President Trump turned the heat on again on Friday, threatening to increase trade protectionist measures against China, calling out currency manipulators and also had another go at the Fed for raising rates while others continue to ease. Kudlow, Trump’s economic adviser, noted the November election will not stop the President on trade issues adding that Trump sees equities as no barrier given they are 30%/40% higher. The above tweet/remarks triggered a broad based USD sell off during Friday’s session and a steepening of the UST curve led by the back end of the curve. Speculation over Bank of Japan policy tweaks help the yen and also played a role in the move higher in UST yields, strong data supported the CAD while the soft USD backdrop and gains in commodities helped the NZD move back above 68c and the AUD back above 74c. US equities ended the day marginally lower, European equities closed mostly weaker and earlier in the session, after 5 negative consecutive days, the Shanghai Composite gained over 2%.
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Ahead of an important week of trade negotiations between the US and Europe, President Trump has sent a clear signal that he is not going to yield on his demands. The outcome of Trump/Juncker tariff meeting on Wednesday will be quite binary for risk sentiment. The President’s remarks also make it very clear he has a distaste for a stronger dollar, effectively limiting the greenback’s ability to perform, at least near term. The CNY fixing on Monday (after a soft Friday for the USD and recovery in CNY) will be important for the AUD at the start of the week before focus shifts towards Australia’s Q2 CPI release on Wednesday morning with markets and NAB expecting solid prints for both the headline and core readings.
Equities
US equities posted small negative returns on Friday, losses in Europe ranged between 0.07% and 0.98% with the DAX the big loser and not helped by Chancellor Merkel’s remark that trade tensions are a ‘’very serious situation’’. Encouragingly for Asia/EM, the Shanghai composite ended a five day losing streak closing Friday with gains over 2%.
Currencies
President Trump’s disparaging remarks for a strong USD look to have capped any potential gains for the greenback near term. After flirting with the idea of making a new year to date high on Thursday, the DXY index is down more than 1%, closing the week at 94.62. That said, idiosyncratic issues in other currencies have also played into the weaker USD narrative.
On Friday, a Reuters report suggested the BOJ is likely to debate policy changes at this month’s meeting. The Bank may discuss adjustments to the way it buys JGBs and ETFs to mitigate market distortions. However, the emphasis of any changes is being portrayed as step for policy sustainability, not tightening.
In a classic pattern of shoot first and ask questions later, reaction to the report gave a boost to the yen, probably not helped by a short squeeze on USD/JPY longs established in the prior week, USD/JPY closed the week at 111.44, just above key technical support levels. Strong CPI and Retail sales figures dragged USD/CAD from a high of 1.3290 to 1.3120 before closing the week at 1.3143. The soft USD backdrop and gains in commodities helped the NZD move back above 68c and the AUD back above 74c.Both antipodean currencies remain confined to their recent tight ranges.
Rates
The UST curve steepened on Friday, led by a selloff in the back end of the curve with reports of a block sale of 2605 ultra-long bond futures seemingly a factor at play. The BoJ reports led to a 5bp rise in the 10 year Japanese government bond future during US trading hours, an unusually large move for Japanese interest rates. The Japanese moves contributed to a steepening in the US yield curve, with the 10 year Treasury yield up 4bps on the day to 2.89% while the 2 year yield was unchanged. Aside from Trump/Kudlow’s remarks it is interesting to note that pricing expectations for a Fed hike in December were little changed at 78% (using effective Fed Funds rate). The Fed is an independent central bank and is unlikely to be swayed from its tightening plans for this year, while many other central banks are constrained from raising interest rates by low inflation in their countries.
Commodities
Copper led the gains in commodities on Friday, up over 2% helped by a softer USD and we would suggest the rebound in the Shanghai composite probably also helped sentiment. Oil and metal prices climbed close to 1.5% and gold gained 0.58%. On the week, iron ore was the only main commodity that managed to scrape a small gain, Brent and lead closed down 3% and copper was -0.7%.
Central Bank/Political Speak
– Trump ‘ready’ to put tariffs on all Chinese goods. “I’m ready to go to 500,” the president told CNBC. “I’m not doing this for politics, I’m doing this to do the right thing for our country,” Trump said. “We have been ripped off by China for a long time.”
– In a Tweet President Trump said ‘’the U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates Really’’
– And in another Tweet the president said ‘’China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day – taking away our big competitive edge’’.
