Pretty much all the attention yesterday has been on the outcome of the European Central Bank meeting, not so much whether the ECB would change any of its key policy rates, but what they would announce as far as Bond purchases. The market was broadly expecting that the ECB was more than likely to continue with its program of purchasing €80bn/month beyond March 2017, perhaps with the opening that they could say “buy up to €80bn”. The ECB announced that the bank would be reducing the amount of Bond purchases from €80bn to €60bn after March through to December 2018 (and beyond if necessary). They also announced that they extend the range of the tenor of Bonds purchased down to one year and that, if necessary, also buy Bonds at yields of less than the ECB’s deposit facility rate that was of course left unchanged at -0.4%.
To mark my 1225th issue of Tradernoble Daily Commentary I am offering a special 2 year rate of Euro 2750 for my Platinum Service which includes 1/4 updated emails throughout the trading day. This offer is open to both new and existing members and if anyone is interested can you please contact me on bryan@tradernoble.com for details.
For anyone following my Platinum Service it made 146 points yesterday and is now ahead by 828 points for December having made 1971 points in November and 1582 points in October. The previous four months saw gains of 1142, 1782, 1682 and 2550 points respectively. Since I started this Platinum Service in June 2015 it has averaged a monthly gain of over 1900 points.
The reduction in the tenor is a move that will help to increase the rundown in the ECB’s portfolio of (over €2tr), when they get to that point. Also, tilting purchases toward the shorter maturities would also steepen up the European rate curve, a point not lost on the European stock market with European bank stocks higher by 2.32% and the Eurostoxx 600 index 1.23% higher.
Given the above announcement to reduce Bond purchases from March, one could have easily expected that the Euro would have been stronger this morning and European Bond yields higher, though more at the longer end of the curve. This is not the case. Most trader had expected to see that the Euro was not in the 1.08-1.09 region, but instead trades this morning at just over 1.06, in what turned out to be a large downside Key Day Reversal.
The Euro was trading at around 1.08 before the announcement, it briefly spiked higher to around the 1.0875 region, before being sold aggressively. Reading between the lines, ECB President Draghi seems to have gotten his wish to reduce the amount of Bond purchases – let’s for argument’s sake call that “tapering” for a moment – but also a weaker Euro. His language around the announcement and how he characterised the move was to send a message that there is still a very large amount of Bond purchases. (The volume is back to March 15 to March 16 levels.) He was at pains to point out that this was “not tapering”, but re-calibrating the volume of ECB Bond purchases. The ECB President said that there was a “very, very broad consensus”, that purchases would continue beyond 2017 if necessary to get inflation back to the ECB’s target of 2%. On the ECB’s forecasts, inflation gets back to 1.7% by 2019 from 1.3% next year.
The market seems to be taken something to heart from Draghi’s view that what was announced is not tapering, but a calibration. He said that tapering had not been discussed by the Board. Word games and semantics it seems. In his words, tapering is reducing to zero purchases. While noting that deflationary risks had abated, he said that there was still quite a lot of uncertainty and that the recovery likely remain fragile. Perhaps the Euro’s reaction was as much about Draghi’s characterisation of the economic outlook.
It is going to be interesting to see how the market now trades the Euro, not only today, but into next week’s FOMC. The US rate market has continued to hold its pricing of a near certainty of a rate rise from the Fed next week and the focus will be on the dot plot Fed funds forecasts, the Fed’s outlook for the economy and Yellen’s presser. Has all the good news on the US Dollar been priced in?
Meanwhile, the USD has been stronger, making gains against most of the crosses since yesterday morning. The AUD is back down to 0.7460. The VIX is up small, US equities are also higher, while news on the commodity price front is mixed, base metals down, as is gold, iron ore and met coal too, while steaming coal rose $US1/t. There was mixed fundamental news for the AUD yesterday with a larger than expected AU trade deficit, but the Chinese trade report revealed stronger than expected exports and imports. There was very little data yesterday. US Jobless claims for the week to Dec 3 remained low at 255k.
This morning on the economic front we already had the Bundesbank out raising its GDP forecast for both 2016 and 2017 to 1.8% while reducing inflation targets by 0.1% for each of the next three years. At 9.30 am we have UK Trade Balance, Construction Output and the Bank of England Inflation Target for the next 12 months. Finally at 3.00 pm we have US Wholesale Inventories and the University of Michigan Consumer Sentiment.
This morning the ECB’s Smets speaks at an Economic Conference in Brussels.
