This time yesterday, there seemed to be every chance that this morning’s market re-open would see some fresh pressure on all things Euro following Friday’s news that Moody’s had placed Italy on watch for a possible downgrade to its Baa2 long term sovereign rating (the latter already just two notches above sub-investment grade, or junk). 24 hours on and news that Italian president Sergio Mattarella has rejected PM-designate Giuseppe Conte’s proposal for Italy’s new Finance Minister the known Eurosceptic Paulo Savone has produced exactly the opposite market response at the London open . EUR/USD is currently 0.4% up on Friday’s New York closing level , with AUD a touch firmer on the back of this and other risk-positive news. The latter includes ‘’on again’’ indications regarding the Trump-Kim Summit in Singapore originally scheduled for June but abandoned by President Trump late last week.
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The Italian news has met a furious response from 5-Star with shrill comments about seeking the impeachment of the President, while the League’s 5-Star’s putative collation partner – is out saying fresh elections are the only answer. The latter may well be so and the obvious risk is that populist parties fare even better than in February on what many may see as an affront to democracy. At the same time, we know there remains popular support for the Euro (and EU membership) inside Italy and Mattarella’s rejection of Savona precisely because he would not countenance a finance min sure who risked taking Italy down the path of ‘’Italexit’’, might work the other way.
For now, the Euro’s recovery is likely to continue and Italian bond spreads over the Euro-core will compress. Also supportive might be ‘’source’’ reports from both Reuters and Bloomberg on Friday saying the ECB is still determined to end its APP (QE) by the end of the year and that guidance to this effect could come as early as the June 14th Council meeting. One report says that some ECB GC members will be revising up their CPI forecasts in June based on higher oil prices and now EUR slippage.
This Euro-positive news aside, Spain is also on the radar after the Socialists who are the largest opposition party in Spain, tabled a no-confidence motion in Prime Minster Rajoy on Friday, but this is not expected to succeed without the support of all other opposition parties. The more reform minded Ciudadanos party reportedly won’t side with the Socialists but will likely later table its own no-confidence motion. On some accounts, they could emerge as the biggest party if there are fresh elections
The bigger news on Friday was the sell-off in Oil. Brent crude lost 3% or $2.35 to $76.44 and WTI 4% or $2.83 to $67.88 on seemingly firm indications from Saudi Arabia that OPEC members and Russia will boost oil output next month. The FT on Saturday reported quite categorically that OPEC and Russia are set to lift oil output by up to 1m barrels a day, in a move to curb a rally that had taken prices above $80 a barrel and prompted calls for restraint from the US. The FT says the decision to raise output, though not to be finalised until next month, is a stark reversal for the oil cartel and its allies who have been reducing supply since the start of last year. The increased production is seen replacing lost supply from Venezuela and Iran once sanctions are imposed.
A crunch in energy shocks was enough to pull both the S&P500 and Dow Jones down by 0.25% (NADSAQ outperformed, off only 0.13% while the Russell 2000 was virtually unchanged). On the week, significantly contrasting fortunes between U.S. markets (up) and European and Asia bourses (both down) where Italian politics, rising EM angst and a re-strengthening JPY undermined non-US markets:
In bonds, the fall in oil prices produced a 4-5bps decline in 5-10yr Treasury yields of which roughly half was via a drop in the break-even (inflation-related) component of nominal yields. On the week, 5 and 10yr UST yields are both over 12bps lower and 2s down 7bps, the mid-week FOMC minutes one driver of the fall in front end yields:
In FX, NOK and CAD were predictably the biggest casualties of the oil price plunge while EUR/USD made a fresh year to date low of 1.1648 as Spain joined Italy in adding political uncertainty into the mix (and proving a modicum of additional support to CHF). JPY was slightly softer despite the fall-back in UST yields. Continued lack of clarity on the U.K.s Brexit position continued to chip away at Sterling. On the day, DX was +0.5% and BBDXY a smaller 0.3% due to its lesser EUR weight. This is much more apparent on the week, where BBDXY ends virtually unchanged but DXY +0.66%, to a new mini-cycle high of 94.28.
In commodities, as well as oil, all base metals bar zinc were lower while steaming coal out of Newcastle continues its rally, up the best part of another $1 to $106.50 a tonne and now some $13 higher on a month ago. On the week, it was a very mixed performance for base metals that leaves the LMEX index flat. WTI crude ended $4.36 back from Monday’s highs.
