The risk off tone that started just before I posted yesterday morning, amid a 3% drop in the Turkish Lira and stalling news on US-China trade talks, extended into the European session courtesy of underwhelming PMI’s in the Euro-Zone and a soft CPI print in the UK. Meanwhile on the other side of the Atlantic, the Fed Minutes confirmed the FOMC bias to hike in June, however, Fed Members remain divided on whether there is a need for an acceleration on the pace of tightening. This lack of urgency triggered a rally in US Treasury yields (led by the 5 year part of the curve), it helped US equities move back into positive territory before the close and it also saw the US Dollar pair most of its early gains.
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Yesterday’s Economic news added further support to the view that US growth outperformance is likely to accelerate in Q2, the Fed remains on track to hike again while other major central banks hit the pause button and if trade tensions are delayed or derailed, the US still stand lose less than everyone else. All signs still point to USD outperformance.
The 3,5% gap lower in the Turkish Lira triggered a risk off tone with the move compounded by President Trump casting doubts on the upcoming US-NK summit. USD/JPY led the safe haven demand, dropping below the 110 mark and US Treasury yields flirted with a move sub 3%.
Disappointing European PMI’s and softer than expected UK CPI did not help the cause. So, although there was a switch in the lead roles, the risk off sentiment extended into the early part of the US session. The Euro and Sterling became the big losers while USD/JPY and 10y UST yields found some support.
The lack of a bounce in Europe’s PMIs (Manufacturing PMI was 55.5 v 56.1 expected and Services PMI was 53.9 v 54.7e) triggered a sell-off in the Euro, with the pair initially gapping 50 pips to 1.1707, the move then extended over the course of the session, not helped by a move higher in Italian bond yields amid lingering political uncertainty. The market is still waiting for Italy’s President Mattarella to decide whether Conte, the little known PM-candidate has the ‘’forza’’ to do the job. After a small reprieve on Tuesday, the 10y BTPS-Bunds spread widened again yesterday (+12bps to 188bps), the Euro traded to a low of 1.1676, an now trades at 1.1725, after a small FOMC minutes boost.
Sterling is another big underperformer (-0.62%), the pair currently trades at 1.3370, after dipping to an intra-day low of 1.3306. UK CPI data came in a tick below expectations, retreating faster towards the Bank of England’s target, with headline inflation down to its lowest level in more than a year of 2.4%. Brexit woes also continue with reports the government is yet to decide on what post-EU Customs option it wants. Both Boris Johnston and Jacob Rees-Mogg are pressuring to press ahead with leaving the Customs Union and for PM May to show more ‘’backbone’’ in negotiations. A Brexit resolution remains elusive and with soft data not helping the BoE cause, downwards remains the path of least resistance for the pound.
Just before the European close and after dropping over 5% since this time yesterday, the Turkish lira did a massive turn around, following the Turkish Central Bank decision to increase its key policy rate by 300bps to 16.5% . The TRY rallied to close in New York at 4.5761, 7% up from the intraday lows. However this morning the Lira has resumed its weakness and is now down 3% as I go to press.
Ahead of the FOMC Minutes, the Turkish Lira move had a small positive effect on market sentiment which was further extended by the ‘’short-term hawkish but medium-term dovish’’ take on the Minutes ( a Bloomberg description). The Fed Minutes confirmed the FOMC bias to hike in June, noting that ‘’it would likely soon be appropriate for the committee to take another step’’ in raising rates, however the Minutes also noted that modest inflation overshoot ‘’could be helpful’’ in anchoring inflation expectations around 2%. Members are also still split on the potential inflation risk coming from the tightening labour market and given the lack of evidence there is not yet the urgency to accelerate the current pace of tightening. This lack of urgency triggered a rally in UST yields with the moves led by the 5 year part, down 4.5bps to 2.82%.
This morning on the Economic front we already had the release of German Final Q1 GDP which came in as expected with a +0.3% rise. At 9.30 am we have UK Retail Sales and this is followed at 1.30 pm by the US Weekly Jobless Claims. Finally we have Existing Home Sales and the Kansas City Fed Manufacturing Index at 3.00 pm and 3.30 pm respectively.
