Opinion – Wednesday 28 January 2015

The Dollar was hit hard yesterday after I posted, falling against all G10 currencies on the back of remarkably weak US Durable Goods Orders. The Euro was a key beneficiary, up as much as 1.6%, before paring those gains to sit at 1.1350 this morning. Core Durable Goods Orders fell by 08% m/m in December against expectations for a 0.6% rise. There were also downward revisions to prior months. Business Investment was also weak with Shipments falling 0.2% m/m and Orders down 0.6% versus +0.9% expected. The genuine weakness was the major driver of market sentiment, seeing the Dollar, Equities and Bond Yields sharply lower. The Dow and S&P closed down 1.65% and 1.35% respectively having been hit hard in the last 30 minutes of trading. Equity markets closed lower despite other US economic data coming in better than expected. US New Home Sales rose by 11.6% m/m versus +2.7% expected and Consumer Confidence rose to a lofty 102.9 versus 95.5 expected, which is a fresh 7-year high.

It is remarkable how much impact this single weak report has had. The US Dollar Index was 1% lower for the day, taking back a sizeable chunk of last week’s 2.4% gain. Cable managed to post a 0.9% gain despite UK QR GDP surprising on the downside at 2.6% y/y versus 2.7% expected.

It is interesting that some of the S&P’s losses stem from currency headwinds. Proctor & Gamble reported that a rising US Dollar ate into its earnings. Other results also shed some light on how volatility in other financial markets are impacting corporates. Caterpillar, an industrial bellweather, said that lower Oil prices had affected sales to energy companies. However markets have rebounded sharply overnight on the better than expected Apple share results which saw margins increase by 2% to 39.3% on much better iPhone 6 sales.

This morning we have no data of note due on either side of the Atlantic. However the  Fed have their latest FOMC Meeting today with the rate decision due at 7.00 pm. I expect the Fed to roll out a statement largely unchanged from the December Meeting.

March S&P 500

Last year when I started writing about the prospects for trading in 2015, I said that we were in for a really volatile trading year and this has certainly proved to be the case as shown by yesterday’s remarkable volatility in the S&P. Literally you cannot take your eye of the screen at the moment as move after move is occurring in nearly every market. Yesterday’s volatility was enhanced by the lack of liquidity due to the snow storm that hit North America resulting in very few traders being able to make their trading desks.

Yesterday after I posted, the S&P traded lower to my 2040 buy level before very quickly stopping me out of this trade at 2033 on the reported awful Durable Goods Orders. Subsequently the S&P was hammered to a 2013 low before reversing course. I then used my ‘5 handle rule’ to reinstate my long position at 2018 but unfortunately I covered this position too early at 2024 as I wanted to be flat ahead of the Apple results and I am still flat. The S&P is stuck in wide range with support at 2016 on the downside and strong resistance at 2065/2080 on the upside. With the FOMC Meeting and rate decision due at 7.00 pm it is hard to see the market selling off ahead of this news. For this reason I will be a small buyer from 2030/2035 with a 2025 stop. If I am taken long I will look to cover this position ahead of the FOMC. Following the Statement announcement, if the S&P rallies I will still look to go short on any further rally to 2059/2064 with a 2070 stop. If the market sells off aggressively following the announcement I will look to buy the S&P on a dip to 2020/2025 with a 2011 stop which is just below yesterday’s low.

EUR/USD