December S&P 500
I was very unlucky yesterday as the S&P missed my 2232 buy level with a 2232.25 low print before rallying to a 2251.50 high print and I am still flat. The S&P is at nose bleeding territory but it is very difficult to be short for more than a few hours as buyers just keep on returning to the market as yet again anyone trying to sell the market gets stopped out. It is clear that despite the very overbought market that the S&P has strong support from 2230/2236 and I will be a buyer in this area with a 2225 stop. If I am taken long and subsequently stopped out of this position I will be a very aggressive buyer on any further dip lower to 2211/2217 with a 2206 stop. My only interest in selling the S&P is on a rally higher to 2256/2261 with a 2266 tight stop.
EUR/USD
Thankfully I said in yesterday’s commentary to be flat into the ECB announcement and Dragi press conference which is my normal situation. The Euro which spiked to a 1.0875 high print following the announcement collapsed nearly 300 points on Dragi’s comments that they will be there for the market. This comment saw the Euro trade through my buy range and I am still flat. It is a long time since I have seen two Key Day Reversals of such magnitude in opposite directions within four trading days of each other and both over 250 points but this is what happened. The Euro needs to break back above 1.0740 for the bulls to regain control. I have to respect the price action and for this reason I will be a small seller on any rally higher to 1.0690/1.0730 with a tight 1.0755 stop. Given the significance of yesterday downside Key Day Reversal I do not want to be long the Euro at this time. I cannot remember the last time that I made that comment.
December Dollar Index
Shortly after Dragi finished his press conference the Dollar was trading near the top of my sell range at 100.95. I went short here with the market so far just missing my 101.40 stop overnight with a 101.38 high print. I am still short and not comfortable with this position and I will now move my T/P level higher to 100.90. If I manage to exit this position I will be a more aggressive seller on any further rally to 101.80/102.20 with a 102.50 stop.
December DAX
After the rate announcement the DAX did hit my 10980 buy level but as I wanted to be flat ahead of Dragi I did not buy the market myself and I am still flat. Yesterday’s move higher saw the DAX trade above my previous target level at 11160 with a 11200 high print. Although the DAX is overbought, it is pointless in trying to sell the market and today I will move my buy level higher to 11070/11120 with a 11030 stop. If the DAX trades lower over the coming days I will be an aggressive buyer from 10950/11100 with a 10925 stop.
December FTSE
Unfortunately the FTSE just missed my 6885 buy level with a 6889 low print before rallying strongly and I am still flat. Compared to the other major Indices the FTSE continues to struggle but just like the DAX above it is pointless in trying to sell this market. Today I will move my buy level slightly higher to 6870/6900 with a 6840 stop.
Dow Rolling Contract.
My Dow plan worked well with the Dow hitting my 19660 sell level before trading 60 points lower. Unfortunately I emailed my Platinum Members to exit this position for a small gain at 19645 as I was nervous after what happened with Wednesday’s explosive move higher. Despite the Dow trading in a very overbought condition as noted at length in yesterday’s commentary with the RSI at a 20 year high, it is very difficult to go short for more than a few hours especially as we are in the seasonally strong time of the year. Despite yesterday’s rally in the US markets the McClellan Oscillator only rose marginally to close with a positive 186 print compared to Wednesday’s 179 close. Today I will again look to sell the Dow on any rally higher to 19710/19780 with a 19840 stop. Given how overbought the Dow is trading I still do not want to be long the market at this time, preferring instead to buy the S&P on dips as noted above.
March BUND
Just like the Euro, the Bund had a rollercoaster ride with the Bund spiking to a 159.91 low print before managing a full recovery to 161.54. Yesterday was another great example of why I go into a major announcement flat with the Bund trading through my buy range and stop on the ECB announcement and Dragi press conference. Subsequently I emailed my Platinum Members to buy the Bund at 160.95 with a 160.40 stop. As soon a sent the Email the Bund plunged to a 160.47 low print before rallying aggressively and this rally enabled me to cover this position at my revised 161.46 T/P level. After taking profit I emailed my Platinum Members to buy the Bund again and this was filled this morning at the open with a 161.05 fill. Since the open the Bund has again rallied strongly enabling me to cover this position at my second 161.45 T/P level and I am now flat. Yesterday’s large reversal higher is a clear sign that the recent aggressive sell-off in the Bund is over for the time being. Today I will again look to buy the Bund on any dip lower to 161.00/161.40 with a 160.70 stop.
Gold Rolling Contract
Overnight after trading in a very narrow range Gold hit my 1166 buy level. As I want to keep with my strategy of banking points when available I emailed my Platinum Members to exit this position at 1170 and I am now flat. Today I will again look to buy Gold on any dip lower to 1151/1159 with a 1143 stop.
Silver Rolling Contract
No change as I am still long from yesterday morning at 17.14 with the same 16.60 stop.
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