A dovish interpretation to Fed Chair Powell’s remarks late yesterday afternoon has boosted US equities and dragged the US Dollar lower alongside a steepening of the US Treasury yield curve led by a rally in front end yields. NZD and AUD have benefitted the most within G10 with both antipodean currencies up more than 1%. A long-awaited Bank of England/Treasury Brexit scenario report reveals the UK to be economically worst off under any form of Brexit, meanwhile President Trump has continued to up the ante on the prospect of car tariffs, by tweeting that “tariffs of 25% have been put on small trucks coming into our country-if we did that with cars coming in, many more cars would be built here.”
To mark my 1720th 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 lost 65 points yesterday and is now ahead by 1413 points for November, having made 2094 points in October, 1279 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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Fed Powell
At 5.00 pm yesterday Fed Chair Powell spoke at the Economic Club of New York and although his speech was primarily about financial stability with an emphasis on a gradual approach to policy tightening (highlighting rising indebtedness and deteriorating loan quality as top vulnerabilities facing the U.S. financial system), the market reaction to the speech came from his observation that Interest Rates “remain just below the broad range of estimates of the level that would be neutral for the economy.”. This was a material change from his view in October when he noted that that ‘’we may go past neutral, but we are a long way from neutral at this point, probably.’’
As noted above Powell’s remarks elicited a risk positive market reaction as they appear to suggest a softening in his stance in terms of what might be the future pace of policy tightening. The consensus view is that the Fed would look to pause as and when it reaches a neutral level in the cash rate where policy is considered to be neither stimulatory nor restrictive. That is all well and good, but the problem is that there is no consensus even within the Fed as to where exactly neutral is and just to put an additional spin on that, neutral is not a static place. For instance if productivity does increase, as many expect , then this means that all else equal the US neutral rate could be higher next year relative to where it is today.
For now the market is going with a dovish interpretation to Powell’s remarks given that by his own interpretation of neutral now we are closer than where we were in October. That said I would add a bit of cautiousness to the market’s reaction, for one based on Fed officials remarks neutral is somewhere between 2.50% and 3.5% and so with the Fed Funds target range of 2.00% – 2.25%, we are one hike away from the bottom of the range, three hikes from the mid-point and five hikes from the top. Assuming the Fed hikes in December, the market is currently pricing essentially one hike in 2019 and currently the median dot for 2019 is suggesting the Fed is looking to hike 3 times next year. Based on recent Fed rhetoric and distribution of dots, I think there is a material chance that the median dot in 2019 goes down to two hikes, so on this basis current market pricing looks aggressive. Ahead of the Fed December meeting on the 18-19th we have important data releases to consider (ISM -3 Dec, Payrolls -7 Dec and CPI 12 Dec), some slowdown in activity from above potential levels has always been part of the Fed’s consideration and if the labour market shows further tightening one hike in 2019, as per market pricing, may not be enough.
Currencies
Powell’s remarks have essentially defined the price action over the past 15 hours, not much to see prior to his speech and a broad weakening of the USD post. The DXY and BBDX Indices are down about 0.60% with DXY now trading at 96.80 and BBDXY at 1204, so both Indices still remain close to the top end of recent ranges.
Looking at G10 currencies, true to form and responding to their usual risk sensitive nature, the NZD and AUD have led the gains against the USD with both pairs up around 1.30%. AUD now trades at 0.7320, back above the figure after spending the previous 9 days with a 72 handle. Focus now is likely to shift to the G20 Trump-Xi meeting where chance for a trade truce remains evenly balanced.
The Euro is also close to the top of the G10 leader board up 0.81% to 1.1380. A lot of market commentary has been focused on the Fed likelihood of blinking, but worth noting here that I think there is a good chance the ECB will have to lower both its growth and inflation projections for 2018 and 2019. EU economic activity has continued to slowdown and lower oil prices will also play into the inflation equation for next year, so while there is clearly a risk the Fed will blink in December (lowering the 2019 dots), ahead of the Fed’s meeting we could well see the ECB blinking on December 13th. Add to that trade, Brexit and Italian uncertainties and it might be too early to call the end of the USD supremacy.
Elsewhere, Sterling did not see much impact from both the UK Treasury and Bank of England’s risk assessments of Brexit scenarios, although it has risen back above 1.28 following Powell’s speech (+0.7% on the day). The Treasury forecast a no-deal scenario would lead to a 9.3% hit to UK GDP over 15 years, while BoE forecast that the GBP would fall 25% in such a scenario, leading the Bank to hike rates to 5.5% to control inflation. Overall, the UK will be poorer economically under any form of Brexit, compared with staying in the EU. The Treasury did not model the recently agreed deal with the EU, but a close variant (the Chequers agreement) would see GDP 3.9% lower in 15 years. Meanwhile, talk of a second referendum is continuing to grow. Labour’s shadow chancellor John McDonnell told the BBC that its ‘’policy is if we can’t get a general election, then the other option which we’ve kept on the table is a people’s vote.’’
