News on Friday that the Russian aid convoy had entered Ukraine without permission and reports of 18,000 Russian troops amassing on Ukraine’s borders provoked quite a strong bout of ‘safe’-haven’ buying at the longer end of the US Treasury curve, in particular. This prevented a clean read of Fed Chair Yellen’s Jackson Hole address. The Ukraine situation looks somewhat less tense this morning following weekend talks involving German Chancellor Merkel after which she expressed confidence that a solution could be reached as long as Russia/Ukraine border security is sufficiently strengthened.
Yellen didn’t come down on one side of the fence or the other with regard to the current state of the labour market, instead emphasising the complexities of reading the multiple labour market nuances without drawing any firm conclusions (it was a fairly long speech and quite technical in parts). In doing so she seemingly endorsed the marginally more hawkish FOMC tone, evident in last week’s July minutes, including explicitly referencing the possibility that ‘increases in the Federal Funds Rate target could come sooner than the Committee currently expects and could be more rapid thereafter’. This proved to be a green light for a resumption of USD buying and higher US rates at the front end of the yield curve.
We also had ECB President Dragi speaking at Jackson Hole and it was a dovish affair with his support for ‘QE’ now unconditional, albeit only involving the purchase of Asset Backed Securities (ABS) at this stage. Unlike in his post August ECB Meeting press conference, Dragi did not talk of additional measures only if necessary.
Even more significantly he departed from the script originally published on the ECB’s website adding a section which noted a decline in short, medium and long term inflation expectations and indicated that this would be acknowledged at the September Meeting. So it looks like more easing ahead and this could start before the TLTROs. Dragi also gave the green light to less stringent Fiscal Policy at the individual country level, suggesting that this could help the cyclical deficiency in aggregate demand.
This morning on the economic front we have the German IFO Business Climate Survey at 9.00 am. We have no UK data due to the UK Bank Holiday. At 1.30 pm we have US Chicago Fed National Activity Index. This is followed at 2.45 pm by US Services PMI and finally at 3 pm we have New Home Sales and the Dallas Fed Manufacturing Index.
September S&P 500
The S&P plan worked well on Friday as shortly before Fed Chair started to speak I was able to cover my 1992 short position at 1986 and I am still flat. The market was unable to gain any strength as the day of reckoning for rate hikes is drawing closer, coupled with the end of QE making it very difficult for this market to rally much further without having another decent correction first.
Today I will again be a seller on any rally to 1990/1996 with the same 2003 stop. I will leave my buy level the same at 1971/1976 with a 1967 stop.
Euro/USD
The Euro is lower this morning as the market is coming to terms with Dragi’s speech last Friday where he openly stated that low inflation will allow the ECB to cut rates or do some significant QE. This morning the Euro is trading at the bottom of its Bollinger Band and Williams Index and I have bought it in small at 1.3190. I will leave my stop the same at 1.3160.
US Dollar Index
The Dollar is trading a lot higher since I cut my position last week at 81.90 and I am still flat. The next big resistance for the Dollar is at 83.00 and today I will be a small seller from 82.80/83.10 with a 83.30 stop. Given how overbought the Dollar is trading I do not want to be long at this time.
September DAX
The Dax plan also worked well on Friday as shortly after I posted it spiked down to my 9300 buy level with a 9292 low.It then had a nice rally which enabled me to cover this position at 9350 and I am now flat. This morning’s IFO Suvey will be very important for the Dax going forward and today I will raise my buy level to 9290/9320 with a 9265 stop. I will leave my sell level the same at 9440/9470 with a 9510 stop.
September FTSE
With the UK closed for a bank holiday today and the fact that I am still flat the FTSE there, I will update tomorrow when the market re-opens for trading.
Dow Rolling Contract
The Dow plan also worked well on Friday as shortly after I posted it had a nice sell-off which enabled me to cover my short position from Thursday at 17000 and I am now flat. The Dow is still trading below its July high at 17150 and the longer we stay below this level the more negative divergence we have vis the S&P which is still trading near record highs. Today I will again be a seller on any rally to 17085/17115 with a 17165 stop. Given how heavy the Dow is trading I do not want to long the market at this time.
September BUND
No change as I am still short from last week at 150.20 with the same 150.75 stop. I will still be a small buyer on any dip to 149.40/149.70 with a 149.10 stop.
Gold Rolling Contract
Gold tried to consolidate on Friday after its near 2% fall last Thursday. I am still long at 1274 with the same 1261 stop. I will look to cover this long position on any rally back to the 1284/1289 resistance level.
Silver Rolling Contract
Today I will raise my buy level slightly to 19.10/19.30 with the same 18.75 stop on any long position.
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