US stocks are back on the up, a 2.2% gain for the S&P 500 (led by the IT sector) which reduces the month-to date loss to 3.5% from 6.7% as of last Thursday and has pushed the VIX index back firmly below 20. This has done nothing for either US bond yields or the US Dollar however, both effectively flat to Monday’s New York closing levels. The New Zealand dollar is the best performing G10 currency of the past 24 hours, holding the gains scored in the immediate aftermath of yesterday’s stronger than expected Q3 CPI data.
To mark my 1700th issue of TraderNoble Daily Commentary I am offering a special 2 year rate of Euro 2750 for my Platinum Service which includes 1 to 4 updated emails throughout the trading day To demonstrate this value, a monthly subscription over the same period would cost 4440 euro in total This offer represents a 38% discount and is open to both new and existing members. If anyone is interested in this offer can you please email me on bryan@tradernoble.com for details
For anyone following my Platinum Service it was flat yesterday and is still ahead by 936 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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Equites
The inimitable Martin Wolf writing in today’s Financial Times <https://www.ft.com/content/b13de8f4-ce02-11e8-b276-b9069bde0956 > (subscription required) has an excellent perspective on recent market events and which very much chimes with what I have been saying of late, both in terms of the battle between the old (US) and new (China) superpowers that implies the current Sino-US trade war is really the start of new cold war, and his take on the rise and recent fall in US stock market in the context of so-called Cyclically Adjusted Price Earnings Ratio (CAPE) as developed by Yale University Professor and Nobel laureate Robert Schiller.
As per my ongoing theme that, US equities measured in these terms are anywhere between 13% and 27% overvalued depending on what risk-free rate is used to discount corporate earnings.
Wolf writes: ‘’Bull markets, it is said, climb a wall of worry. When the last worrier turns into a fully invested optimist, the market has nowhere to go but down. That might be what has just happened: so much optimism was already in the prices of financial assets’’ in the US, above all ‘’ that once worry returned they had nowhere to go but down. How far might unfolding events exacerbate the worries? A long way, is the answer’’. He notes that the CAPE is, with the exception of the pre-1929 and dotcom crash levels, higher than it has been at any time in the last 137 years:
Anyway back to yesterday, and a ‘’buy the dip’’ mentality has evidently prevailed serving to push the S&P back above its 200-day moving average. Stronger earnings reports have supported the move (Goldman Sachs among those already reported, Netflix due after the close where analysts have been busy slashing earnings estimates ahead of their release – of course came in stronger). The data flow has been positive. The US JOLTS report showed US job openings rise in August to a fresh all-time high, exceeding the number of unemployed people by over 900k, the most on record. Both US Homebuilder Sentiment and Industrial Production figures were slightly ahead of consensus, the latter +0.3% versus the 0.2% consensus. With the IT sector leading the rally, the NASDAQ is up 2.9% as is the smaller cap Russell 2000.
Bonds
Heading into the New York close, the 10-year Treasury yield is -0.4bp and the more Fed policy sensitive 2yr yield +0.6bps, so rally nothing to see here. Money markets still ascribe a more than 80% probability to the Fed lifting rates by another quarter percent in December.
Earlier in Europe, Italian 10-year BTP yields were off 9 bps, which in my opinion, is a little bewildering. This is as Italy submits its 2019 budget to the EU, saying it is ‘’extremely happy’’ that it is keeping with its election promises of not raising taxes of any kind. The budget essentially increases social spending and lowers the retirement age. Italy still foresees a deficit of 2.4% of GDP and it is not clear the EU will accept it. EU Commission President Juncker was reported today as saying the EU executive arm would face a revolt if it were to give its approval to the budget plan.
Currencies
The New Zealand dollar followed by the Swedish Krone (the latter of late one of the more risk-sensitive G10 currencies) are both up 0.6% to top the leader board, with the safe-haven JPY and CHF both down, by 0.4% and 0.3% respectively. NZD gains are largely of the back of yesterday Q3 CPI report showing inflation coming in stronger than consensus at 1.9% yr/yr. Core measures of inflation were relatively steady, averaging around 1.7-1.8% although annual non-tradeable inflation was 0.2% higher than the RBNZ projected, alongside the 0.5% miss in headline inflation. Post-CPI, the kiwi rates market priced out some of the RBNZ easing risks in the OIS curve, with the implied probability of a rate cut by August 2019 falling from 24% to 18%.
The AUD meanwhile sits mid-pack at 0.7142 as I write, 0.15% up on this time yesterday. Worth noting that globally, Emerging Market currencies are generally stronger over the last 24 hours, with gains of over 2% for the Argentine Peso and Turkish Lire and of more than 1% for the South African Rand and Colombian and Chilean Peso. Yesterday’s RBA October meeting Minutes came and went without fanfare as far as the currency or rates markets were concerned. The next move is likely up, but not for good while yet, was the now familiar take-away.
