. The E-mini S&P had spent most of the morning oscillating just under technical resistance at 1177.50 before the Buffet news saw BoA shares spike 25% dragging the whole S&P index up 15 points with to top out at 1188.50 following the cash open. However, the knee jerk reaction was short lived as ultimately Buffet?s deal does nothing to alter the underlying macroeconomic conditions. Then rumours that Germany would lose its AAA credit rating sent the Dax tumbling and despite all three ratings agencies re-affirming Germany?s top rating the damage was already done to sentiment with risk assets dumping ahead of Bernanke?s speech today.

Strategy Yesterday's double bottom was right on one of our key support levels at 1153.25. This was last Friday?s high as well as providing solid support on Wednesday on two occasions. This level remains key going into today?s key event when Bernanke will deliver his highly anticipated statement at 15.00BST. The closer we have gotten to the Bernanke speech we think the market has become more realistic towards the Fed?s stance on QE3. We feel that Bernanke will more likely mainly discuss other simulative tools at his disposal such as the ?Twist Light? of increasing the average maturity of the Fed?s balance sheet by selling short duration debt and repurchasing longer duration bonds. We also have the second estimate of US Q2 GDP as well as Consumer Confidence numbers to digest. But Bernanke is headlining today?s session and we expect volatility but ultimately for the market to be eventually modestly higher on the day.

Alternative Scenario Bernanke dismissing the idea that QE3 is an option or worse than expected GDP or Consumer numbers will send equity markets tumbling. A break below 1142.50 should lead to an accelerated move through S2 at 1130.75.

EUR/USD INTRADAY

Review In the danger of sounding like a broken record, EUR/USD continues to remain within it?s summer range of 1.4696 to 1.3837 which in August has narrowed to 1.4517 to 1.4054. However, yesterday we saw the most significant move this week in the currency pair, with a strengthening USD in the build up to Jackson Hole, and new concerns surrounding the European short selling ban and German downgrade the EUR/ USD finished sharply lower, through our stop at 1.4347. In the EU session the EUR/USD trended gradually higher before all its gains to reach a low of 1.4328 by 15:45 BST.

Strategy Yet again yesterday we saw the currency pair generate the ?n? pattern where losses follow gains on the day and ultimately no direction is given. The overnight rally has reversed most of yesterday?s losses as the currency pair remains stubbornly in it?s range. Although we have data today in the form of US GDP, PCE and Uni Michigan Confidence (final) we expect the main opportunity to come at 15:00 BST with Bernanke. We warn impatient traders against over-trading the currency pair during his speech due to expected volatility and remind traders that in recent weeks the USD has not necessarily acted in line with a safe haven currency. We are neutral due to the uncertainty but in the light of Bernanke being unable to commit to significant easing look to Wednesday?s high as an entry short.

Alternative Scenario Commitment from Bernanke to a further weakening USD will see 1.4500 tested and broken with the July high at 1.4578 being a decent target.

US 10Y T-Note (Sep 11) INTRADAY

Review T-Notes spent most of the session close to their lows after Wednesday?s significant sell off. However, as negative sentiment returned to the market into the US session T-Notes initially found firm resistance at our key resistance level of 129.260. However, as concerns built on the back of rumours that Germany might lose its AAA rating Treasuries pushed higher at 15:00 BST hitting our stop and exiting the trade at a loss. Recognising the uncertainty in the market we deemed the entry to be prudent and were surprised to see such a retracement of Wednesday?s move.

Strategy The reversal of Wednesday?s sharp move lower reflects the volatility and uncertainty seen not only in T-Notes but across nearly all asset classes in this environment. Clearly the main event today will be Bernanke speaking at 15:00 BST. The closer we have gotten to the Bernanke speech the market has become more realistic towards the Fed?s stance on QE3. We feel that Bernanke will more likely mainly discuss other simulative tools at his disposal such as the ?Twist Light? of increasing the average maturity of the Fed?s balance sheet by selling short duration debt and repurchasing longer duration bonds. Such a move should support Treasuries although we believe to a large extent this to be priced in to some extent and we do not think Bernanke has the capacity to surprise the market.

Alternative Scenario Bernanke explicitly detailing further QE3 or a bond buying programme more aggressive than expected may see Treasuries move back into last week?s range.

Crude Oil (Oct 11) INTRADAY

Review Crude prices fluctuate wildly along with other risk assets yesterday in a session of two halves. The news that Warren Buffet has invested $5bln into Bank of America briefly boosted investor sentiment as the trade is seen as a sign that Buffet is still expecting economic recovery to continue. Oil spiked to test Wednesday?s high where it found resistance and this level at $86.57 is now a powerful double top. The subsequent reversal triggered by rumours that Germany would lose its AAA rating sent crude prices tumbling breaking through the previous two day?s lows to bottom out at $83.10. However, Hurricane Irene continued to provide support for crude prices and oil retraced the earlier losses to actually finish almost unchanged on the session at $85.30 just 17 ticks above the opening price.

Strategy Today?s session will be mainly focused on Bernanke?s Jackson Hole speech. We feel that Bernanke will prefer to keep QE3 comments to a minimum and mainly discuss other simulative tools at his disposal such as the ?Twist Light? of increasing the average maturity of the Fed?s balance sheet by selling short duration debt and re-purchasing longer duration bonds. We expect some intense volatility during his speech but ultimately for the market to get what it is expecting. We have a neutral strategy to reflect the likely volatility but ultimately expect the risk assets to mildly benefit from Bernanke?s comments. We look for a long entry on a pull back to support at $83.40 with a tight stop.

Alternative Scenario Should Bernanke indicate that QE3 is not likely then risk assets will come under intense pressure. Should crude break through the $83 handle then we expect a quick move to test support at $82.01