No a huge amount of market volatility over the past 24 hours which is typically the case in front of an FOMC meeting when a rate change, new economic projections, the Fed’s ‘’dot plot’’ and press conference from the Fed chair are all on schedule. US yields continue their grind higher to new post-May 2018 highs as to do oil prices with Brent approaching $82. But the US dollar in Index terms continues to languish near the bottom of its mid-June to date range and contributes to the AUD and EUR going nowhere.
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Bonds
Heading into today’s 2nd day of the FOMC meeting and where the outcome will be known at 7pm London time, 10-year US Treasuries have made a new post-May 2018 high of 3.11 (3.09% now). This is a 30bps increase on where we were a month ago before rates started moving higher, during which time the 2-year note yield is up about 26bps.
This surely means that any ‘’hawkish tilt’’ from the Fed this evening, whether in the form of upward revised growth projections for this year and next, a higher skew to the ‘’dot plot’’ (even if the median dots don’t move higher) and possibly even a lift to the Fed’s median view of the long run (neutral) rate, are by and large discounted.
And if the Interest Rates market wants to take a leaf out of the FX market’s reaction to last Monday’s news that more tariffs on China were definitely going ahead, a buy the fact (i.e. lower yields) response to the Fed should not be seen as a big surprise., If I am wrong, as I see 3.12-3.13% on the 10-year note yield as the significant level (the May highs) above which thoughts will inevitably turn to a move to the 3.25% round number level.
Oil/Commodities
Higher bond yields have gone hand in hand with higher oil prices of late (Brent crude from $70 in mid-August to a high of $82.50 overnight – $81.50 now) though more than half of the rise in nominal yields has been in real terms (i.e. break-evens have risen by less than 10bps). Further signs perhaps that the move up owed something to expectations of a somewhat more hawkish Fed affair.
On oil, President Trump was particularly belligerent in his comments about Iran in his address to the UN general Assembly last night, as well as accusing OPEC of ‘’ripping off the world’’. Whether this contributed to the further move up in oil I cannot say, though on the other side we have reports of Europe working hard to be able to circumvent the approaching re-imposition of sanctions on Iranian oil exports come November. Were they to succeed this could mean less of a drop in Iranian output relative to the 2015 pre-sanctions lifting level.
Commodity prices elsewhere are mixed though base metals are mostly lower, including copper (-0.6%) and iron ore (-0.1%)
Currencies
Oil and bond yields may be moving on up, but the big dollar is not. The DXY index is -0.04% on the day at 94.15 so still languishing near the bottom of the range in which it has been confined since mid-June. Indeed, higher oil prices and a lower US dollar is the historic norm, in the context of rising expectations that oil could be headed back to $100 later this year. Watch this space.
The biggest FX mover in G10 has been Sterling, up about 0.5%. This is on combination of: (i) Comments from German chancellor Merkel that a Brexit deal is still possible in October or November; (ii) the UK Labour Party conference and the possibility of 2nd referendum being endorsed as party policy in the event that Labour cannot succeed in bringing down the government and so forcing an early General Election; and (iii) Comment from Bank of England’s Vlieghe suggesting one to two rate rises a year (against the prevailing guidance suggesting only one).
The Euro gave back a little more of the gains seen after ECB President Draghi on Monday’s comments that he sees a ‘’relatively vigorous’’ pick-up in underlying inflation, after chief economist peter Praet was out stating Draghi’s comments were nothing new.
Equities
A quiet session with US indices closing narrowly mixed, the Dow and S&P down smalls and the NASDAQ +0.18% so recovering a little of its recent underperformance that was driven by the likes of Alphabet and Facebook on antitrust concerns.
This morning on the Economic Front we have no data of note from either the Euro-Zone or the UK. At 12.00 pm we have US MBA Mortgage Applications and this is followed at 3.00 pm by New Home Sales. Finally we have the FOMC Statement at 7.00 pm followed by the Fed Chair Powell’s press conference at 7.30 pm.
December S&P 500
With the yield on the 3-month and 6-month US T-Bill currently trading at 2.17% and 2.37% respectively, solidly above the Fed Funds Rate of 2%, the market is signaling that the Fed will raise rates this evening by 25 basis points. It will be the 8th hike in the Fed Funds Rate since December 2015, when the series of rate increases began. I am still flat the S&P which again just missed my buy level near the Chicago close before having a small rally overnight. Today I will leave my buy level unchanged from 2907/2915 with a lower 2899 stop. My only interest in selling the S&P is still on a rally higher to 2950/2959 with a 2965 stop.
EUR/USD
I am still flat the Euro and today I will now go ahead and raise my buy level to 1.1690/1.1730 with a 1.1655 stop. Given the recent bullish price action I still do not want to be short the Euro at this time.
December Dollar Index
I am still flat the Dollar as we wait for the FOMC Statement at 7.00 pm. Today I will now lower my buy level slightly to 92.80/93.25 with a 92.40 stop.
December DAX
The DAX again traded in a narrow range and I am still flat. With the stronger Euro I am reluctant to chase this market higher and today I will again still look to buy the market on any dip lower to 12170/12240 with the same 12115 stop.
December FTSE
I am still flat the FTSE which again outperformed the other major European Indices yesterday despite the firmer pound. This is encouraging for the bulls and today I will again raise my buy level to 7370/7410 with a 7335 stop.
Dow Rolling Contract
Frustratingly the Dow just missed my initial buy level before having a nice rally overnight and I am still flat. As we have the FOMC Statement at 7.00 pm I will again lower my Dow buy level slightly to 26280/26430 with a 26195 stop. Meanwhile I will leave my sell level unchanged from 26850/27000 with the same 27110 stop.
December NASDAQ
I am still flat the NASDAQ which just like the Dow came close to my buy level before rallying. Today I will leave my buy range unchanged from 7490/7530 with a 7455 stop.
December BUND
Unfortunately I was stopped out of my 158.20 long Bund position near the low of the day at 157.80 and I am now flat. The Bund is severely oversold after its aggressive sell-off over the past two weeks. The Bund has strong support from 157.30/157.70 and today I will be a buyer on any dip to this area with a 156.95 tight stop.
Gold Rolling Contract
Gold continues to underperform Silver at this time. Gold needs to break and close above its now strong resistance level at 1212 to see higher prices. Today my only interest in buying the market is still on a dip lower to 1180/1188 with the same 11730 stop.
Silver Rolling Contract
My long 14.30 Silver position with the market trading higher to my 14.40 T/P level and I am now flat. Today I will again look to buy the market on any dip lower to 13.95/14.35 with a 13.55 stop which is just below the December 2015 low print.
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