The tepid US Dollar resurgence that started late on Tuesday night continued yesterday with a strong ISM manufacturing print and Fed Minutes with a hawkish tinge only having a subdued positive impact. The US Treasury curve has ended the day flatter and US Equities had another positive day with the Dow Jones, S&P 500 and NASDAQ again closing at new record highs while European equities more than reversed Tuesday’s losses. Meanwhile commodities are mixed but oil prices have jumped ahead of a US government report this afternoon.
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So the US Dollar has ended its losing streak after six days of negative returns with the BBDXY closing up 0.18%. But given the strength in the ISM manufacturing print and the slightly hawkish tone in the FOMC minutes (see more below), the rise in the US Dollar seems fairly muted and highlights yet again how the currency continues to struggle in spite of a positive macro backdrop.
Looking at G10 currencies the US Dollar has managed to outperform all G10 pairs excluding the AUD (0.18%) and NOK (0.30%). The latter two appear to have benefited from the 2% rise in oil prices on expectations that a U.S. government report scheduled for release on later today will show the longest decline in crude stockpiles since the summer driving season. AUD now trades at 0.7837, after trading to an overnight high of 0.7845.
Meanwhile Sterling has been the G10 underperformer following the UK Construction PMI miss of 52.2 vs 53.0 forecast. The pound came under additional downward pressure after former Treasury minister, Jim O’Neill, suggested key UK Brexiteers are clueless over the world economy and slamming the cabinet’s fantasy approach to post-Brexit trade. After initially trading to a high of 1.3613, cable is now one big figure lower and currently trades at 1.3511.
US equities have continued on their upward path with the S&P500, DJ and NASDAQ all making new all-time highs. The ISM print was a positive factor, but tech stocks have continued to lead the way ( NASDAQ +0.84%, S&P500 +0.64% and DJ +0.40%).
Reaction to the data and Fed Minutes has resulted in the US Treasuries essentially reversing Tuesday’s steepening of the Yield Curve. The flattening was led by a 1.2bps increase in the 2y part of the curve while 10y yields drifted 1.8bps and currently trade at 2.44%.
The December FOMC Fed minutes revealed a broad consensus within policymakers that US tax reform will likely boost economic growth, but there were clear differences of opinion on whether the tax stimulus warranted a faster pace of rate hikes in 2018. Participant noted risks that if realised could require a quicker pace of rate hikes. These risks included the possibility that inflation pressures could build unduly, perhaps owing to fiscal stimulus or accommodative financial-market conditions. Still, the fact that the new Fed GDP forecasts were only marginally revised upwards suggests the magnitude of any GDP growth boost is uncertain at this stage.
The Minutes also showed officials discussed the recent flattening of the yield curve by noting this fact, and generally agreed that the current degree of flatness of the yield curve was not unusual by historical standards. Not surprisingly, the Minutes also showed concerns over weak inflation, but overall risks to the outlook were seen as balanced. Downside risks to inflation included the possibility that longer-term inflation expectations may move lower or that the run of soft core inflation readings this year could prove to be more persistent than the staff expected. These downside risks were seen as essentially counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to move further above its potential.
The US ISM Manufacturing read for December was better than expected (59.8 vs consensus of 58.2 and NAB was 59.2). The increase in the index in the month was mostly driven by the New Orders sub-index (+5.4 to 69.4). Most economists noted that the new numbers are suggestive of a very strong Manufacturing sector and a good indicator for solid US growth going into 2018. The Price index was also higher, up 3.5 points to 69, a theme that is also being reflected in other global manufacturing gauges. But, the key will be whether higher manufacturing prices find their way into consumer prices.
This morning on the Economic Front we have German, Euro-Zone and UK Services PMI at 8.55 am, 9.00 am and 9.30 am respectively. Also at 9.30 am we have UK Net Consumer Credit/Mortgage Approvals. This is followed at 1.15 pm by US ADP Employment Change which will be closed watched by the markets for any hints ahead of tomorrow’s NFP data. Finally we have US Jobless Claims and the Manufacturing PMI at 1.30 pm and 2.45 pm respectively.
