As expected the Fed left the Funds Rate unchanged and the key take away is that in spite of the recent inflation uplift the Fed is happy to stay the course and does not yet see the need to accelerate the pace of rate hikes. Ahead of the Fed, market moves were relatively subdued, initial reaction to the decision and Statement saw the US Dollar and US Treasury yields gap lower, but these moves quickly reversed. The USD has ended marginally stronger across the board, the UST yield curve has steepened and after trading in and out of positive territory, US equities have closed marginally lower.
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The post-meeting Statement revealed a Fed more confident that inflation will recover, evident by the removal of the line that the Committee is ‘’monitoring inflation developments closely’’. This observation was added when inflation was edging away from target and now that inflation is close to target, the FOMC noted that on a 12-month basis inflation is expected to run near the Committee’s ‘’symmetric’’ 2 percent objective over the medium term. As for the labour market, the Fed retained the same language noting that is has continued to strengthen and in terms of the economy, the Fed dropped the line that the economic outlook has strengthened in recent months (since it has not ) noting that economic activity remained at its ‘’moderate rate’’.
The immediate reaction to the Statement saw the USD drop about 0.5% along with a decline in UST yields, however these moves quickly reversed into the close, leaving the USD marginally stronger across the board. Meanwhile, the US Treasury curve has ended marginally steeper with the 2y note 1bps lower at 2.49% while the 10y rate is at about half a bps higher at 2.966%.
So the Fed has done little to change the factors that are currently supporting the USD. The Fed remains on course to at least deliver two more rate hikes this year (a June hike is almost fully priced and another one also essentially fully priced for December) with the risk of adding one more if there is evidence of more inflationary pressures. Meanwhile other major Central Banks have curled under their duvets awaiting a rebound in activity data following a soft start to 2018. On this latter point we note that Europe’s Q1 GDP reading, released after I posted yesterday morning eased as expected (more below). So along with relatively better domestic data releases, the US Dollar also continues to find support from relatively higher US yields and a likely reversal of extreme speculative positioning. Thus, near term, the USD path of least resistance continues to be up rather down.
Looking at other currencies in more detail, the AUD has won the least ugly contest relative to other G10 currencies and it has managed to remain unchanged while others have continued to succumb to the stronger USD environment. That said, the AUD currently trading at 0.7520, still looks vulnerable to the down side and I would not be surprised to see the Aussie eventually trade with a 73 handle near term. Similarly, NZD now trades just under the 70c mark with key support coming in around the 0.685/0.69 mark.
The Euro has been one of the biggest losers trading to a low of 1.1938 before bouncing overnight and now trades at 1.1980, essentially back to levels last seen at the start of 2018. EU data was not helpfull, the EU grew at 0.4% in Q1, down from 0.7% in Q4-17. The softness partly reflects the bad weather and an underlying slowdown from the rapid pace of growth seen last year. Meanwhile, back in the US and ahead of tomorrow’s Payrolls Report, the ADP Employment Report showed another month of strong private employment confirming that the US labour market remains strong.
Sterling came under more pressure last night amid reports that PM May does not have cabinet support for her ‘’customs partnership’’ plans with the EU. Bloomberg reports that Ministers are said to have split 6-5 against her proposal, opening the door for more political uncertainty. Sterling now trades at 1.3590, 8 big figures below the mid – April peak and a level not seen since mid-January. The 200 Day Moving Average sits at 1.3535 and I am watching this level carefully for a reversal higher.
In other news and ahead of the US-China trade talks, Chinese officials have said that China won’t succumb to ‘’threats’’ from the US, noting that China won’t accept any U.S. preconditions for negotiations such as abandoning its long-term advanced manufacturing ambitions or narrowing the trade gap by $100 billion, said the official, who asked not to be named, citing protocol. Yesterday, US Trade Representative Robert Lighthizer said that The US and China could ‘’spend the next year developing how we deal with each other over a period of time’’. So the main conclusion hear is that, more rhetoric is likely and we should not expect any outcomes any time soon.
This morning on the Economic Front we have UK Markit Services PMI at 9.30 am and this is followed at 10.00 am by Euro-Zone CPI and PPI. At 12.00 pm we have the Chinese Central Bank Rate decision. Next we have US Trade Balance, Weekly Jobless Claims, Non-Farm Productivity and Unit Labour Costs. This is followed at 2.45 pm by US Services PMI. Finally at 3.00 pm we have Factory Orders and ISM Non-Farm Manufacturing PMI.