June S&P 500
My S&P plan worked well with the market trading lower to my 2707 buy level before rallying to my 2712 T/P level and I am now flat. Incredibly the S&P continued to rally during the US trading session, helped by the FOMC Minutes to close over 2730 as yet again the buy the dip wins the day. As I have mentioned countless times over the past few weeks, until we see a sell extreme that breaks some key technical levels this market will continue to be a buy on dips. The S&P has key resistance at 2740/2745 and a break and close over this level is another buy signal for 2760, 2775 and possibly as high as 2800 over the coming weeks. Any test of the 50 Day Moving Average at 2680 will be met by strong buying. Today I will again look to buy the S&P on any dip lower to 2715/2723 with a 2709 stop. I do not want to be short the market at this time.
EUR/USD
My Euro plan worked well with the Euro eventually trading lower to my 1.1695 buy level before rallying to my revised 1.1715 T/P level and I am now flat. Given the severely oversold condition of the Euro I will continue to be a buyer on dips especially against the strong support at 1.1670. Today I will again look to buy the Euro on any dip lower to 1.1655/1.1695 with a 1.1625 tight stop.
June Dollar Index
My Dollar plan worked well with the Dollar eventually trading higher to my 94.10 sell level before selling off overnight to my 93.80 T/P level and I am now flat. Today I will again look to sell the Dollar on any rally higher to 94.10/94.50 with the same 94.75 tight stop.
June DAX
After weeks of sideways to higher prices in the DAX, yesterday the DAX got crushed falling over 250 points. My DAX plan worked well with the market trading lower to my 12940 buy level before rallying 50 points and I used this rally to exit my long position at my revised 12968 T/P level and I am now flat. This morning the DAX is trading at the key 12980 pivot point with the market so far unable to rally despite the strong close in the US Indices last night. Today I will again look to buy the DAX from 12860/12920 with a 12810 stop. Despite the negative price action yesterday I still do not want to be short the market at this time.
June FTSE
After the FTSE traded lower to my 7765 buy level the market fell another 20 points before having a small rally into the close. As we had made some nice points yesterday I did not want to run the risk of losing some of these gains and I used the small rally into the Cash FTSE close at 4.30 pm to cover this position at 7773 and I am now flat. Overnight the FTSE traded to a rebound high at 7795 before selling off small this morning. Today my only interest in buying the market is on a dip lower to 7700/7740 with a 7670 stop.
Dow Rolling Contract
My Dow plan worked well with the market trading lower to my initial 28640 buy level before rallying over 250 points into the US close. Unfortunately as so many of my positions hit I covered this Dow long position for a small gain at 24668 and I am still flat. The Dow really needs to break above Tuesday’s high at 25085 for the bulls to regain control. Today I will be a small buyer on any dip lower to 24630/24760 with a 24570 tight stop. I will also be small seller on any rally higher to 25080/25210 with a 25270 stop.
June NASDAQ
Unfortunately the NASDAQ just missed my 6820 buy level with a 6829 low print before rallying over 100 points and I am still flat. Today I will now raise my buy level to 6870/6920 with a 6825 stop. I still do not want to be short the NASDAQ at this time.
June BUND
I am still flat the Bund and today I will now raise my buy level slightly to 158.95/159.35 with a 158.65 stop. My only interest in selling the Bund is on a further rally higher to 160.30/160.70 with a 161.05 tight stop. The Bund has massive resistance from 160.50/161.00.
Gold Rolling Contract
Unfortunately Gold just missed my 1284 buy level and I am still flat .Sentiment remains compatible with the potential for a Gold rally and for this reason I will now raise my buy level slightly to 1280/1288 with a 1272 tight stop.
Silver Rolling Contract
No change as I am still long at 16.55 with the same 16.75 T/P level which is just below the key 16.80/17.00 resistance level. Remember a break and close over here is a strong buy signal.
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