March S&P 500
The strong start for the S&P continued yesterday with the S&P trading to a new high at 2714 which is a 46 Handle rally off last Friday’s closing level. The S&P is now close to its third Standard Deviation of 2792 as this bull market shows no signs of ending. Yesterday after the S&P traded the whole of my 2705/2712 sell range which had me short at an average rate of 2708.50. I emailed my Platinum Members to exit any short position after the FOMC Minutes were released at 2708 and I am now flat. The final numbers are now in for the American Association of Individual Investors (AAII) Asset Allocation Survey and they continue to press levels last seen in late-1999 and early-2000, near the peak of the Great Asset Mania. ‘’Mom and Pop’’ are now allocating 72% of their portfolios to stocks and just 13% to cash, a 59% disparity, which is the widest since March 2000. That month the S&P peaked before declining 51% over the next 31 months, while the NASDAQ which also peaked, crashed 78%. This move is not sustainable but as usual we have to wait for a sell extreme first before putting a more long-term bearish position. The S&P has strong resistance at 2720 and today I will again look to sell the market on any rally higher to 2715/2723 with a 2729 stop. I will also raise my buy level to 2685/2692 with a 2680 stop.
EUR/USD
I am still flat the Euro and today I will now lower my buy level slightly to 1.1945/1.1980 with a 1.1915 stop. I still do not want to be short the Euro at this time.
March Dollar Index
Just before lunch the Dollar rallied to my 91.80 T/P level on my average 91.75 long position and I am now flat. The 91.50/92.00 is strong support for the Dollar as a break and close below 91.50 is bearish with a 90.00 target price. Today I will again look to buy the Dollar on any dip lower to 91.25/91.60 with a 90.95 stop.
March DAX
My fears that the DAX could have a strong rally certainly played out yesterday with the market rallying 300 points off Tuesday’s 12733 low print and I am still flat. For the DAX to cancel its sell signal it needs to break and close over 13200. I still do not want to be short the market and today I will now raise my buy level to 12790/12850 with a 12745 tight stop.
March FTSE
I am still flat the FTSE which again closed a new all-time high as the market just missed my 7545 buy level shortly after the London market opened yesterday morning. I am not comfortable in chasing this market higher especially after such a huge move and today I will leave my buy level unchanged from 7510/7545 with the same 7480 stop.
Dow Rolling Contract
No change as I am still a seller on any further rally to 25050/25120 with the same 25180 stop. Although the Dow closed at another new all-time high the pace of the increase since last Friday’s sell-off is slowing and is a worry. Just like the FTSE above I do not want to chase this market higher and I will leave my buy level unchanged from 24610/24680 with the same 24550 stop.
March NASDAQ
The NASDAQ continued its strong start to 2018 with another positive performance yesterday. I am still flat and nervous given how severely overbought this market is trading. The NASDAQ has strong resistance from 6650/6720 and today I will be a seller in this area with a wider 6780 stop. I do not want to be long the NASDAQ at this time despite the positive price action.
March BUND
No change as I am still a buyer on any dip lower to 160.45/160.90 with a 160.15 stop.
Gold Rolling Contract
Finally we saw Gold sell-off late in the New York session after numerous up days. The Daily Sentiment Index has jumped to 80% Gold bulls, similar to the trader optimism that attended the $1357 high on September 8 (79%). This is a worry for the bulls and in light of this data I no longer want to be long Gold at this time and will stay flat for now.
Silver Rolling Contract
Overnight Silver traded lower to my 17.00 buy level. I am still long the market which has now risen over 10% since its 15.48 low print on December 8. In light of the sell-off in Gold late yesterday I will now lower my Silver T/P level on this position to 17.15. I will only look to add to this position on any further move lower to 16.60 with a 16.20 stop. If my second buy level is triggered before my T/P level is executed I will be back with a new update for my Platinum Members.
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