Economic data failed to have much market influence on Friday. The final University of Michigan final May consumer sentiment index slipped to 98.0 from its 98.8 preliminary reading while US April Durable Goods Orders fell by a slightly more than expected 1.7%. The core numbers (ex transport and ex defence ex-aircraft) were though both modestly better than expected at +0.9% and +1.0% respectively.
This morning on the Economic Front we have no data of note with the US closed for the Memorial Day Holiday and the UK for its second Bank Holiday in May.
June S&P 500
My S&P plan worked well with the market trading lower to my 2721 buy level with a 2715 low print before rallying to my 2726 T/P level and I am now flat. Although the S&P closed weak on Friday the Futures Market opened higher last night on the back of the US/North Korea Summit seemingly back on again. As I have mentioned countless times that even though long-term I am bearish the US Equity Markets until we get a sell extreme that takes out some significant levels I will continue to be a buyer on dips as this strategy has worked really well for most of the last three months. If the S&P can break and close over 2750 it will be a buy signal for a possible move higher to 2820/2840 where I will be an aggressive seller. Today I will again look to buy the S&P on any dip lower to 2714/2721 with a 2708 stop. I still do not want to be short the market at this time.
EUR/USD
Yet again the Daily Sentiment Index has proved what a valuable trading tool it is. Last week the DSI had a reading of just 9% Euro bulls which was the lowest reading since December 2016 when the Euro was trading under 1.05 before making it’s bottom at 1.0341 on January 3, 2017. The weakening political situation in Italy saw the Euro trade lower to my 1.1670 buy level on Friday with a 1.1648 low print before rallying to my revised 1.1685 T/P level as I did not want to have a position on board over the weekend. This morning the Euro is trading higher at 1.1715. Today I will again look to buy the Euro on any dip lower to 1.1655/1.1685 with a 1.1625 tight stop.
June Dollar Index
Just before the New York close on Friday night the Dollar traded higher to my 94.25 sell level before selling off early this morning to my 93.95 T/P level and I am now flat. With sentiment at such extreme bullish levels I will continue to be a seller of the US Dollar on rallies and today I will again look to sell the market from 94.10/94.50 with a 94.80 tight stop. I still do not want to be long the Dollar at this time.
June DAX
I am still flat the DAX and today I will now raise my sell level to 13110/13170 with a 13220 tight stop. I will also raise my buy level to 12840/12910 with a 12780 stop.
June FTSE
The FTSE just missed my 7680 buy level with a 7687 low print on Friday before rallying into the close and I am still flat. The FTSE is closed today for the UK Bank Holiday and even thought the spread betting firms are making a market in the FTSE today I prefer to wait until the market re-opens tomorrow and I will stand aside.
Dow Rolling Contract
My Dow plan worked well with the market trading lower to my initial 24730 buy level before rallying 100 points. I did not buy the Dow myself as I was already long the S&P and I had enough exposure to the markets at that time. If you did buy the Dow then you made a nice gain. Technically the Dow continues to be a buy on dips especially if we can hold above the key 50 Day Moving Average at 24400. Today I will now look to buy the Dow again on any dip lower to 24600/24720 with a 24520 tight stop. I still do not want to be short the Dow at this time.
June NASDAQ
Unfortunately the NASDAQ just missed my 6920 buy level on Friday before rallying strongly overnight and I am still flat. The NASDAQ has strong resistance from 7060/7110 and today I will be a seller on any rally to this area with a 7145 tight stop. I will also raise my buy level to 6900/6940 with a 6860 stop, which is just above the key 6850 support level.
June BUND
After the Bund traded higher to my initial sell level at 160.80 I emailed my Platinum Members to only add to this position on a further move higher to 161.20 with a tight and higher stop at 161.40. After my second sell level was filled I covered this now average 161.00 short position for a small loss at 161.05 before the close on Friday as I wanted to be flat over the weekend. Unfortunately this was the wrong call with the Bund trading much lower to 160.40 this morning. Today I will now look to sell the Bund again on any further rally to 160.95/161.35 with a 161.65 tight stop. Given the insanely low yield I do not want to be long the Bund at this time.
Gold Rolling Contract
As long as Gold can hold the 1280/1288 support level then the market should push higher especially given the low DSI reading. Today I will now lower my buy level slightly to 1282/1290 with a 1275 tight stop.
Silver Rolling Contract
Silver traded lower to my 16.50 buy level on Friday. I am still long and I will only add to this position on any further move lower to 16.20 with a 15.90 stop. Sentiment remains compatible with a larger bounce and I will leave my T/P level unchanged at 16.70.
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