Main news on Friday was a small up move in the US stocks and another bout of trouble in Russia. Good news first with the S&P500 up 0.3% in thin trading, sufficient for a fresh all time high of 2089. However last Friday’s volume was the lowest in over eight years. Bond yields were flat to down a little Friday night – US 10 Year Bond at 2.25% After plunging by 51% so far in 2014, Iron Ore stabilised on Friday at $66.94, up $10 cents.
Less good news was the near 4% slide in the Ruble which ended the prior week’s recovery and apparent stabilisation. Over the past month the Russian Central Bank has defended the falling Ruble by lifting interest rates (to 17% from 10.5%) and by selling some of their foreign currency reserves in order to buy the Ruble however there are limits to how much they can do on both these fronts. On the interest rate side the Russian economy is already headed for a deep recession if the oil price stays low and for now this is what it wants to do, with WTI oil closing at $US54.73 on Friday, down $1.11. A slumping economy will make the Central Bank reluctant to lift interest rates even further, in fact I am sure they would prefer to cut interest rates.
On the Foreign Currency Reserves front, the Central Bank still has a sizeable war chest of US$399 billion but as they started the year with US$510 billion they have been burning through the cash. It is not all terrible news as the Russian Government comes into this crisis with a relatively modest amount of debt – they only have about US$216 billion of debt (8% of GDP) and just US$50bn in foreign currency.
How this story ends will depend on how they 1) manage the inevitable economic downturn and 2) spend/preserve their FX Reserves. The market did not like news on Friday that the Government has had to treble its bail out for Trust Bank to $1.9bn and they intend to support other banks also.
Outside of Russia, movement in currency markets has been fairly subdued. After making a new low of 0.8088 on Christmas Eve, AUD is 0.8120 this morning. EUR lower in line with USD strength and Ruble trouble – 1.2177. The NZD the best performing of the majors now at 0.7753 and GBP at 1.5557, JPY at 120.4.
With most traders still on holiday until next Monday we have no economic data of note due from the UK or the Euro-Zone while the only US data to be be released at 3.30 pm is the Dallas Fed Manufacturing Activity.
March S&P 500
When I last posted on Tuesday the US had released much stronger revised GDP which printed at 5%. This led to an initial rally in the market which saw the S&P trade higher to my 2082 sell level before having a small sell-off which enabled me to cover this position at 2077 and I am now flat. Just like in 2013 when the S&P traded higher through December, the market ran into a brick-wall of resistance at the start of 2014 and I expect a similar pattern to develop next week when normal trading returns to the market after the Holiday break. I am going to continue with the strategy of selling rallies with a tight stop. The PE’s are are currently near historic levels for this market and with US Rates expected to rise in April, it is very difficult to make a bullish case from these levels. Today I will again be a small seller from 2087/2092 with a 2095 stop. My only interest in buying the market is on a dip to 2070/2075 with a 2066 stop.
Euro/USD
No change with the Daily Sentiment Index still at near record levels against the Euro. I will still be a buyer on any dip to 1.2120/1.2160 with a 1.2085 stop.
US Dollar Index
After I posted last Tuesday I was stopped out of my short 89.85 position for a small loss at 90.35. Given how extreme the sentiment is in favour of the Dollar I have gone short the Dollar Index again at 90.35. I will leave a 90.75 stop on this position. The Dollar Index has strong resistance from 90.50/91.00. However a break and close over 91.00 will be very bullish.
March DAX
The Dax is opening weaker this morning on the back of the Russian situation. It is very difficult to make a bullish case for the Dax from here as, to me, the market has priced in all the QE that the ECB may or may not do as so far they have not done anything. The ECB are in a very difficult position as it is very hard for them to start Sovereign Bond buying especially with Italian and Spanish 10-Year yields at sub 2% There is no doubt that if they buy these bonds at these record yields they will lose a lot of money on these purchases. Today I will be a small seller from 9910/9950 with a 9975 stop. I still do not want to be long the Dax at this time.
March FTSE
The market continues to push higher without me been able to get a long position on board and I am still flat. Today I will raise my buy level to 6510/6550 with a 6485 stop.
Dow Rolling Contract
Last Friday was the seventh consecutive higher close for the Dow which is relatively rare. After I posted on Tuesday the Dow rallied to the top of my sell level at 18070. I am still short and I will leave my stop the same at 18110. If I am stopped out of this trade, I will be a more aggressive seller in front of 18150 with a 18210 stop.
March BUND
The Bund has traded in a very narrow range since the market re-opened after the Christmas break. Today I will again be a small seller on any further rally to 155.30/155.60 with a 155.80 stop. Given how low yields are in Germany I do not want to be long the Bund at this time despite the positive price action.
Gold Rolling Contract
The Daily Sentiment Index for Gold has been below 10% for the past three trading days as traders have virtually given up on a Gold rally developing. Gold bottomed on December 31 2013 and then had a 30% rally in early 2014. I am not saying that the same scenario is going to be repeated in 2015 but the conditions are there for a substantial Gold rally. For this reason I have bought Gold this morning at 1193. I will leave a 1179 stop on this position.
Silver Rolling Contract
Finally we are seeing some upward price movement in Silver. Just like Gold above the Daily Sentiment Index is near record lows for Silver. I am still long at 15.80 with the same 15.45 stop.
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