On the US Dollar, President Trump has been out on Fox News just before the New York close again railing against the Fed, saying he respects its independence but that ‘’the Fed is raising rates too fast’’ and that the Fed is his ‘’biggest threat’’. While such name calling shouldn’t mean anything in terms of what the Fed actually does, it is a factor which somewhat undermines sentiment towards the dollar and so, I would argue, is a contributory factor, albeit minor, to recent poor performance of the US dollar in the face of first higher US yields then last week’s sharp turn for the worse in US equity market and with that the spike in the VIX. But of course, a weaker dollar is exactly what Trump wants. A method to his madness?!
Commodities
A mixed session, with oil slightly firmer, precious metals slightly lower and base metals mixed (copper down but zinc and aluminium up, while iron ore is virtually unchanged and coking coal back up by $1.50.
This morning on the Economic Front we have UK CPI, PPI and Retail Price Index at 9.30 am. This is followed at 10.00 am by Euro-Zone CPI and Construction Output. At 12.00 pm we have US MBA Mortgage Applications and at 1.30 pm by Housing Starts and Building Permits. Finally at 7.00 pm we have the latest Fed Minutes from last month, where particular interest in the Fed’s view of the neutral rate has been sparkled by chairman Powell’s comments on 5th October that ‘’we are a long way from neutral’’.
Meanwhile the Fed’s Brainard, The Bundesbank’s Weidmann and the UK’s Broadbent are all speaking at 5.10 pm, 5.30 pm and 6.00 pm respectively.
December S&P 500
I have mentioned the importance of the McClellan Oscillator numerous times over the past week saying what a fantastic trading signal it is. I also mentioned at length the importance of the VIX when it gives a buy signal and this is exactly what happened yesterday with the S&P rallying to my 2810/2830 inflection point and resistance area. If we are to repeat what happened in 1987 then the market should run out of steam near current levels before re-testing last Thursday’s low before a more meaningful and sustainable rally into year- end ensues. Late in yesterday’s session the S&P traded higher to my 2816 sell level. I am still short and I will now add to this position on any further move higher to 2830 with a higher 2837 stop. The S&P closed comfortably above its 200 Day Moving Average which comes in at 2770 this morning and this area should offer good support on an initial test lower. Today I will move my buy level higher to 2768/2778 with a 2759 stop.
EUR/USD
I am still flat the Euro and today I will now raise my buy level slightly to 1.1470/1.1510 as we wait for the FOMC Minutes at 7.00 pm. I still do not want to be short the Euro at this time.
December Dollar Index
The Dollar continues to trade sideways and I am still flat. Today I will again leave my sell level unchanged from 95.40/95.80 with a 96.15 stop.
December DAX
Thankfully we had no sell level in the DAX yesterday as yet again anyone trying to short these markets for more than a few days gets slammed. I am still flat and today I will now raise my buy level to 11520/11590 with a 11450 stop.
December FTSE
The FTSE just missed my buy level before rallying and I am still flat. The FTSE is oversold and continues to underperform the other main Indices that I cover. Today I will move my buy level higher to 6970/7010 with a 6925 stop. Even though the price action is weak I still do not want to be short the FTSE at this time.
Dow Rolling Contract
What a day. On Monday the Dow closed at its lows of 25180 which was just above its 200 Day Moving Average, while yesterday the market has a massive rally to close at its high at 25800. This is just below its 50 Day Moving Average which comes in at 25991. This area should act as initial resistance but a break and close above here will be bullish with the market again frustrating the bears. Today I will now raise my buy level in the Dow to 25300/25580 with a 25130 stop which is just below the 200 Day MA which comes in at 25155 this morning. Despite the 50 Day MA offering some resistance I do not want to be a seller of the Dow at this time especially as I have a small short position in the S&P.
December NASDAQ
Just as everyone is getting excited about the downside in the NASDAQ, the market reverses to close with a near 3% gain. I am still flat and today I will now raise my buy level to 7100/7150 with a 7040 stop which is just below its 200 Day MA. The 50 Day MA comes in at 7460 and this should offer strong resistance on any test. For this reason I will be a small seller from 7410/7470 with a 7505 tight stop.
December BUND
The BUND again traded in a sideways pattern and I am still flat. I am reluctant to chase this market higher and today In will again leave my buy level unchanged from 157.40/157.80 with the same 157.10 tight stop.
Gold Rolling Contract
No change as I am still a small buyer on any dip lower to 1202/1214 with the same 1194 stop.
Silver Rolling Contract
Silver continues to underperform Gold at this time. Late in the New York session I bought the market at 14.65. I will add to this position on any move lower to 14.25 with a now higher 13.80 stop. Meanwhile I will leave my T/P level unchanged on this position at 14.85 which is just below yesterday’s 14.87 high print. If any of the above levels are hit I will be back with a new update for my Platinum Members.
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