In what has been an orderly and quiet market, the main event has been the outcome of the ECB meeting, its forecasts, guidance and takeaways from the Draghi press conference. The market was primed and expecting a very dovish ECB that the ECB seemed to deliver in its statement but much less so at Draghi’s subsequent press conference. Continued confidence with increasing caution was one key take away phrase that the ECB wanted to leave the market with at its last meeting for the year. The ECB was not as convinced about some of the external risks afflicting European economies as markets might have anticipated. The ECB said in its opening statement that, ‘’the risks surrounding the Euro area growth outlook can still be assessed as broadly balanced’’ It then added, ‘’However, the balance of risk is moving to the downside’’, citing the often spoken of ‘’persistent uncertainties relating to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.’’ There was an injection of a less worrisome outlook at Draghi’s press conference.
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For anyone following my Platinum Service it made 60 points yesterday and is now ahead by 1554 points for December, having made 1541 points in November, 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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The Euro dipped on the formal statement, looking for a negative takeaway from the ECB. They confirmed that the QE programme would be capped at the end of the year at 2.6tr and that rates ‘’remain at present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium-term’’.
As for thoughts of when the unwinding of QE might start, the messaging was not in essence dissimilar to the US experience that was a lag of two years between when rates started to rise and when the unwind started. The ECB said that it will continue to reinvest principal payments from maturing securities from ‘’for an extended time after the end of its net asset purchases’’ to ‘’an extended period of time past the date when we start raising the key ECB interest rates and (as was the case before) for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.’’
At his presser addressing the external risks that the markets have been besotted with of late, Draghi remarked that, ‘’actually the trade situation is probably better than two months ago’’ (perhaps a nod to the 90-day tariff freeze and improving mood music out of the White House, for now anyway) while the situation in some emerging markets is less dangerous, a reference to the stabilisation seen in areas such as Turkey, Argentina, Venezuela and Brazil, especially now that the market had scaled the extent of US rate rises for 2019, the Fed much more discretionary rather than gradual rises on ‘’autopilot’’.
Also in the Q&A, Draghi was asked why markets are more pessimistic than the ECB. In what was an interesting reply Draghi acknowledged there was a little less conviction in the latest ECB staff forecasts, but he observed that markets are reading the hard data and then easing financial conditions. This is said shows markets understand well the ECB’s reaction function, but also that the ECB never gets to the downside risk outcome as markets are doing the work for it.
One Bloomberg reporter wrote that ‘’this echoes former BoE Governor Mervyn King’s Maradona theory of interest rates that central bankers can sway market expectations without changing policy. In the 1986 World Cup, the Argentinean soccer star scored against England by running straight at the goal from midfield — beating five players who expected him to turn left or right on the way. It was a nice way for the ECB President to play the markets to get the very accommodative financial conditions to support achievement of their growth forecasts.
There was no material change to the ECB’s growth and inflation forecasts. GDP for 2018 is down a tenth from September’s 2% to 1.9%, 2019 also a tenth lower at 1.7%, while 2020 is unchanged at 1.7% and a new 2021 forecast comes in at 1.8%. Inflation for this year was increased a tenth to 1.8% and lowered a tenth next year to 1.6%.
Draghi remains upbeat on the domestic growth side. On wages, he noted ‘’the strength of the labour market, ongoing employment gains’’. supporting private consumption. He called out the over 4% rise in German wages. He also said that business investment is benefitting from domestic demand, favourable financing conditions and improving balance sheets, while residential investment remains robust. Despite all the global trade angst, the expansion in global activity, ‘’is still expected to continue, supporting euro area exports, although at a slower place.’’
There has been little movement in major currencies over the past 24 hours. The biggest mover has been Sterling that has drifted lower since I posted yesterday morning.
Other Economics: US data points to still low inflation and strong labour market
US import prices in November were less than expectations, down 1.6%, led by collapsing oil prices, but also the continued effects of the strong dollar, ex-petroleum prices also down, by 0.3%, neutralising the impact of tariffs on US downstream inflation. Jobless claims were back down to just 206K in the week of December 8, down from 233K and while we can over-read week to week movements, it suggests the labour market still looks solid. The USD was a little higher on this news.
