More worries about Italian deficit jitters sends EUR/USD back to 1.1505 before a late afternoon rally, that has continued overnight sees the EUR/USD trading at 1.1580 this morning. Equity markets were weak early following a fresh Emerging Market Asian wobble. However the theme of buying the dip continues to pay dividends with the Dow Jones closing at yet another new all-time high. Meanwhile we heard nothing new from Fed Chair Powell who said that gradual Interest Rate rises would continue.
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For anyone following my Platinum Service it made 15 points yesterday and is now ahead by 29 points for October, having made 1276 points in September, 599 points in August, 1074 points in July, 994 points in June, 1927 points in May, 1657 points in April, 1760 points in March and 2256 points in February. Since I started this New Platinum Service in June 2015 it has averaged a monthly gain of over 1600 points
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Currencies
A fair bit of movement in FX markets in the last 24 hours, most of it from mid-morning London time when both the AUD and EUR came under quite pronounced downward pressure, EUR/USD to a low of 1.1505 (it’s weakest level since August 21st) and AUD/USD to 0.7162 (a two-week low). The Euro’s drop was entirely an Italian affair, while I would place more of the blame for the drop in the Aussie at the door of Asian Emerging Markets.
Earlier pressure on the likes of the Indonesian Rupiah saw it rise above 15,000 for the first time since 1998, just post the Asia crisis and linked more to the latest spike in oil prices more so than the tsunami tragedy). The Korean Won was also significantly weaker, later joined by what proved to be a temporary spike in USD/CNH. The latter moved back above 6.90 for the first time since mid-August. The ADXY (EM Asia) Currency Index, to which AUD remains highly correlated, lost about 0.5% on the day.
The message is fairly clear; if we are not out of the woods regarding pressure on Emerging Markets – not just from the likely scaling up of US tariff actions on China but also rising US rates and potentially higher USD/EM Asia FX – the AUD is equally not out of the woods in terms of risk of returning to retest post-2014 cycle lows below 0.70.
On Italy, the Euro was under pressure as soon as the European market stepped in the door, with early selling pressure aggravated by reported comments from the head of Italy’s lower house of parliament, Claudio Borghi, that ‘’I am very convinced that with its own currency Italy would solve the majority of its problems’’. Shortly thereafter he made clear that the ‘’There is no plan to leave the Euro within this government regardless of my personal conviction’’, sentiments echoed even more forcefully by several Italian cabinet ministers; but the damage had already been done.
In truth, ‘’Italexit’’ scaremongering is very much old news (there is limited public support for Italy exiting the Euro). The more significant issue is the risk albeit not immediate – of Italy being downgraded to ‘’junk’’ status by at least two of the major ratings agencies and which would have profound implications for the ability of investors with minimum credit rating restrictions – including global sovereign bond market index trackers – from holding Italian government debt.
Moodys and S&P review Italy’s sovereign rating before the end of October (after the budget has been submitted to the European Commission). All three major rating agencies rate Italy ‘’BBB’’ (i.e. two notches above junk), and even if Moodys were to downgrade Italy at the end of next month (its outlook is negative), it would likely be quite some time and a willingness by the government to take some fiscal decisions which send their debt trajectory back north – before a downgrade to junk becomes a possibility.
In the more immediate future, there is likely to be more negative headlines and volatility around the submission of the budget to the EC in mid-October, but I do not expect Italian yields to skyrocket like they did earlier this year when the market started to question Italy’s membership of the Euro. Consequently, there should be relatively limited spill-over to major risk asset markets. Our assumption is that by year-end, the budget situation will have been resolved to the ratings agencies satisfaction and that EUR/USD will be higher than it is today.
Elsewhere in FX, both the Yen and Swiss Francs showed a few of their traditional safe haven characteristics (JPY more so than CHF) while CAD continues to outpace other commodity-bloc currencies, still basking in the glory of Sunday night’s Trade Agreement but more especially from Monday’s big ($2) advance in oil prices, most of which has stuck.
Equities
The Dow Jones has closed at a new record high of 26,774, up 0.5% on the day and 12% since the start of Q3 (so a near 50% annualised return in the last three months). The S&P500 (flat on the day) is still half a percent off its all-time high (from two weeks ago), while the NASDAQ is off half a percent, both of these Indices weighed down somewhat by a 2% drop in Facebook’s share price.
This though does not really deflect from the message that whatever is going on in most other parts of the worlds, there is nothing to see here as far as sentiment toward US risk assets is concerned given that the bulk of corporate America’s revenue continues to be earned inside the United States. Helpful here though is the new NAFTA agreement (which looks very much like the old one, just with a much less catchy acronym (USMCA or United States Mexico Canada Agreement).
Bonds
US treasury yields are lower at 10 years, down 2bps to 3.06%, a move almost entirely due to the contagion from lower German Bunds yields (-5bps to 0.42%) which in turn is a direct function of the latest back-up in Italian bond yields (10yr BTPs +15.4bps to 3.445%). Of note on the latter is that contagion to other Euro-peripheral bond markets has so far been minimal.
