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, FOREX.com
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, FOREX.com
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.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.