US equities were having a good day ahead of the Fed announcement, the US Dollar was steady and US Treasury yields were drifting higher. As expected the Fed delivered its patient pledge and also confirmed a review of its balance sheet normalisation guidance. Risk assets loved the Fed message with US equities jumping across the board. The Dow rose 435 points for a 1.77% gain. Post the Fed, the US Treasury curve is steeper with the move led by a rally in front end yields. The USD is also broadly lower with AUD and CAD the outperformers.
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As expected the Fed stood pat and delivered a more dovish message relative to its December Statement. The Fed removed its reference to further gradual rate changes and consistent with official speeches post the December meeting, the Committee has pledged to be patient on further adjustments to the target range. Notably the Fed reasoning for its patience is largely attributed to ‘’global economic and financial developments and muted inflation pressures’’ whilst its assessment of the US economy remains encouraging “The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes”. Speaking before the media, Fed Chair Powell said that the case for rate hikes has weakened somewhat and although the outlook remains ‘’favourable’’ ‘’we are now facing a somewhat contradictory picture,’’. Powell then added that there is growing evidence of cross-currents and patiently waiting for greater clarity has served policy makers well in the past.
In a separate statement the Fed said that the Committee is ‘’prepared to adjust’’ the details of balance sheet normalisation if required and also hinted such an adjustment is likely by stating ‘’the Committee is revising its earlier guidance regarding the conditions under which it could adjust the details of its balance sheet normalization program’’.
Risk assets have reacted positively to the Fed Statement and Powell’s comments, it seems the Fed has listened to markets and is watching the global outlook closely with a ‘’muted’’ inflation outlook allowing the Fed to be ‘’patient’’ in determining future rate moves. As noted above, however, the Fed assessment of the US economy suggest its bias is still for the Funds Rate to be higher in the future. Stabilisation in global growth and renewed signs of inflationary pressures are themes to watch.
Equities
US equities were already enjoying a good day buoyed by better than expected Apple results (after the bell yesterday) and news that Boeing’s earnings had beaten expectations by a significant margin. The Fed patient message was an additional boost with the S&P and NASDAQ closing higher by 1.55% and 2.25% respectively.
Currencies
Ahead of the Fed the US Dollar was marginally higher, but a mover lower in shorter dated yields along with a decline in safe haven demand triggered a broad USD sell-off. In G10 AUD (+1.41%) and CAD (0.94%) are the outperformers. Both pairs were outperforming prior to the Fed announcement. Counter to its safe haven attributes JPY is also stronger (USD/JPY is down almost one big figure to 108.95, following the move lower in UST 10y yield).
Yesterday a marginally better than expected Australian CPI boosted the AUD with price action suggesting the market was positioned for a soft outcome. Movements in iron ore prices have also helped the Aussie with the bulk metal trading above $80 in Asia. The CAD also benefited from a move higher in oil prices (WTI +2.02%) with the viscous lubricant benefiting from Venezuelan political crisis and glacial weather in some parts of the US. As we type the AUD trades at 0.7255, finally breaking higher from the tight 0.7076 and 0.7235 held since after the January 3rd crash. Technically the AUD is looking constructive with many looking at the 50Week Moving Average at 0.7378 as the next target a more dovish RBA is a risk next week from a fundamental basis a Fed led risk positive environment and higher commodity prices are all good news. Of course the caveat here is the binary outcome from the US-China trade talks due to end tomorrow.
Sterling has recovered somewhat after the Fed and now trades at 1.3110. Earlier, the Pound was under a little bit of pressure following news that the EU seems in little mood for compromise with EC President Juncker saying that the backstop was ‘’part and parcel’’ of the deal and would not be renegotiated. He added that the risk of a disorderly no-deal scenario had increased. There is still time for UK MPs to vote to extend the leave date of March 29th if PM May is unsuccessful in securing concessions from the EU over the next few weeks, as seems likely. I still retain the view that a no-deal scenario is unlikely.
Bonds
The UST curve steepened led by a move lower in front end yields (2y down 3.5bps on the day to 2.526%), 10y UST yields fell 2bps to 2.69% and interestingly the 30y note is higher up 1.6bps to 3.057% relative to Tuesday’s levels. For all the talk of recessionary risk implied by various yield curves, 5s30s is at its steepest in almost a year, at 55bps. A Fed on hold implies a rangy environment for UST yields and a favourable atmosphere for risk assets.
