US equities have another very volatile session, from square to deeper negative and partially back again. After getting hit hard into the New York close the Dow is trading 400 points higher this morning in the grey market. Meanwhile, Bond yields and currencies showing a lot less volatility than stocks; US 10s off a net 2bps in yield; 2s up 1bp US CPI misses again; another ‘’one off’’, but a miss is a miss and does not deflect the Fed from gradual removal of accommodation strategy. Equity markets rebounded after it was announced that President Trump is to meet the Chinese leader at next month’s G-20, in Argentina. Also, the White House expects the pastor to be released by Turkey within days on the back of a deal. The Turkish courts are due to announce a decision later today.
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Equities
It has been another volatile past 24 hours for equity markets, European stocks taking over where Asia left off yesterday, the Eurostoxx 600 down 1.98% with the FTSE, DAX, and CAC-40 all down by between 1-2%. The US market has been in the red for most of the session, the market making it back to square mid-session before more selling re-emerged in the last two hours of trade. At its intraday low, the Dow was down close to 700 points, and has closed down 546 points, down 2.13%. The market is still struggling with lofty valuations and all the other factors such as US-China trade and political tensions, elevated oil prices and the restraining effect of higher US rates and yields.
Currencies
There has not been a full-blown risk off event across asset classes – that while equities have been under pressure again, currencies, bond markets, and credit indices have seen contained moves and in some cases with tinges of ‘’risk-on’’. For FX, there has not been a further increase in the USD. It has been the opposite, the DXY off a net 0.20% since he opening of the London markets yesterday morning with the spot Bloomberg DXY index down 0.31%. The AUD/USD made its way back above 0.71, trading at 0.7120/25 as this note goes to press, having tested 0.7105 in the past two hours, and despite a very choppy last hour or two for US stocks.
Most major currencies have made some net gains against the USD, the exceptions being the Swiss Franc and the Japanese Yen, though to be technically fair, the yen is up marginally since late yesterday, up 0.05%, but the CHF is off 0.28%. The best performers have been Kiwi (+0.75%) and Aussie (+0.60%) more symptomatic of risk-on rather than risk-off and perhaps reflecting an already short market and long USD. Meanwhile the Euro is testing 1.1600 this morning.
Bonds
It has been a similar story for bond yields with yields not gapping 10-15bps lower in yield that a risk-off sizeable rally might fuel, but more measured, incremental moves. German 10y bund yields closed down 3.4bps to 0.518, while US 10s have declined a marginal 2 bps to 3.1423% and despite a still choppy end to the session for US equities. US 2y yields have actually risen slightly, up 0.4bps. January 19 Fed Funds Futures have eased by 1 bps, the market continuing to price in an over 80% likelihood that the Fed will again hike in at its December 19 meeting (when there will be a full dot points/forecasts refresh) after taking a break at its forthcoming 8 November meeting.
President Trump has been railing further against the Fed, saying that the market plunge is a correction that he thinks is caused by the Federal Reserve. He said that the Fed was ‘’going loco’’, but that he was not going to fire Jay Powell, just expressing disappointment. ‘’I think it’s far too fast, far too rigid’’, that the rate rises are ‘’not necessary in my opinion and I think I think I know about it better than they do. The Fed is out of control, I think what they are doing is wrong.’’ While being especially open and free with his comments, he is not the first President to be disappointed with Fed actions and no doubt won’t be the last.
Economics
There was certainly no US September CPI-inspired sell off. The headline and core CPI both missed consensus by one tenth, the miss in the core CPI attributed to an out-sized decline in used car prices, the largest such decline in 15 years after the large unexpected decline in apparel prices last month. Yes, a one-off, and will only add to the Fed continuing on with its path of gradual rate rises up to around its neutral rate.
Esther George, Kansas City Fed President has been on the wires (she does not get a vote this year, but will next year, as will James Bullard at the other end of the policy spectrum) noting trade uncertainties but also speaking of inflation risks from fiscal policy and accommodative monetary policy settings.
Commodities
Again, the biggest move was in oil, to the downside again, the US EIA revealing a larger than expected weekly jump in crude inventories, up 5.987mb, above the 2.173mb expected and following a 7.975mb rise the previous week. WTI and Brent were both down by over 3%, WTI and Brent both now closer to $70/$80 respectively. Again bucking equities, copper rose marginally, but other base metals dipped. Bulk commodities were mixed, iron ore and steel prices higher. For once, gold had a big move, this one to the top side, up $34/oz, +2.87%.
