On Friday, news of a temporary end to the US government shutdown alongside reassuring development on US-China trade negotiations and additional stimulatory policy tweaks from China combined to feel the air with optimism, driving equities, commodities and UST yields higher while the USD ended the week weaker across the board. In contrast, the new week has begun with a broad risk-off tone as Caterpillar and Nvidia reveal disappointing earnings reports citing a slowdown in Chinese demand for their struggles. Caterpillar and Nvidia are not the first companies to blame China for their afflictions, but both companies are seen as industry bellwethers and their disappointing results provide further evidence that this time China’s slowdown is for real. US equities closed well in negative territory despite a strong rebound into the close. US Treasury yields are a few bps lower while the USD has consolidated Friday’s decline.
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Equities
Before lunch Caterpillar posted its biggest quarterly profit shortfall in a decade while guidance for 2019 was well short of analysts’ estimates. The company now expects no sales growth from in China this year and only a ‘’modest’’ increase worldwide. Caterpillar shares are down around 9% after falling over 10% at one stage. Meanwhile, shares in US graphics chipmaker Nvidia fell almost 15% after it unexpectedly revised its revenue guidance for 2019 sharply lower, blaming ‘’deteriorating macroeconomic conditions, particularly in China’’. Nvidia is due to report earnings in mid-February but, like Apple earlier this year, chose to update its guidance to the market ahead of time
The S&P500 closed 0.80% lower, after falling just over 1.5% half way through the intra-day session. The Nvidia news also dragged the NASDAQ index below 1.5% at one stage before recovering a little to close 1% lower. This week is the busiest week of the US earnings season, with over 100 of the S&P500 reporting, including Amazon, Apple (tomorrow) and Facebook. So far this earnings season, 70% of corporates have beaten analyst expectations, but that has not stopped analysts trimming expectations for 2019 earnings growth (now 5.6% for 2019 vs. 6.3% two weeks ago). Also in focus later this week will be the resumption in US-China trade talks, with US Vice Premier Liu meeting US officials on Wednesday and Thursday.
Bonds
The selloff in equities has triggered a risk-off mood across other markets. The UST yields have drifted lower along the curve with the declines led by the 5y tenor, down over 2bps to 2.58%. Relative to yesterday’s closing levels, the 10y note is down 1.5bps to 2.744% after trading to an intra-day low of 2.7260%.
Currencies
On Friday the US Dollar was weaker across the board amid positive vibe emanating from US government shutdown and China news. The big dollar ended Friday around 0.70/80% lower in Index terms with AUD and NZD up over 1% on the day. Yesterday’s risk off tone has seen JPY and CHF outperform, but both currencies remain comfortably within their recent trading ranges (USD/JPY now trades at 109.38 and CHF is at 09918), meanwhile the USD has not been able to benefit from the risk-off tone with DXY and BBDXY little changed.
Sterling has eased back from three month highs to 1.3170, down 0.2% on the day. UK MPs are due to vote on a number of amendments to Theresa May’s Brexit plan today, with the market particularly focused on one amendment proposed by Labour MP Yvette Cooper, which would seek take a no-deal scenario off the table. The Cooper amendment would allow the House of Commons to instruct the government to extend Article 50 should there be no Brexit deal in place by February 26, and if it were passed would likely boost the Pound. An alternative amendment proposed by Tory backbencher Graham Brady that would seek to water down the Irish backstop was publicly rejected by Brexit hardliner Jacob Rees Mogg last night.
Commodities
Oil prices closed down over 3%,seemingly spooked by the equity reaction to Caterplillar and Nvidia reports. A slower global growth is not good news for oil demand. Copper is also down 1.76% while coal and iron ore are little changed.
Lastly on the government shutdown, discussions are ongoing between Trump and Democratic lawmakers over border security matters. The recently passed bill only keeps the government open until the 15th of February. Trump said yesterday that the chance of a bipartisan deal to avert the government shutting down again was ‘’less than 50-50’’ and again threatened to use his emergency powers if required to build the wall.
This morning on the Economic Front we have no data of note from either the UK or the Euro-Zone. At 2.00 pm we have the Shiller Home Price Index. Finally at 3.00 pm US Consumer Confidence is due to be released.
March S&P 500
My S&P plan did not work out with the S&P trading lower to my 2645 average buy level before stopping me out of this position at 2632 and I am now flat. Subsequently I emailed my Platinum Members to buy the S&P at a price of 2617 but the market fell short of this buy level by 5 Handles before rallying over 20 Handles into the close. Markets will be nervous today as we wait for Apple results later this evening and the FOMC Rate decision/Powell press conference tomorrow night. Today I will again look to buy the S&P on any dip lower to 2614/2622 with a 2605 stop which is just below the falling 50 Day Moving Average which comes in at 2612. I still do not want to be short the S&P at this time.
EUR/USD
Unfortunately I was stopped out of my short 1.1380 Euro position at 1.1435 and I am now flat. Today I will look to buy the Euro on any dip lower to 1.1330/1.1375 with a 1.1285 stop. I no longer want to short the Euro at this time.
March Dollar Index
No Change as I am still a seller on any rally higher to 95.85/96.25 with the same 96.55 stop.
March DAX
Frustratingly the DAX just missed my 11160 buy level by a few points before the market rallied into the New York close. I am still flat and today I will now lower my buy level slightly to 11020/11100 with the same 10945 stop.
March FTSE
My long 6710 FTSE position traded higher to my 6740 T/P level after I posted early yesterday morning and I am still flat. With the UK Parliamentary vote later today the UK Markets will be volatile with all eyes on the reaction to the Pound. The FTSE has strong support from 6610/6660 and today I will be a buyer on any dip to this area with a 6570 stop. Given the underperformance of the UK equity market I have no interest in being short the FTSE at this time.
Dow Rolling Contract
My Dow plan worked well with the Dow trading lower to my 24380 buy level before bouncing over 140 points and this move higher enabled me to cover this position at my revised 24460 T/P level and I am now flat. Today I will again look to buy the Dow on any dip lower to 24150/24300 with a 24070 tight stop.
March NASDAQ
The NASDAQ got hit hard on Nvidia yesterday before recovering some if these losses into the Chicago close. I am still flat and today I will be a buyer on any dip lower to 6540/6600 with a 6495 tight stop.
March BUND
The Bund just missed my initial 164.65 buy level by 4 points before rallying back above 165 and I am still flat. Today I will lower my buy level slightly to 164.00/164.40 with a 163.65 stop.
Gold Rolling Contract
I am still flat Gold and today I will also lower my buy level slightly to 1282/1292 with a 1274 tight stop.
Silver Rolling Contract
No Change as I am still a buyer on any dip lower to 15.20/15.60 with the same 14.85 stop. If I am taken long I will have a T/P level at 15.85.
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