As for the latest on US-China trade talks, Bloomberg reported that the two sides remained far apart on some of the deep-seated issues like US demands that China revamp its industrial policies and take greater steps to protect intellectual property. Ahead of the talks, China’s National People’s Congress fast-tracked a law that would formally ban ‘’forced’’ technology transfers from foreign firms operating in China, although it is uncertain whether that will be sufficient to assuage US concerns. The China CSI300 Index was 0.4% lower yesterday, with more than 20 companies reporting lower than expected earnings results, a further sign of the slowdown in growth in the country. But the CNY strengthened further against the USD overnight (+0.3%) and the currency is now at its highest level since July last year.
This morning on the Economic Front we have German Retail Sales at 7.00 am and this is followed at 9.30 am by UK Nationwide Housing Prices. At 10.00 am we have Euro-Zone GDP and Unemployment. This is followed at 1.30 pm by US Weekly Jobless Claims and the Employment Cost Index. Finally at 2.45 pm we have the Chicago Purchasing Mangers’ Survey, followed by Bundesbank President Weidmann’s key speech at 4.00 pm
March S&P 500
My overall bullish view on the S&P has been vindicated and it was unfortunate to be stopped out of my long position on Monday at 2632 especially with the S&P trading over 2680 this morning. The S&P has now left a bullish buy extreme on the break of 2655 and close over last Friday’s intra-day high of 2672. This area should act as strong support on any subsequent sell-off. In my opinion the level of Central Bank buying of the Global Equity Market was large since the extreme low of 2332 in the S&P on December 26. Today I will now raise my buy level to 2662/2674 with a 2652 stop. I still do not want to be short the S&P at this time.
EUR/USD
Thankfully we had no sell level in the Euro today given the large sell-off in the US Dollar and I am still flat. Today I will raise my buy level to 1.1410/1.1450 with a 1.1370 stop.
March Dollar Index
The Dollar just missed my 96.00 sell level before falling 100 points into the New York close and I am still flat. Today I will now lower my sell level to 95.50/95.90 with a 96.30 stop. I still do not want to be long the Dollar at this time.
March DAX
Frustratingly the DAX missed my 11110 buy level by a few points before rallying over 100 points on the Fed Statement and I am still flat. The Bundesbank will be delighted with the stronger Euro whereas the rest of Euro would prefer to see the Euro trading much lower for a competitive advantage. The stronger Euro will hamper the DAX and today I will only raise my buy level to 11050/11130 with a 10995 tight stop.
March FTSE
As expected the FTSE rallied hard yesterday on the back of the weaker Pound and I am still flat. Today I will now raise my buy level to 6805/6845 with a 6765 tight stop. I still do not want to be short the FTSE at this time.
Dow Rolling Contract
The Dow is now trading over 800 points higher than the lows recorded last Monday as yet again anyone trying to sell this market for any length of time gets slammed. Crucially the Dow managed to break and close over its 200 Day Moving Average which comes in at 24981 this morning. Today I will now raise my buy level to 24720/24870 with a 24595 stop. I still do not want to be short the Dow at this time.
March NASDAQ
The NASDAQ recorded an impressive 2.20% rally yesterday. The market has now rallied over 14% since the low recorded on December 26. I am still flat and today I will now raise my buy level to 6710/6760 with a 6655 stop.
March BUND
The rally in the 10 Year US Treasury Note helped the Bund to close again over the key 165.00 pivot point. I am still flat and today I will now raise my buy level to 164.65/165.05 with a 164.30 stop.
Gold Rolling Contract
Gold just missed my 1300 buy level before rallying to close at 1320 in New York last night. As mentioned yesterday the DSI is still showing that Gold has plenty of upside potential even after rallying over $100 in the last six weeks. Today I will raise my buy level to 1296/1306 with a 1288 stop.
Silver Rolling Contract
Finally Silver closed over $16 after weeks of trying to crack the key 15.60/16.00 resistance level. I am still flat and I will now raise my buy level to 15.40/15.80 with a 15.05 stop.
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