An overall disappointing US Payrolls Report, the ‘lowlight’ of which was an unexpectedly flat monthly read on average hourly earnings and which, together with a 0.1% downward revision to May, served to pull annual earnings growth down to 2.0% from 2.3%. This is not a number to inspire confidence in Janet Yellen that inflation will be heading back close to the Fed’s 2% objective anytime soon. Alongside, the further fall in the Unemployment rate, to 5.3% from 5.5%, was clearly flattered by a 3/10% fall in the labour participation rate, to its lowest since 1977.
According to one report (Market News) citing BLS officials, the Unemployment rate drop may have been exaggerated by seasonal factors that reflected all the school makeup days for the severe winter’s snow. Presumably this meant more people than usual temporarily dropping out of the labour force to ferry their kids to and from school on the extra school days. As for Non-Farm Payrolls, the headline 223k rise was close to the 233k median forecast, but not when 60k worth of downward revisions to April and May was added in. The net market results of the payrolls report was to see US Treasury yields lower (By 6bps at 2 year and 4bps at 10 years) and the US Dollar softer but not by much (the narrow DXY dollar index fell by just 0.2%). Equities markets didn’t really know what to make of the numbers, probably with even bigger things on their mind in the coming 72 hours and given the early pre-Independence Day market close, ending very slightly lower.
This follows another bad day for China stocks, where the news of a relaxation of margin trading rules failed to prevent a 3.5% loss for the Shanghai Composite Index. This has reduced the year-to-date gain to just 20% from 60% three weeks ago.
A couple of notable developments in Europe ahead of Sunday’s Referendum. The IMF is out re-iterating that Greece’s debt burden is unstainable without debt relief and suggesting that EU creditors should extend the maturity of Greece’s debt from 20 to 40 years. This sounds like a woman (Madame Lagarde) after Alex Tsipras’ heart (we somehow doubt that). It potentially plays into the hands of the ‘No’ camp in Sunday’s referendum. We’ve also had the ECB announcing the inclusion of €90bn worth of state-backed corporate bonds into its ‘QE-eligible’ armoury. This reads like a further circling of the wagons by the ECB, in the spirit of doing ‘whatever it takes’ to protect the Euro-area in the wake of the referendum. Despite this news, Euro-peripheral bond spreads were mostly wider. Overall in currencies, Sweden’s decision to cut its already negative policy rate to -0.35% from -0.25% (unexpected) sees the SEK firmly at the bottom of the G10 league table. AUD was slightly firmer post payrolls while Iron Ore ended $3.6 lower and may resonate this today.
Post payrolls and pre Greek referendum, we could be in for a long (but hopefully good) Friday. According to one Greece-based consultancy firm, first exit polls will be published well before the markets open on Sunday night and with the final result probably known within few hours of that. So probably by the time the Wellington/Sydney market opens. Latest publicly available polls suggest that a ‘yes’ vote will get up on Sunday, which market will interpret as greatly increasing the chances of a an early new agreement between Greece and her creditors that keeps Greece from defaulting and inside the Euro area. The worry for markets will be if Alex Tsipras then refuses to relinquish the Prime Ministership having campaigned so vociferously for a ‘no’ vote. It is hard to escape the view that Mrs Merkel, Mr Schaeuble and Madame Lagarde, to name but three, can’t wait to see the back of him. Greek Finance Minister Varoufakis, at least, has gone public saying he will resign in the event of a ‘yes’ vote.
Knee-jerk market reaction to a ‘yes’ should be both risk and Euro positive. In the event of a ‘no’ markets will – rightly in our view – jump to the conclusion that a Greek exit from the Euro Zone shifts from possible to probable, and that a severing of the lifeline from the ECB to the Greek banking system will be the mechanism that sets this process off. Despite the restrained market reaction to date on news of the referendum and Greece’s failure to pay the IMF on time, we would still expect a knee jerk ‘risk-off’ and Euro-negative market reaction.
With the US markets closed for trading today we have no economic data this afternoon. Germany, Euro-Zone and the UK all have the same economic release namely the Markit Services/Composite PMI and this indicator will be released at 8.55 am, 9.00 am and 9.30 am respectively.
September S&P 500
Yesterday the S&P just missed both my buy and sell level by a few Handles and I am still flat. With the Cash S&P closed for the Independence Holiday, the Futures market is only open until 4.30 pm and I would expect the market to be quiet. The difficulty in putting on a position today and keeping it over the weekend is obviously very risky with the Greek referendum on Sunday. For this reason and given the shorter trading day I am going to stay flat. The next major support for the S&P is from 2035/2040 which is the low from the very weak April Non-Farm Payroll Report. This level also contains the 200 day Moving Average. If the S&P opens much lower on Sunday evening I will be a small buyer in this area with a 2029 stop. If I am taken long and subsequently stopped out I will be a more aggressive buyer from 2014/2022 with a 2008 stop. My only interest in selling the market is in the event of a positive opening on Sunday is to still sell any rally higher to 2088/2093 with a 2102 stop.
EURO/USD
Yesterday’s reaction to the Non-Farm Payrolls and lack of volatility was probably the lowest that I have seen in a very long time. Last Monday Key Day upside reversal has quickly evaporated with the Euro giving up nearly 200 points of that upside move. I am still flat and despite the Greek referendum on Sunday I will be a small seller on any rally higher to 1.1160/1.1210 with a 1.1240 stop. If the Euro opens substantially lower on Sunday evening I will be a reasonable aggressive buyer on any dip to 1.0840/1.0890 with a 1.0780 stop.
September Dollar Index
The Dollar has very strong resistance at 97.20 and today/Sunday I will still be a small seller on any rally higher to 97.10/97.40 with the same 97.70 stop. If the Dollar breaks and closes over 97.50 it will be very positive in the short-term.
September DAX
Finally very late in the European trading session the DAX traded lower to my 11080 buy level. Given the fact that I want to be flat the DAX ahead of Sunday I have covered this position this morning at 11120 and I am now flat. On Sunday/Monday morning if the DAX opens with a large move lower I will be a reasonable buyer on any dip to 10650/10750 with a 10570 stop.
September FTSE
No change as I am still a small buyer on any dip to 6480/6520 with a 6460 stop.
Dow Rolling Contract
I am still flat the Dow and if the market gaps lower on the open on Sunday evening I will be a small buyer from 17490/17580 with a 17430 stop. Given how oversold the Dow is currently trading and despite the fact that we have five confirmed Hindenburg Omen’s on the clock I do not want to be short the Dow at this time.
September BUND
The BUND plan did not work out so well as shortly after I posted I was stopped out of my long 151.20 position for a small loss at 150.80. Subsequently the BUND just missed my 150.30 buy level by a few points before rallying strongly and I am still flat. Today I will still be a buyer on nay dip to 149.90/150.50 with a 149.50 stop.
Gold Rolling Contract
Very frustrating as Gold just missed my 1156 buy level by 0.4 of a Dollar before rallying strongly and I am still flat. Today I will raise my buy level slightly to 1152/1160 with a 1139 stop.
Silver Rolling Contract
I am still flat Silver and today I will raise my buy level to 15.20/15.60 with a 14.90 stop.
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