– Chancellor Merkel warned ‘’On the issue of trade, we have a very serious situation in the world, I want to make that very clear’’, Merkel told reporters Friday in Berlin. Potential auto tariffs are ‘’really a danger for the prosperity for many in the world’’ and would be viewed by Germany as a violation of global trade rules, likely provoking retaliation.
– White House Economic Adviser Larry Kudlow says President Trump is not going to ‘’let go’’ of trade issues “no matter what the elections are’’, Axios reports, citing interview following Trump;s comments to CNBC.
– On Brexit: Barnier says he sees a deal in Oct or Nov which implies the two sides are not so far apart. Barnier also notes the only ‘business as usual option is Norway plus, Norway EEA option means UK stays out of a customs union and thereby can do free trade deals. It means tariff free access but not completely frictionless trade (as is now the case). That’s good, but is it good enough for UK-EU ‘just in time’ auto industry and Airbus parts?
This morning on the Economic Front we have no data of note due from the UK. The only US release is the Chicago Fed National Activity Index at 1.30 pm. Finally we have Euro-Zone Consumer Confidence at 3.00 pm.
September S&P 500
My S&P plan worked well on Friday as shortly after I posted the S&P traded lower to my 2793 buy level before rallying to my 2798 T/P level and I am now flat. Internally the stock market continues to struggle and this is reflected by the inability of the S&P to break the initial 2800/2820 resistance level. As long as the S&P can hold the key 2760/2770 support level I will continue to be a buyer on dips. Today I will again look to buy the S&P on any dip lower to 2785/2793 with a 2777 stop. If I am taken long and subsequently stopped out of this position I will be a more aggressive buyer from 2762/2770 with a 2754 stop. I still do not want to be short the S&P at this time.
EUR/USD
I am still flat the Euro and today I will now raise my buy level to 1.1635/1.1675 with a 1.1595 stop. I still do not want to be short the Dollar at this time especially with President Trump back tweeting for a weaker Dollar.
September Dollar Index
I am still flat the Dollar and today I will now lower my buy level to 93.30/93.70 with a 92.85 stop. The 93.50/94.00 is critical support for the Dollar and should hold any initial test. However a break and close below 93.50 opens up the possibility of a quick move lower to 92.50.
September DAX
The DAX had a volatile trading session on Friday. After the DAX sold off to my 12570 buy level, thankfully I did not have a greedy T/P level which was at 12605 (filled with a rebound high of 12625) before the market subsequently fell a further 150 points. I am still flat and today my only interest in buying the DAX is on a dip lower to 12360/12430 with a 12310 stop. Despite the negative price action I am still reluctant to go short especially ahead of the EU/USA Trade Tariffs on Wednesday.
September FTSE
My FTSE plan also worked well on Friday with the market eventually selling off to my 7575 buy level before rallying to my 7600 T/P level and I am now flat. Today I will again look to buy the market on any dip lower to 7495/7545 with a 7460 stop.
Dow Rolling Contract
The Dow had a volatile trading session on Friday with the market again reacting to all of Trump’s tweets. Initially the Dow sold off to my 24930 buy level before rallying to my 24990 T/P level and I am now flat. The Dow continued to rally after the US Markets opened as the market made a high over 25125 before having a small sell-off into the close as yet again the buy the dips won the day. As I mentioned last week the Dow needs to break the key 25350/25500 resistance area for the bull market to regain strength. Today I will continue to be a seller in this area with a 25580 stop. My only interest in buying the Dow is still on a dip lower to 24750/24910 with a 24670 stop.
September NASDAQ
Unfortunately the NASDAQ just missed my 7340 buy level by 10 points before rallying strongly and I am still flat. Today I will lower my buy level slightly to 7275/7315 with a 7235 stop. I still do not want to be short the NASDAQ at this time.
Gold Rolling Contract
Gold rallied as expected on Friday with the market just missing my 1214 buy level. With the Daily Sentiment Index at near record lows it is only a matter of time before Gold rallies. I still believe that in three months time both Gold and Silver will be trading a lot higher than current prices. Today I will now raise my Gold buy level to 1213/1220 with a 1206 stop.
Silver Rolling Contract
No change as I am still long Silver from last Thursday evening at 15.39 with the same 14.95 stop. I will now lower my T/P level on this position to 15.60. If any of the above levels are hit I will be back with a new update for my Platinum Members.
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