Commodities
Oil gave back 25 cents or so of Monday’s strong gains, but other commodity prices are mostly higher, all bar zinc stronger in the base metals complex (including iron ore +0.6%) and metallurgical coal adding another $7 to bring its month to date gain to $16. Gold is also firmer, up just over 1%
Economic news, Central Bank Speakers
No economic data of note yesterday save that the latest Global Dairy Trade auction yielded a 1.9% drop in the main GDT index with the whole milk clearing price down another 1.2%.
Fed chair Jay Powell has been speaking but has not moved the dial on Fed rate hike pricing, reiterating the message that he backs ongoing gradual hikes for what he described as an ‘’extraordinary’’ economy. He says higher wage growth alone need not be inflationary (in which regard note Amazon’s announcement of a lift to the minimum wage rates it will pay globally, though the overall impact on its bottom line is seen to be slight).
This morning on the Economic Front we have German, Euro-Zone and UK Markit Services/Composite PMI at 8.55 am, 9.00 am and 9.30 am respectively. The latest Euro-Zone Retail Sales will also be release at 9.00 am. Next we have Fed Member Evans speaking at 11.30 am and this is followed at 12.00 pm by US Mortgage Approvals. At 1.15 pm we have the ADP Employment Change and US Composite PMI at 2.45 pm. Finally we have the ISM Non-manufacturing PMI at 3.00 pm.
The Fed’s Brainard, Mester and Chair Powell are due to speak this evening at 7.00 pm, 7.15 pm and 9.00 pm respectively.
December S&P 500
Judging by the amount of bearish research that I have received in my inbox over the past two weeks commenting that we are on the verge of a major bear market for US Equities, it is ironic that yesterday the Dow closed at yet another new all-time high. As I have consistently said all year until we get a sell extreme that breaks the 50 Day Moving Average and preferably the 200 Day Moving Average it is a waste of time and capital in trying to pick a top in these markets. Yes the Breath has been weak and we had 10 Hindenburg Omens last month but let us wait until the charts tell us when it is safe to go short the market. I still believe that if we get through October unscathed that we will break 3000 by year end. My ultimate target is still above 3300 for the S&P and over 30000 for the Dow. Unfortunately the S&P missed my 2915 buy level yesterday with a 2917.50 low print before the market rallied nearly 20 Handles and I am still flat. Today I will now raise my buy level to 2917/2925 with a 2909 stop. I still do not want to be short the S&P at this time.
EUR/USD
The Euro just missed my second buy level at 1.1500 with a 1.1505 low print before rallying to my 1.1555 T/P level on my latest 1.1540 long position and I am now flat. Today I will again look to buy the Euro on any dip lower to 1.1495/1.1535 with the same 1.1470 stop.
December Dollar Index
No change as I am still a buyer on any dip lower to 94.10/94.50 with a 93.75 stop.
December DAX
The fact that Italian Bonds are trading 14 bps lower this morning is helping to stabilize the DAX following yesterday’s sell-off. I am still flat and today I will now raise my buy level to 12140/12210 with a higher 12070 stop. Despite the weak price action in the DAX over the past few weeks I still do not want to be short the market at this time.
December FTSE
Frustratingly the FTSE missed my 7405 buy level by three points before having a strong rally and I am still flat. As we wait for UK PM May’s speech this afternoon I am going to leave my FTSE 7365/7405 buy level unchanged with the same 7330 stop.
Dow Rolling Contract
The Dow missed my buy level by 60 points yesterday before subsequently rallying over 300 points and I am still flat. Thankfully we had no sell levels in this market as yet again anyone trying to go short got slammed. Today I will now raise my buy level to 26500/26650 with a 26495 stop.
December NASDAQ
No change as I am still a buyer on any dip lower to 7565/7605 with the same 7520 stop. I have a target level of 7800 on the NASDAQ and my only interest in selling the market is from 7780/7830 with a 7865 tight stop,
December BUND
I am still flat the Bund which came close to my 158.90 buy level this morning before subsequently having a small rally. Today I will now lower my buy level slightly to 158.30/158.70 with a 157.95 stop.
Gold Rolling Contract
Finally we saw Gold rally 1% yesterday. It looks like that the August low of 1160 may now finally hold the market. However Gold needs to break and close above 1212 for the market to trade higher. I am still flat and today I will now raise my buy level to 1185/1193 with a 1178 stop.
Silver Rolling Contract
Silver missed my 14.40 buy level by 4 cents yesterday before subsequently rallying 3.5%. This move higher broke the key 14.80 pivot point and as a result I got a rush of blood to the head and bought the market at a price of 14.87. I am still long and I will leave my stop unchanged at 14.38. My T/P level on this position is 15.10. If any of the above levels are hit I will be back with a new update for my Platinum Members.
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