Opinion – Wednesday 4 June 2014

Equity markets lost ground yesterday with US Indices down 0.1% and European stocks off an average of 0.5%. Markets were on the back foot from early morning following reports of a further deceleration on European Inflation.

The Euro-Zone CPI slowed from 0.7% April to 0.5% in May, year on year, versus 0.6% expected although it was not a complete surprise after Monday’s German CPI which showed prices falling in the month of May. The soft inflation data reaffirmed expectations of further policy easing by the ECB tomorrow. ECB forecasts had consumer prices increasing at an annual rate of 1.1% in June but this is now unlikely and so the short term inflation forecast is likely to be lowered on Thursday when new forecasts are presented.

The Euro briefly dipped lower to 1.3590 after the CPI data but then surprisingly found some support, strengthening to 1.3645 before the solid US Factory Orders (up 0.7% in April versus 0.5% expected) saw the US Dollar strengthen.  Otherwise yesterday was yet another very quiet trading session ahead of the big events tomorrow and Friday.

This morning on the economic front we have UK Services PMI at 9.30 am and this is followed at 10.00 am by German and Euro-Zone Services PMI. At the same time the Euro-Zone will release its GDP which will be closely watched by the ECB ahead of tomorrow. At 1.30 pm we have the latest US Trade Balance and Nonfarm Productivity. At 2.45 pm we have US Services PMI and this is followed at 3 pm by the ISM Non Manufacturing Composite.

June S&P 500

The S&P, having followed the other major indices lower, rebounded to close flat by day’s end on yet another extremely quiet and low volume trading day. None of my parameters were hit yesterday and today I will again be a small seller from 1923/1927 with the same 1931 stop. I will also leave my buy level the same at 1905/1910 with a 1901 stop. I am still looking for a major top in the market somewhere between 1935/1950. The S&P continues to trade at the top of its Bollinger Band and Williams Index and is still overbought on a Daily and Weekly basis.

Euro/USD

The Euro worked out well yesterday as the market had a nice rally in the morning which enabled me to cover my long 1.3595 position from Monday at 1.3630 and I am now flat. It is interesting that despite the awful inflation data reported out of the Euro-Zone yesterday that the Euro rose on this news. Today I will still be a buyer from 1.3580/1.3610 with a tighter 1.3565 stop which is just below last week’s low at 1.3585. I will also be a small seller on any rally to 1.3690/1.3720 with a 1.3740 stop.

US Dollar Index

The US Dollar again traded in a very narrow range. I am still long from last week at 80.20 and I will leave my stop the same at a break-even. Again if I am stopped out of this position I will be a more aggressive buyer on any dip to 79.80/80.00 with a 79.45 stop.

June DAX

The Dax continues to trade heavy as the market was hit hard shortly after the inflation data was released. None of my parameters were hit yesterday and I am still flat although I still have the DAX/FTSE short spread position from 3120 which  finally closed under 3100 last night. I will leave my stop on this spread  the same at 3190.

The Dax is still finding it difficult to break the key 10000 resistance level and most traders will probably stay flat ahead of tomorrow’s key ECB Meeting and Dragi press conference. Today I will lower my sell level slightly to 9960/9990 with a 10020 stop. Given how over extended this market is trading I do not want to be long the Dax at this time.