With an absence of major data, trade talk has been consuming most of the attention of markets over the past 24 hours, with the threats of more from the Trump Administration on Friday, Europe retaliating with tariffs on $3.3b of US imports, the EU and China getting together to chew over strategy, and more. Moreover, July 6 is looming when the specified $34b of additional tariffs kick in with the additional threat of another $200bn from the US side should China retaliate, which they did. Where to begin and what is the market to make of all of this? It has been a very messy past 24 hours or so.
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There were threats yesterday from an FT report pointing to restrictions of investment from China in US technology companies, an announcement due in days, though the US Trade Council head Navarro headline last night appears to be downplaying this. Specific restrictions on Chinese investment are apparently designed to prevent Beijing from moving ahead with plans outlined in its ‘’Made in China 2025’’ report to become a global leader in 10 broad areas of technology, including information technology, aerospace, electric vehicles and biotechnology. The Treasury Department is reported to be crafting rules that would block firms with at least 25% Chinese ownership from buying companies involved in what the White House calls ‘’industrially significant technology’’ To that were added reports that the National Security Council and the Commerce Department are putting together plans for ‘’enhanced’’ export controls, designed to keep such technologies from being shipped to China, said the people familiar with the proposals. As noted above, whether Navarro is voiding this remains to be seen in this rapid headline changing world.
Stocks are down on all of the above news, the Shanghai down 1.05% yesterday, the Dax off 2.46% to it’s lowest level since April while the Dow was down 328 points, off 1.33%, a similar proportionate decline in the S&P 500 and a 2.09% decline in the Nasdaq. Stocks pared some losses after the Navarro headline. Harley-Davidson shares are down a cool 5.97%, near the top of the declines in the US broader market. Harley-Davidson has said that they could look to produce more motorbikes bound for the EU offshore to tariff-friendly locations, EU tariffs on Harleys increasing from 6% to 31% that the company estimates would be an additional $2,200 per HOG. On the US data front, US New Home Sales in May surprised on the higher side despite tightening lending standards and higher mortgage rates; these numbers can be revised.
In comparison, dips in global bond yields have been mild, German 10 year bunds down one basis point and US 10 year Treasuries off a net 1.46 bps. Running against the tide were Italian short and long end yields both rising in size (2s by 11.7bps and 10s by 13.2 bps) on news of the League having a strong showing in Italian municipal elections. This has not stopped the Euro from sitting at the top of the FX leader board this morning, ostensibly on safe buying and perhaps on the meetings between China and the EC over the weekend to discuss trade, though that is not a very satisfactory explanation given the market’s focus on China. Liu He, top Chinese economic adviser has said that ‘’unilateralism is on the rise and trade tensions have appeared in major economies’’. China and the EU firmly oppose trade unilateralism and protectionism and think these actions may bring recession and turbulence to the global economy.
Endeavouring to work out the end game and winners/losers at this point in the war of words is premature. Trade frictions and trade access with China in focus though has rightly centred some renewed selling attention on the AUD, that is at the other end of the FX leader board, back just above 0.74 this morning, having tested just below the figure in the NY session. Base metals prices took a hit yesterday, as did gold, though the Chinese benchmark 62% iron ore price rose 1% yesterday with Met Coal and Steaming Coal prices up marginally. BHP raised its end year price target for Met Coal yesterday from $160 to $168/t. The VIX is up 3.56 points to 17.33 having been as high as 19 at one stage.
What I also note is that China cut its bank reserve requirement ratio (RRR) on Sunday to cut the amount of cash some lenders must hold as reserves, unlocking about 700 billion yuan ($108 billion) of liquidity, as it seeks to control leverage and support smaller companies. The required reserve ratio for some banks will drop by 0.5 percentage point, effective July 5 to support small and micro enterprises, and to further promote the debt-to-equity swap programme. The move was widely expected after China’s Cabinet said on Wednesday that it would use monetary policy tools, including cutting reserve ratios for some banks, to boost credit supply to smaller companies. In addition, USD/CNY has been fixed at higher levels, up 2.2% since the middle of the month, adding a measure of external support.
This morning on the Economic Front we have no data of note from the Euro-Zone or the UK. However, Haskel, Fried and the Bank of England’s McCafferty all speak at the BoE’s Appointment Hearings in London which starts at 10.00 am. Finally at 3.00 pm we have the Richmond Fed Manufacturing Index and the Conference Board Consumer Confidence at 3.00 pm.
Meanwhile the Fed’s Bostic and Kaplan are speaking at different venues this afternoon.
