President Dragi and the ECB have managed to carefully surprise the markets with their €60 billion QE announcement which has seen a substantial rally in Equity and Bond markets while the Euro continued its plunge into the 1.1212/1.1374 ‘Open Gap’ from 2003. The €60 billion a month includes the Asset Backed Securities Programme (ABSPP) and the Covered Bond Programme which started in late November and late October 2014, respectively. Those two programmes have bought €2 billion and €33 billion so far, which amounts to around €12 billion per month, leaving net new money today at €48 billion per month. But any disappointment on the detailed breakdown is more than offset by a pledge to carry out its new purchases until September 2016, and will in any case be carried out until the Governing Council sees a sustained adjustment in the path of inflation that is consistent with its aim of achieving inflation below, but close to 2% over the medium-term. Total QE will amount to €1.14 trillion which is marginally above the much talked about €1 trillion balance sheet expansion.
As for the identity of the Bond purchaser and the thorny issue of burden sharing, there is a bit of a messy compromise. The ECB will buy only 20% of the Sovereign Bonds with the rest being devolved to the National Central Banks based on the Euro system’s capital key. Germany is out in front with an almost 18% weighting, France on 14%, Italy at 12% and Spain at almost 9%, with the fixed timetable designed to prevent and foot dragging from reluctant participants.
In other news the US equity markets were helped by better than expected FHFA House Prices which printed +0.8% in November versus 0.3% expected.
This morning on the economic front we have German and Euro-Zone Manufacturing Services PMI at 8.30 am and 9.00 am respectively. This is followed at 9.30 am by UK Retail Sales. Finally we have US Manufacturing PMI and Existing Home Sales at 2.45 pm and 3.00 pm respectively.
March S&P 500
The expectation of a wild trading session in the wake of the ECB QE announcement certainly proved to be the case yesterday as after Dragi revealed the extent of QE the S&P traded as high as 2047 before falling all the way back to 2022 shortly after the US markets opened. The market then rallied to a 2059.50 high just missing my 2060 sell level before having a small sell-off into the close. I am still flat but I have to respect the fact that the S&P has now clearly broken the key 2031/2043 previous resistance and that this zone should act as decent support on any new sell-off that may emerge. For this reason I will be a small buyer from 2040/2046 with a 2035 stop. I will still be a small seller on any further rally to 2067/2073 with a tighter 2078 stop.
EUR/USD
The Euro managed to trade on four different big figures after the QE announcement and just missed a fifth by 15 points. After yesterday’s announcement the Euro is now completely unloved and unwanted by a large majority of the trading population. As you know I am firm believer in ‘Open Gaps’ been filled but it has taken nearly 12 years for the market to trade back into the 2003 ‘open Gap’ at 1.1212/1.1374. In the process I have gone long in very small size at 1.1340. I will buy more on any further drop to 1.1230. This morning I have raised my stop on my existing long to 1.1175. I will also be a small seller on any rally back to 1.1535/1.1580 with a 1.1640 stop on any short position.
US Dollar Index
After yesterday’s surprise move by the ECB I went short the US Dollar Index at 94.00. However I was very quickly stopped out of this position at 94.50 and I am now flat. It incredible that the Dollar has now strengthened by almost 23% since May with the Daily Sentiment Index now at 99% which is a level never seen before. Today I will again be a small seller on any further rally to 95.00/95.30 with a 95.60 stop. Given how extreme the Daily Sentiment Index reading is at present I do not want to be long the Dollar at this time.
March DAX
The DAX continues to outperform the other major World Indices and is now up 13% off its 2015 low at 9380 to stand at 10600 this morning. As I have mentioned over the last few weeks the price action in the Dax changed in 2015 with every dip been bought by the market in contrast to the S&P where all rallies were getting sold into. The Dax is extremely overbought this morning and is trading at the top of both its Bollinger Band and Williams Index but it will take a closing break of 10100 for me to start to turn bearish. Yesterday I tried to go short late in the day at 10520, and while this position looked fine on the open this morning I have just been stopped out of this trade at 10600 despite the PMI come in weaker than expected at 51. I am now flat and given how over-extended this market is to the upside I will again look to go short from 10680/10730 with a 10770 stop. I will also move my buy level higher to 10320/10370 with a 10240 stop.
March FTSE
The FTSE has had a huge move since it finally broke through the key 6480 pivot and is now up 300 points off this key level. Unfortunately having been long initially on this break higher I covered my position too early and I have not been able to reset my long position. Just like the Dax above the FTSE is extremely overbought and is also trading outside the top of its Bollinger Band and is also at the very top of its Williams Index. Given how over extended the FTSE is trading for the first time this year I will try to go short on any further mover higher to 6795/6830 with a tight 6850 stop. I will also be a small buyer on any dip to 6670/6710 with a 6645 stop.
Dow Rolling Contract
I am glad that I moved my Dow sell level a lot higher yesterday and I must be honest in saying that I never thought my 17850 sell level would be reached. I am still short and as I do not want to risk too much on this trade I will lower my stop to 17920. If I am stopped out of this trade I will be a more aggressive seller in front of 18000 with a 18070 stop.
March BUND
The volatility in the Bund is incredible as yesterday when I marked prices it was trading at 156.10. This morning the Bund is trading an incredible 270 points higher at 158.80 with Yields now below an unbelievable 30 basis points for 10-year Bonds. If we keep progressing at this rate we will soon see the Bond curve in Germany negative all the way out to 10 years. Think about this, if you invest money in Germany you will have to pay them to do so. The Bund has now taken out all chart points with this aggressive move higher and today I will again be a small seller on any further rally to 159.20/159.50 with a 159.70 stop.
Gold Rolling Contract
Compared to the other markets, Gold had a relatively quiet trading session yesterday. I am still flat and I will leave my buy level the same at 1260/1270 with a 1249 stop.
Silver Rolling Contract
Having finally cover my long 16.30 position from early January on Tuesday at 18.30, I am still flat. Today given how over-extended Silver is trading at this time I will leave my buy level the same at 17.30/17.60 with a 16.95 stop on any long position.
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