Dow Jones: China concerns and bond market impact on market sentiment

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China remains in the spotlight

The previous week witnessed minimal developments in the US, with initial jobless claims aligning roughly with estimates and continuous claims rising to 1.71 million. Additionally, the Philadelphia Fed reported an improvement in manufacturing, moving from -13.5 to 12. However, concerns continued to revolve around China, particularly the People’s Bank of China (PBoC) decisions.

The PBoC's move to cut the one-year Loan Prime Rate (LPR) by 10 basis points (bp) to 3.45% instead of the anticipated 3.4%, while keeping the 5-year rate at 4.2%, came as a surprise. This followed last week's cut in the one-year medium-term lending facility (MLF) to 2.5% and a 10bp reduction to 1.8% for the seven-day reverse repo. The focus for Chinese policymakers is on implementing easing measures to stimulate economic growth while addressing yuan weakness.

Bond market blame game

The past week witnessed a downturn in the stock market, marked by the VIX exceeding 17 and MOVE reaching the 120 mark. Partial blame was attributed to the bond market, where Treasury yields experienced a partial retreat on Friday but ultimately ended the week higher in a week-on-week comparison. Market pricing data from Refinitiv indicates that there has been relatively little change in expectations for future Federal Reserve (Fed) actions.

The anticipation for the Fed's September meeting is for them to maintain the status quo. Although there is still a significant minority anticipating a 25 basis points (bp) increase in November, there has been a shift in projecting a rate cut from March to May next year.

Week ahead: PMIs, Nvidia earnings, and Fed Chairman's address

The upcoming week in the US lacks any prominent early indicators. Throughout the week, there will be several updates from regional Fed branches, including Kansas, Richmond, and Chicago. Housing data, including existing home sales and mortgage applications, will be released, along with new home sales.

On Wednesday, preliminary Purchasing Managers Index (PMI) figures are anticipated to mirror the previous outlook of manufacturing contraction and a struggle to maintain expansion in services. Thursday will feature durables data for July, following robust growth in the previous release. University of Michigan (UoM) will release revised figures on Friday, aiming to uphold confidence after a dip in consumer inflation expectations in the preliminary figures.

Nvidia's earnings report on Wednesday will stand out among other US earnings releases. Additionally, two bond auctions are scheduled during the week, including the 20-year on Wednesday and the inflation-protected 30-year on Thursday. The week will conclude with considerable weight on central bank communication as Fed Chairman Powell speaks at Jackson Hole.

Dow technical analysis, overview, strategies, and levels

The overview remains as 'cautious consolidation' in both daily and weekly time frames, requiring attention from potential buyers contemplating a return to the previous average. During the previous week, the Dow witnessed movements that brought it below its previous weekly 1st Support level, leading to the stoppage of even the cautious weekly conformist buy-after-significant reversals strategy.

Additionally, there was a lack of a trigger for daily conformists during the upward move beyond Thursday's 1st Support level. However, with Friday's follow-through, the Dow reached its 2nd Support level, which was successfully held.

IG Client* and CoT Sentiment Analysis for the Dow**

Regarding sentiment, recent movements have distinctly favored newly established sell positions made at the peak, resulting in a substantial decrease in short positions for retail traders week-on-week. Starting from an almost extreme 77% short position at the beginning of last week, retail traders have shifted to a more balanced 61% short position at the start of this week.

In terms of CoT speculators, the sentiment remains predominantly short as well. However, there has been a shift from a slight 53% buy position to a slight 52% sell position, reflecting a reduction in long positions by 770 lots and an increase in short positions by 6,482 lots.

Dow chart with retail and institutional sentiment

_{*The percentage of IG client accounts with positions in this market that are currently long or short. Calculated to the nearest 1%, as of today morning 8am for the outer circle. Inner circle is from the start of last week.}

_{**CoT sentiment taken from the CFTC’s Commitment of Traders report, outer circle is latest report released on Friday with the positions as of last Tuesday, inner circle from the report prior.}