September S&P 500
It is a long time since my two S&P calls have got hit on the same day and also lost points but that was exactly what happened yesterday on what turned out to be a rout in the S&P which at one stage was down close to 60 Handles, before rallying 25 Handles into the Chicago close. For the record I bought the S&P at 2733 before getting stopped at 2724 and again at 2715 before also getting stopped at 2707. The first low for the S&P was 2704 and I used my 5 Handle Rule to re-buy the S&P at 2709. Subsequently the S&P rallied back to 2722 and this move higher enabled me to cover this position at 2716 and I am now flat. Navarro’s late comments helped the S&P, Dow and NASDAQ to all close back above their key Moving Averages which was vital or else we could have seen a real meltdown in the market. As long as last night’s 2700 support level hold for the S&P then the market will continue to be a buy on dips especially given how oversold both the Dow and S&P are at this time. Today I will again look to buy the S&P on any dip lower to 2705/2713 with a 2697 stop. I do not want to be short the S&P at this time.
EUR/USD
The Euro has now bounced over 200 points off last week’s 1.1509 low print as yet again short positions are getting squeezed. The Euro has strong resistance from 1.1760/1.1800 and today I will be a seller in this area with a 1.1835 stop. I am reluctant to chase this market higher and today I will only raise my Euro buy level slightly to 1.1580/1.1620 with a 1.1545 stop. Again if I am taken long and subsequently stopped out of this position I will be a more aggressive buyer from 1.1420/1.1470 with a 1.1375 stop.
September Dollar Index
The sell-off in the Dollar has continued since I posted yesterday morning with the key support range of 93.00/93.40 close. Today I will be a buyer on any dip to this area with a 92.65 stop. The Dollar has now fallen over 150 points since the Daily Sentiment Reading touched 9% bulls two weeks ago, again proving what a valuable technical indicator this signal is. I will now lower my sell level slightly to 94.45/94.85 with a 95.15 stop.
September DAX
After the DAX traded lower to my initial buy level at 12375 the market traded sideways for a couple of hours and this gave me a chance to cover my long position at my revised 12400 T/P level as emailed to my Platinum members. Subsequently I emailed them to buy the market again at 12310 with a 12345 T/P level and thankfully both levels were filled in what is a seriously oversold market with the DAX now trading at the bottom of its Daily Bollinger Band following a 900 point sell-off in the last 10 days. As I mentioned yesterday the real level to watch for the DAX is 11600 as a break and close below here is a major sell signal following the Head & Shoulders pattern that has been building over the past two years. Today I will again look to buy the DAX on any dip lower to 12180/12250 with a 12130 stop.
September FTSE
After the FTSE traded lower to my revised 7472 buy level I was stopped out of this position near the low of the day at 7435 and I am now flat which is frustrating. The FTSE had it worst session in many months with the market falling over 2%. Today I will again look to buy the market on any dip lower to 7380/7425 with a 7345 stop.
Dow Rolling Contract
My Dow plan worked well as after the market traded lower to my 24220 average buy level the market bounced to my revised 24290 T/P level and I am now flat. The late rally again showed how clued in the US traders were as they knew they had to get the Dow to close back over its 200 Day Moving Average or else we could see another bout of strong selling into the close and overnight. The tweets from US President Trump are moving these markets at an unbelievable pace and if you are on the wrong side of one of these tweets then it can be very costly. The Dow has good support from 24020/24170 and today I will be a buyer on any dip to this area with a 23950 stop. Yesterday the Dow left a large ‘’Open Gap’’ from Friday at 24550/24670 and today I will lower my sell level to this area with a 24730 tight stop.
September NASDAQ
My NASDAQ plan worked well yesterday with the market trading lower to my average buy level at 7030 before a late rally saw the market hit my revised 7070 T/P level and I am now flat. The NASDAQ has now fallen over 400 points since last Wednesday’s latest all-time high with the FANG stocks getting hit hard. Today I will again look to buy the market on any dip lower to 6970/7020 with a 6930 tight stop. Despite the negative price action of the past few days I still do not want to be short the market at this time.
September BUND
I am still flat the Bund which traded in a narrow range yesterday. Today I will now lower my buy level slightly to 161.30/161.70 with a 160.95 stop. I still do not want to be short the Bund at this time despite the insanely low yield. As mentioned over the past few weeks the fact that so much of the German Curve has a negative interest rate tells you the Euro-Zone has little or no growth.
Gold Rolling Contract
The Daily Sentiment Index reading for Gold is still in single digits while the Managed Money Accounts for Gold Futures is at its lowest level since January 18, 2016 with a net-long 23,514 Contracts. This tells me that Gold is very close to a tradeable low even though the price action is awful. I am not going to chase the market higher and today I will leave my buy level unchanged from 1243/1253 with a wider 1233 stop which is just below the key 1236 trendline support level. A break and close above 1280 will signify that Gold may have bottomed.
Silver Rolling Contact
Shortly after I posted yesterday morning Silver rallied to my 16.45 T/P level on my latest long 16.30 position and I am now flat. So far Silver is holding above its 16.03 May low while of course God has broken its May equivalent low at 1282 which is positive divergence. Today I will again look to buy Silver on any dip lower to 15.95/16.25 with a 15.60 stop. If I am taken long I will have a T/P level at 16.40. If any of the above levels are hit I will be back with a new update for my Platinum Members.
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