This morning on the Economic Front we have Euro-Zone Industrial Production at 10.00 am. Finally we have the University of Michigan Consumer Sentiment at 3.00 pm.
Meanwhile the Fed’s Evans and Bostic are speaking at 2.30 pm and 5.30 pm respectively.
December S&P 500
It was only last Wednesday that the S&P was trading at 2940 in what was an overbought condition. Yesterday the S&P traded to an intra-day low of 2713 for a 227 Handle move since last week’s high. I mentioned yesterday that one more sell-off will be enough to get the McClellan Oscillator to such a negative print that the risk/reward was to be a buyer of the market. After the weak close last night when the S&P fell 40 Handles in the last 20 minutes the MO was released at 10.30 pm London time showing a reading of -294. Traders immediately bought the market and this morning we are now trading over 2780. It is a long time since I have seen the market go from severely overbought to severely oversold in such a short space of time. I still believe that once this washout plays out that we will make new all-time highs if not this year then certainly in early 2019. Yesterday my S&P plan worked very well with the market selling off to my 2751 buy level before rallying to close Wednesday’s ‘’Open Gap’’ with a high of 2798.50. This move higher enabled me to cover my long position at 2763. After closing the gap the S&P collapsed and I re-bought the market ahead of my 2700/2718 buy range at a price of 2725 before exiting this position at 2740 and I am now flat. Today is going to be difficult to get an edge given the massive move higher overnight. The S&P has strong support from 2690/2715 and today I will be a buyer on any dip to this area with a 2675 wider stop. Given how oversold the market is trading and even though we have this massive ‘’Open Gap’’ my only interest in selling the S&P is on a further rally to 2815/2830 with a 2841 stop.
EUR/USD
The Euro rallied as expected and I am still flat as the market never came close to my buy level. I am reluctant to chase the market higher and today I will only raise my buy level slightly to 1.1470/1.1510 with a 1.1435 stop.
December Dollar Index
I am still flat the Dollar and today I will lower my sell level to 95.30/95.70 with a 96.05 stop.
December DAX
I am still flat the DAX which surprisingly has not fallen as much as I expected given the massive move lower in the Dow. Today I will be a small buyer on any dip lower to 11400/11470 with a 11330 stop.
December FTSE
My FTSE plan worked well with the market trading lower to my 6985 buy level before rallying to my revised 7020 T/P level and I am now flat. Today I will again look to buy the FTSE on any dip lower to 6930/6965 with a 6890 stop. The rebound in Sterling is preventing the FTSE from following the other Indices higher this morning. Given how oversold the FTSE is trading I do not want to be short the market at this time.
Dow Rolling Contract
My Dow plan worked well with the market trading lower to my 25200 buy level shortly after I posted before rallying to a rebound high at 25668 after the US Markets opened. I covered my long position way too early at 25320 and I am now flat. Incredibly after the Dow hit this 25668 high print the market subsequently fell 770 points before rallying 600 points off this low overnight. The Dow is now fallen over 2000 points from its recent high made earlier this month. I am reluctant to chase this market higher given all that has happened in the past 72 hours and today my only interest in buying the market is on a dip lower to 24950/25200 with a 24850 stop.
December NASDAQ
Thankfully after I posted yesterday morning the NASDAQ was trading below my 7000 entry level thus given you a better fill than myself. The NASDAQ subsequently rallied to my 7090 original T/P level as mentioned in my Daily Commentary. However as I wanted to make up for Wednesday’s losses I covered this position at 7055 and I am now flat. The NASDAQ certainly fared better that both the Dow and S&P after falling over 10% from its recent highs and this is the kind of price action we need to see to get a more sustainable recovery for the stock markets. Today I will again look to buy the NASDAQ on any dip lower to 7020/7070 with a 6970 stop.
December BUND
I am still flat the Bund and today I will now lower my buy level to 157.00/157.45 with a 156.65 stop.
Gold Rolling Contract
After weeks of sideways trading Gold exploded to the upside yesterday as the key 1212 resistance level was finally broken. This buy extreme is the type of price action needed and could well result in a large move higher in Gold from here. The 1212 level should now act as strong support and today I will now raise my buy level to 1202/1213 with a tight 1195 stop.
Silver Rolling Contract
My long 14.30 Silver position worked well with the market rallying to my 14.45 T/P level and I am now flat. I was disappointed that Silver did not some further follow through to the upside given the 3% rally in Gold. Today I will again look to buy the market on any dip lower to 14.10/14.50 with a 13.75 stop.
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