After Wednesday’s big drop, European and US equities have rebounded yesterday with tech shares leading the gains. As expected and in spite of recent softer activity readings, the ECB has retained it policy guidance and remains on the long and winding road that leads to the end QE by the end of this year. Draghi played down the risks to the economic outlook, but his Euro uplift proved to be short lived. USD Indices have remained on the ascendency with Sterling the big underperformer while AUD and NZD hold their ground. The improvement in risk sentiment lifted UST treasury yields with the belly of the curve leading the way. However after the bell Amazon reported weaker than expected earnings with the shares down 6.5% in after-hours trading and this will have an impact when the US Cash Equity Markets open this afternoon.
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Currencies
Apart from watching the equity market, yesterday’s ECB meeting was the other focus for markets. As expected, the ECB left rates on hold and made no changes to its forward guidance, the Bank is still set to end its Quantitative Easing programme at the end of the year and Interest Rates are still expected to remain on hold ‘’through the summer of 2019’’. Draghi’s killer quotes is that he still sees risks as ‘’broadly balanced’’ and sees ‘’no sense that we should doubt our confidence that inflation is gradually converging to our aim’’ adding that ‘’ The labour market is becoming tighter and recent wage increases are here to stay’’.
Draghi attributed the most recent weakness to sector- and country-specific factors which are seen as temporary and highlighted the emission regulation on the car industry in Germany as one example. Interestingly, Draghi suggested that these factors may continue to weigh in the near future, so although temporary they are likely to last a bit longer than expected. Nevertheless, the ECB reiterated that, despite the recent moderation, consumption and business investment remain strong, supporting the expansion going forward.
The Euro was briefly boosted by Draghi’s comments, reaching an intra-day high of 1.1432, but it seems that the market remains unconvinced on Draghi’s views that the risk to the outlook remain ‘’broadly balanced’’. The pair now trade at 1.1370, 15 pips above yesterday’s lows. Technically the Euro is in no man’s land and it seems that the market wants to test the August low of 1.1301 before a material rebound can ensue.
Meanwhile and in part reflecting Euro weakness, the USD remains bid with the break of technical resistance in BBDXY at 1200 favouring an extension of the current move higher. DXY, the narrower USD Index, currently trades at 96.625, 10 pips below the YTD high. Sterling is the big G10 loser with the pair now trading at 1.2817, after briefly trading below the figure. It seems that at the moment no news are bad news for the pound, the clock keeps on ticking and politicians remain unable to find a solution to the Brexit deadlock(s).
Equities
After Wednesday’s more than 3% fall, the S&P500 has today closed at + 1.86%, with some attributing this to better earnings results from familiar names like Twitter, Microsoft and Tesla, but the reality is that we are just in a more volatile trading environment, so more time is needed to say with some certainty that a recovery now looks to be in place. European bourses were also positive, with the Euro Stoxx 600 index up 0.5% and Germany’s DAX up 1.0%.
Bonds
The US rates market has largely followed US equities, with the rebound in equities seeing the 10-year rate push up to 3.14%, up 4bps for the day and reversing some of Wednesday’s decline. The move higher in yields has been led by the belly of the curve, with the 7 year auction tailed slightly and featured the lowest direct bidding stats since 2011.
Commodities
Commodities are mostly flat to a little bit stronger with oil prices at the top of the leader board, up just under 1%. Metal prices are little changed and Zinc is the big loser, down 0.98%.
Economics/Politics
New vice-chair of the Fed, Clarida, gave his first speech on monetary policy and he gave a fairly upbeat view on the US economic outlook, with a positive view on productivity, business investment and the labour market, seeing scope for stronger jobs without generating inflationary pressures. On rates he looked to stick to the line of the FOMC, in saying ‘’I believe some further gradual adjustment in the policy rate range will likely be appropriate’’.
The Wall Street Journal reported that the US is refusing to resume trade negotiations with China until Beijing comes up with a concrete proposal to address Washington’s complaints about forced technology transfers and other economic issues, according to officials on both sides of the Pacific. One White House official said that if China wanted a meaningful meeting between Trump and Xi at the November G20 meeting, then there needs to be some groundwork and without that it is hard to see the meeting being fruitful. China is reluctant to propose anything until further discussions have taken place, so there is a bit of a stand-off there.
This morning on the Economic Front we have no data of note from either the Euro-Zone or the UK. At 1.30 pm we have US GDP and Core PCE. Finally at 3.00 pm we have the University of Michigan Consumer Sentiment while earlier at 2.00 pm The Fed’s Mester is speaking in New York.
December S&P 500
The S&P was finishing strongly at 2720 with about 20 minutes of trading to go when it fell 15 Handles into the close. Just after 9.00 pm we got the much weaker than expected results from Amazon and the Futures Market subsequently fell another 35 Handles to trade at 2670 as I go to press. With the VIX closing again above 23 the intra-day movements are extraordinary following months of sideways to higher trading. I am still flat the S&P as I watch to see if Wednesday’s lows can hold the market for a rebound into the weekend. Obviously US GDP will be a key factor for the market when released at 1.30 pm. Today I will lower my buy level slightly to 2625/2645 with a 2612 stop. I am not going to chase this market lower and my only interest in selling the S&P is still on a rally higher to 2750/2765 with the same 2775 stop. If the S&P can build value above 2681 and close over 2710 for 2/3 days then we could well see a move higher back to the 2825 key resistance area.
EUR/USD
Thankfully before we got the ECB Rate announcement the Euro traded higher to my 1.1415 T/P level on my latest 1.1393 long position and I am still flat. The Euro has strong support from 1.1300/1.1340 and today I will be a buyer on any dip to this area with a 1.1255 tight stop. I still do not want to be short the market at this time.
December Dollar Index
I am still flat the Dollar and today I will again raise my sell level to 96.80/97.20 with a higher 97.55 stop.
December DAX
I am still flat the DAX which just missed my buy level before having a strong rally. Given the awful Amazon results I am not going to chase this market higher and today I will leave my buy level unchanged from 10880/10980 with the same 10810 stop.
December FTSE
No change as my only interest in buy the FTSE is on a dip lower to 6800/6840 with the same 6760 tight stop. So far the increased weakness in Sterling is not providing much support for the FTSE market.
Dow Rolling Contract
The Dow rallied to my 24825 T/P level on my average 24775 long position with a 25105 high print. This high just fell short of my 25150 initial sell level before the market subsequently fell nearly 300 points into the close and after hours trading. Today I will lower my sell level slightly to 25130/25330 with the same 25450 stop. Remember I am only trading the Dow in small size. I no longer want to be a buyer of the Dow at this time as I have buy levels in my other Indices that I cover.
December NASDAQ
The NASDAQ fell over 140 points in after-hours trading on the release of the Amazon results. This is a massive move and a major worry for the markets today. I am still flat and will continue to be a buyer on any dip lower to 6680/6740 with the same 6625 stop. I will also be a small seller on any rally higher to 7070/7130 with a 7180 stop.
December BUND
No change as I am still a seller on any rally higher to 160.95/161.35 with a 161.55 same stop.
Gold Rolling Contract
I am still flat Gold which continues to trade sideways to higher. As I am back long Silver I will now lower my Gold buy level to 1203/1213 with a lower 1195 stop.
Silver Rolling Contract
Silver traded lower to my 14.60 buy level. I am still long and I will add to this position on any move lower to 14.20 with a 13.80 stop. I will now lower my T/P level on this position to 14.80.
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