Commodities, Bonds, and Equities
Oil has again stood out, now increasing on the day, WTI up to $52.59, up $1.44 on the day, a rise of just under 3%, a similar story for Brent. Prices were supported as news filtered through that the Saudis will cut shipments to US refiners soon to cap any upside to US inventories. Base metals were little changed, as was gold, while in the bulks space, both Dalian iron ore and Chinese steel rebar futures were up. Coal prices were also higher.
As for bonds, German bunds were little changed, Italian bonds rallied as the Italian PM signalled a deficit plan of just over 2% of GDP, while 10 year US Treasuries were little changed. Two year Treasuries rallied ahead of what the FOMC might do to their dot plot forecasts next week.
Overnight the Nikkei fell 2.0% while in the last few minutes the Bundesbank has cut GDP growth for 2018 to 1.50% from 2.0% and this combination is leaning on stock prices this morning.
This morning on the Economic Front we have German and Euro-Zone Manufacturing PMI at 8.30 am and 9.00 am respectively. This is followed by US Retail Sales at 1.30 pm and Industrial Production at 2.15 pm. Finally we have US Manufacturing PMI at 2.45 pm.
Of note the ECB President is speaking in Pisa at 1.00 pm.
December S&P 500
Finally on the back of the weaker Asian Markets the S&P traded lower to my 2625 buy level before subsequently missing my T/P level with a 2632 high print. As I wanted to concentrate in writing today’s Daily Commentary I emailed my Platinum Members to exit any long position at 2628 and I am still flat. The S&P has strong support from 2602/2615 and today I will be a buyer on any dip to this area with a wider 2592 stop. If I am taken long and subsequently stopped out of this position I will be a more aggressive buyer on any further dip to 2568/2585 with a 2559 tight stop. Given how oversold the S&P is I do not want to be short the market at this time especially ahead of a weekend.
EUR/USD
No change as I am still a buyer on any dip lower to 1.1270/1.1310 with the same 1.1235 stop. Remember the Euro has to break and close over 1.1425 for a more sustainable rally.
December Dollar Index
The Dollar again traded in a narrow range over the past 24 hours. I am still flat and I will leave my 97.40/97.80 sell range unchanged with a 98.20 low stop if executed.
December DAX
On the open of the Futures Market this morning the DAX traded at my 10825 buy level before rallying to my revised 10840 T/P level and I am still flat. The Bundesbank downgrade to GDP is not helping sentiment and today my only interest in buying the market is on a move lower to 10620/10690 with a 10570 tight stop.
December FTSE
Just before the US Markets closed last night the FTSE traded lower to my 6840 buy level. As I did not want to hold a long position overnight I emailed my Platinum Members to exit any long position at 6855 and I am still flat. This morning the FTSE is opening lower. The market has support at 6750 and today I will be a buyer on any dip to 6720/6760 with a 6685 stop. I still do not want to be short the FTSE at this time.
Dow Rolling Contract
The Dow just missed my sell level yesterday before selling off into the close and again overnight on the weaker Asian Markets. I am still flat. The Dow has strong support from 24050/25250 and today I will be a strong buyer on any dip to this area with a 23900 stop. Ahead of the weekend I do not want to be short Dow.
December NASDAQ
I am still flat the market and I will continue to be an aggressive buyer from 6530/6600 with the same wider 6470 stop. Yesterday the NASDAQ was the weakest of the main US Indices with the market currently trading just above my buy range at 6675 as I go to press.
March BUND
No Change as I am still a seller from 163.45/163.85 with a higher 164.25 stop.
Gold Rolling Contract
Gold is opening weak this morning as the market again struggles to move away from the key 1230 support level. I am still flat and with Silver just hitting my buy level I will now lower my Gold buy range to 1218/1226 with a 1211 stop.
Silver Rolling Contract
In the last few minutes Silver traded lower to my 14.62 buy level. I will now raise my stop on this position to 14.25 while lowering my T/P level to 14.80. If any of the above levels are hit I will be back with a new update for my Platinum Members.
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