June S&P 500
My S&P plan worked well with the market trading lower to my 2642 buy level before rallying 17 Handles to a 2659 high print following the release of the FOMC Statement. This rally higher enabled me to cover this long position at my 2648 T/P level and I am now flat. Subsequently the S&P got hit hard into the close. It is very important to see the reaction of the market to any significant news item. I mention this because think about all the ‘’great news’’ that has appeared over the past several days, including solid earnings from Microsoft, Amazon and Apple, no Fed Hike last night, an upcoming peace Summit with North Korea and yesterday’s announcement that Telsa ‘’lost less money than analysts thought,’’ projecting profitability by the Third Quarter. Yet despite all this seeming positivity, the Dow and S&P closed at their lowest level since April 2. This is a dangerous market that could break at anytime. So far all dips have been bought with some fierce rallies as we have witnessed over the past 10 days. The S&P needs to break and close over the now key resistance level from 2652/2662 for a re-test of 2700. Given yesterday’s negative trading session I will be a seller on any rally to this area with a tight 2668 stop. My only interest in buying the S&P today is on a dip lower to 2603/2613 with a 2596 stop. The 2628 level is key as a break and close below here for a couple of days opens up the possibility of a large move lower to 2550, 2500 and possibility 2480 where I will then look to set up a more sustainable long position.
EUR/USD
After I posted yesterday morning the Euro rebounded to a high at 1.2032 before getting hit hard. This move lower saw my 1.2035 long position stopped out at 1.1960. I still believe that the Euro is oversold and due a meaningful bounce. For this reason I emailed my Platinum Members to re-buy the Euro after the FOMC Statement was released from 1.1930/1.1980. The Euro subsequently made a new low at 1.1938 and I bought the market myself at 1.1970. I will now have a stop on this position at 1.1925 while my T/P level is now at 1.2015. Building value and settling above 1.2020 will see me look to go long again for 1.2070/1.2120 and possibly 1.2170/1.2210.
June Dollar Index
My Dollar plan worked well with the Dollar trading higher to my 92.50 sell level before falling 40 points and this move lower enabled me to cover my short position at my revised 92.30 T/P level and I am now flat. Today I will again look to sell the Dollar on any move higher to 92.70/93.10 with a 93.40 stop. I still do not want to be long the Dollar at this time.
June DAX
I cannot remember the last time that the DAX rose 300 points while the Dow fell 200 in the one trading session. Thankfully we had no sell levels in the DAX as both the 100 and 200 Day Moving Averages were taken out and both of these levels should now act as strong support on any subsequent test. Today I will move my buy level higher to 12620/12690 with a 12555 tight stop.
June FTSE
My FTSE plan worked well with the market trading higher to my 7525 sell level before selling off to my 7500 T/P level and I am now flat. Today I will again look to sell the market on any rally higher to 7520/7560 with a 7590 stop. Given how overbought the FTSE is trading I do not want to be long the market at this time.
Dow Rolling Contract
There is no sign of the volatility in the Dow ending anytime soon. Yesterday the Dow spent most of the afternoon trading around 24050 before spiking to a high at 24185 post the FOMC Statement. For the next 30 minutes the market traded sideways before falling 265 points into the close as one long position after another got stopped out. With the market close to my 23930 buy level near the close I emailed my Platinum Members in one of the seven updates that I did yesterday to lower their buy level to 23850. This level was subsequently filled and as I did not want to have a position on board overnight I covered this trade at my revised 23880 T/P level and I am now flat. There is no doubt that the price action in the Dow is bearish but one reason why I am reluctant to go short is the fact that the McClellan Oscillator is only barely in negative territory. With NFP tomorrow I would expect any sell-off today to be contained. Today I will be a buyer on any dip lower to 23600/23750 with a tight 23520 stop. I do not want to be short the Dow today especially as I have sell levels above in both the FTSE and S&P.
June NASDAQ
The good news which I mentioned at length above is certainly not helping the NASDAQ which got hit hard in the last hour of trading last night. Just before the close the NASDAQ traded lower to my 6640 buy level before having a small bounce and I covered this position at 6645 and I am still flat. The NASDAQ has good support from 6525/6575 and today I will be a buyer on any dip to this area with a 6480 stop. Despite the negative price action I do not want to be short the market at this time.
June BUND
No change as I am still a buyer on any dip lower to 157.60/158.00 with a 157.30 stop. I will also still be a seller on any rally higher to 158.95/159.35 with the same 159.65 stop.
Gold Rolling Contract
My Gold plan worked well with the market trading lower to my 1304 buy level before bouncing $10. As so many of my positions hit yesterday I covered my long position at my revised 1306.70 T/P level and I am now flat. The 200 Day Moving Average for Gold comes in at 1303 and so far the market is holding but the price action looks weak. A break below 1295 is a short-term sell signal with a target price of 1282 and then 1270. Today I will be a small buyer on any dip lower to 1290/1298 with a 1283 stop.
Silver Rolling Contract
Silver had a nice bounce off Tuesday’s 16.03 low to yesterday’s 16.56 high print. I used this rally to cover my latest long 16.32 position at my revised 16.47 T/P level and I am now flat. Today I will again look to buy Silver on any dip lower to 15.95/16.30 with a 15.60 stop.
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