There was a surprise rate cut from the ECB yesterday as it cut it’s main refinancing rate by 25 basis points to 0.25% whilst the Marginal Facility was cut to 0.75%. The Deposit rate was unchanged at zero and the combination of ECB actions lead to a host of Key Day Reversals in many markets (see Education Section). It appears that last week’s CPI data which showed a fall from 1.1% to just 0.7% in October was enough to get a majority to vote for further easing. Concerned that Europe ‘may experience a prolonged period of low inflation’ ECB President Dragi suggested there could be further policy action ahead as they have, in his words, ‘a whole range of available instruments’. Dragi insisted that the ECB is not targeting a lower currency, thus limiting Euro damage to some degree. Euro/USD quickly shed 2 cents to 1.3300 after the decision but after his comments the Euro recovered some ground and is now back at 1.3420.
In the US, the headline economic data was good but the detail was mixed. Q3 GDP came in at 2.8% versus 2% expected due to a large jump in inventories which contributed 0.8% but consumption growth was very soft at just 1.5%, the slowest pace in 3 years. Meanwhile Jobless Claims improved 9k to 336k but still a long way from the 294k in early September. This led to a large reversal in US Equity markets with the Dow, S&P and NASDAQ losing between 1% and 2% each.
This morning on the economic front we have the Trade Balance from the UK at 9.30 am and this is followed at 1.30 pm by the US Non Farm Payrolls in which a rise of just 120k is expected due to the distortion caused by the Government shutdown. Later at 2.55 pm we have the University of Michigan Survey. We also have a host of Fed speakers this afternoon including Bernanke and Fisher.
December S&P 500
Finally after two weeks of very little action in the equity markets they certainly woke up yesterday as we had a Key Day Reversal in the S&P. I wrote yesterday that I was concerned about the lofty price of the S&P but I did not expect the market to react so quickly especially the day before Non Farm Payrolls are announced. After the ECB announced their surprise 0.25% rate cut I was stopped out of my short 1765 position at 1771. I then followed my plan to reset my short position on any subsequent 5 handle sell off so when the market made a 1774.75 high I went short at 1769.
The S&P was hit hard after the GDP release and I was able to cover this position at 1758. The market then broke again and traded down to my 1754 buy level before having a nice rally back to 1763 before collapsing into the close. I covered my 1754 long position at 1760 and I am still flat.
I am going to stay flat until after the Non Farm Payrolls are released at 1.30 pm. If the S&P rallies after the numbers I will be a small seller from 1752/1757 with a 1760 stop. Given the extent of the Key Day Reversal yesterday I do not want to be long the S&P at this time.
Eur/USD
I am glad that I mentioned yesterday to stay flat until we got the ECB announcement and Dragi’s press conference out of the way before making a trade. The market reactions in both directions were so quick that I did not trade the Euro and I am still flat. Even though Dragi said in his press conference that he is not targeting a lower Euro, I actually believe that he is and today if we get a rally after the Non Farm Payroll Number I will be a seller from 1.3465/1.3495 with a 1.3530 stop. My only interest in buying the Euro is on a drop to 1.3280/1.3310 with a 1.3250 stop.
December DAX
The key level for the Dax is 8960 and as long as the market can stay over this level the market is okay but a break and close below 8960 will be very bearish. Today I am going to leave my buy level the same at 8980/9000 with a 8955 stop.Even though we got a large move up and then down yesterday we did not get a Key Day Reversal and for this reason I am not going to look to short the Dax unless we break and close below 8960.
December FTSE
The FTSE had a large Key Day Reversal yesterday following weeks of very little daily movement in the market. After the ECB announced their surprise rate cut I was able to cut my long 6705 position at 6750 as the market made a 6764 high before having a large sell-off and I am still flat. The key level for the FTSE is 6640 and if we break below this level after the Non Farm Payrolls are released I will be a small seller with a 6670 stop. I do not want to be long the FTSE at this time.
Dow Rolling Contract
I am glad I made the decision to stand aside in the Dow yesterday as it had nearly a 300 point move. I was suspicious of the Dow breaking and closing over 15720 on Wednesday and we certainly did not stay long over this key level. Today I will be a small seller from 15660/15690 with a 15725 stop. I do not want to be long the Dow at this time.
December BUND
The Bund traded up to my 141.90 sell level after the ECB announcement before quickly stopping me out of this position near the top of the day at 142.05 and I am now flat. I am impressed at how well the Bund has traded up from the key 141.00 level and as long as it can stay over 141.00 the market is bullish. Today I will be a small buyer from 141.40/141.70 with a 141.20 stop. My only interest in selling the Bund is on a rally to 142.60/142.90 with a 143.15 stop.
Gold Rolling Contract
Gold worked well yesterday as the market traded down to my 1300 buy level before having a nice rally and I was able to cover this position at 1311 and I am now flat. Today I will still be a buyer on any dip to 1295/1302 with a 1288 stop. I do not want to be short Gold today.
Silver Rolling Contract
Silver traded down to my 21.50 buy level and I am still long. I will move my stop up to 21.25 which is just below yesterday’s low.
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