Bonds
US Interest Rates have fallen and the curve has steepened in response to the Powell speech. The Fed sensitive 2y rate is 3.6bpos lower to 2.798% and the 10y rate is 1bps lower to 3.053%. Early in Europe Italian 10y BTPS fell 3.3bps to 3.25% and 10y bunds were unchanged at 0.348%.
Commodities
On Tuesday copper was the big loser and yesterday is the big winner by a mile. The corroding metal is up 3.28% followed by base metals up close to 1%, both probably reflecting the improvement in risk appetite. Oil prices in the meantime are relatively stable, down about 0.5%.
Economics
– US: Trade Balance ($b), Oct: -77.2 vs. -77 exp.
– US: GDP (q/q%, ann.), Q3: 3.5 vs. 3.5 exp.
– US: New Home Sales, Oct: 544k vs. 575k exp.
This morning on the Economic Front we have German Unemployment at 8.55 am and this is followed at 9.30 am by UK Mortgage Approvals. Next we have Euro-Zone Economic Confidence at 10.00 am and German CPI at 1.00 pm. At 1.30 pm we have US Weekly Jobless Claims and the PCE Deflator. Finally we have the FOMC Minutes at 7.00 pm.
December S&P 500
The good news was exiting any short S&P positions early yesterday morning, the bad news was the market subsequently rallied over 50 Handles without giving us a chance to get long. Unfortunately I had a sell range yesterday which triggered a short position at an average rate of 2720 before getting stopped out of this position at 2733 and I am now flat. The S&P has now rallied over 120 Handles off last Friday’s trading session low as yet again the Daily Sentiment Index proves what a fantastic trading signal it is when the reading is in single digits as we had at Friday’s close with an 8% print. The ferocity of this week’s rally is why it is so difficult to be short the US Market for any length of time as the authorities will do anything to prevent an all – out crash. There is no doubt the Housing Market in the US is in serious trouble with mortgage rates close to 5%. On top of the rate hikes the Fed has been taking $80 billion out of the system each month. Europe has not started its QE and already we have seen a marked slowdown in the Euro-Zone’s Economy over the past six months. The S&P is back in its neutral 2720/2740 range. If we break and close over 2740 I will look to set up longs for a move to 2770/2785 then 2840/2860. This will also be the first signal for new highs and a bullish move into the First Quarter of 2019. Meanwhile building value below 2710 and settling below 2685 tells us to setup shorts for a move to my aggressive buy level from 2560/2585. Today I will be a small buyer on any dip lower to 2716/2726 with a 2707 tight stop. I do not want to be short the market at this time despite the S&P close to strong resistance at last week’s 2740/2750 high range.
EUR/USD
Unfortunately I covered my average 1.1295 long Euro position for a small gain at 1.1305 and I am still flat. Today I will now look to buy the Euro again on any dip lower to 1.1305/1.1335 with a 1.1265 stop which is just below yesterday’s low print.
December Dollar Index
The Dollar just missed my sell level yesterday before selling off as expected and I am still flat. The DSI had another reading above 91% bulls again proving how strong this indicator is as a trading signal. Today I will now lower my sell level to 97.10/97.50 with a 97.85 tight stop.
December DAX
Despite the massive move higher in the US Indices, European Equity markets are struggling to keep pace. The DAX is only trading 50 points higher from where I marked price 24 hours ago which is a worry for the bulls. There is no doubt the recent slowdown in Economic activity is major burden for the DAX. Today I will raise my DAX buy level to 11200/11280 with a 11130 stop. Despite the heavy price action I still do not want to be short the market especially as we have month-end tomorrow.
December FTSE
The FTSE traded lower to my 6990 buy level before rallying. As I wanted to be flat ahead of Powell’s speech I covered this position at my revised 7000 T/P level and I am still flat. Today I will again look to buy the market on any dip lower to 6965/7005 with a 6930 stop.
Dow Rolling Contract
Thankfully we exited any short Dow position yesterday morning in the 24780/24840 range which we traded after I posted with the Dow rallying over 500 points since I posted for an 1100 point rally since Friday. As I was short both the S&P and NASDAQ I waited to sell the Dow which I did at a price of 25220. I am still short in very small size and I will now add to this position on any move higher to 25350 with a tight 25420 stop. I will now raise my T/P level on this position to 25190 and if my second sell level is triggered I will then raise my T/P level to 25260. If any of the above levels are hit I will be back with a new update for my Platinum Members.
December NASDAQ
My NASDAQ plan worked well with the market trading higher to my 6860 sell level before thankfully selling off to my 6825 T/P level and I am now flat. The NASDAQ has now rallied over 7% off its November low. The market has strong resistance from 6950/7000 and today I will be a seller on any rally to this area with a 7040 tight stop.
December BUND
No change as I am still a seller on any rally higher to 161.50/161.90 with the same 162.25 stop.
Gold Rolling Contract
Gold rallied yesterday off an intra-day low of 1211 but yet again has run into strong resistance at the 1230 level. I am still flat and today I will raise my buy level slightly to 1204/1212 with a 1197 stop.
Silver Rolling Contract
Silver finally rallied to my 14.30 T/P level on my latest 14.20 long position and I am now flat. Today I will again look to buy the market on any dip lower to 13.85/14.15 with a 13.55 stop.
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