Good morning and a Happy New Year to all.
2015 promises to be a very interesting year for markets and economies given the Fed is likely to raise interest rates for the first time in eight years and the full impact of the sharp decline in oil prices seen over the past six months takes effect. The question is ‘will the trend to US$ strength remain?’ I believe that the strength for the US Dollar will continue but I expect a decent bounce first to correct it current oversold condition. The Daily Sentiment Index for the Euro has been below 10% for seven consecutive days and when we do get an upward reversal in the Euro I would expect the move to be sharp. On Wednesday the Euro closed at a five year low at 1.2095 and this has already elicited more bearish news resulting in it trading lower to 1.2035 overnight.
My brief comments today reflect moves on international markets on New Year’s eve, with most markets closed on Wednesday. The moves were generally small, largely reversing the trends of the previous day. The main noteworthy move was a weaker US stock market which the screens attributed to a further fall in oil prices (down nearly a $1 to $53.27 a barrel, a fall of 1.6%). This saw the Dow lose 160 points or 0.9% to 17,823, the S&P500 down 1% or 21.5 points to 2059 and the Nasdaq down 0.9%. In the last two days of trading for 2014 the S&P wiped out all of its gains for the month of December. The weakness in equities and oil prices saw bond yields a few points lower, US 10-Year yields dropping 3bps to 2.17%.
This morning on the economic front we have German Manufacturing PMI and Euro-Zone PMI at 8.55 am and 9.00 am respectively. This is followed by UK Consumer Credit and Manufacturing PMI at 9.30 am. The US Manufacturing PMI will be released at 2.45 pm. Then all eyes will be on the US ISM release at 3.00 pm. Market expectations are for a 57.5 read after 58.7 in November. There will also be interest in the employment component ahead of next week’s ADP and Non-Farm payrolls releases. The US labour market ended 2014 firmly and historically, this has been one of the most important factors impacting on global bond markets and US Fed expectations. Next week will prove very interesting as markets refine their views as to when both the Fed kicks off its tightening phase and the pace at which subsequent moves will occur.
March S&P 500
On what should be two of the strongest trading days of the year, namely December 30 and 3, the S&P got slammed with the market falling almost 40 handles from the 2089 high on Monday, to close at 2052. This morning the S&P is opening firmer on the expectation that this rally will continue. The Investors Intelligence Advisors Survey was just published and shows that sentiment towards the stock market is still at the 1987 extremes with the percentage of bears at just 13.7%. As I wrote earlier this week that I still expect this market to run into a wall of resistance this year. The big question is whether we test 2100 or was last Monday’s high at 2089 going to stand for a prolonged period.
Today I will look to go short on any further rally to 2070/2075 with a 2081 stop. If I am taken short and subsequently stopped out I will use my 5 handle rule to go short again with a stop put in just above whatever new high is made. Despite the beginning of January been a traditionally strong time of the year for the stock market I do not want to be long at this time.
Euro/USD
Unfortunately I was stopped out of my long 1.2140 position overnight at 1.2085 and I am now flat. As I said above, the Daily Sentiment Index reading still remains at extreme levels towards the US Dollar thus making it difficult for me to short the Euro. The next big support for the Euro does not come until 1.1920 and today my only interest in buying the Euro is on a dip to 1.1930/1.1970 with a 1.1875 low.
US Dollar Index
Just like the Euro, I was also stopped out of my short 9035 position at 9075 and I am now flat. I am going to stay flat today as I want to see how the Dollar trades given that today is the first trading day of the year which historically can lead to extreme moves that are then reversed.
March DAX
The DAX is back open this morning after its two-day break. As I have mentioned over the last two weeks, it is very difficult to build a bullish case for the market when you consider what is happening in both Russia and Greece. However the first trading sessions of a new year can be very difficult to trade and, as a result, today I will be a small seller on any further rally back to 9850/9900 with a 9930 stop.
March FTSE
My long FTSE 6500 position worked out well this morning as after the market opened higher – it enabled me to cover this position at 6540 and I am now flat. Today I will again be a small buyer on any dip to 6460/6490 with a 6440 stop. I will also be a small seller on any further rally back to 6560/6590 with a 6615 stop.
Dow Rolling Contract
The Dow is trying to rally this morning after its 160 point surprise fall on Wednesday. I am still flat and today I will be lower my sell level to 17980/18050 with a 18080 stop.
March BUND
The Bund continues to trade higher with the market making new highs nearly everyday. The move higher in the Bund is been led by the Italian BTP which is again making new highs. This puts the ECB in a very difficult position as it is very hard to see them Sovereign Bond buying with the periphery Bond Yields so low, despite what ECB President Dragi says. Today I will again be a small seller on any further rally to 156.20/156.40 with a tight 156.60 stop.
Gold Rolling Contract
After I posted on Wednesday, Gold was hit hard again with the market eventually trading lower to my 1185 buy level. I am still long and I will leave my stop the same at 1175.
Silver Rolling Contract
No change as I am still long at 15.80 with the same 15.45 stop.
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