The boost to equities and to the US Dollar continued yesterday driven by comments from US Fed Chair Yellen and supported by strong US economic data. Chair Yellen indicated that a December rate hike was a base case, noting “such an increase could well become appropriate relatively soon”. The OIS market agrees and currently prices in a 96% chance of the Fed hiking in December. For those who thought there was a chance Yellen may depart the Fed early, those notions were cast aside with Yellen indicating she was very much Stayin’ Alive and was intending on serving out her full four year term.
To mark my 1200th issue of Tradernoble Daily Commentary I am offering a special 2 year rate of Euro 2750 for my Platinum Service which includes 1/4 updated emails throughout the trading day. This offer is open to both new and existing members and if anyone is interested can you please contact me on bryan@tradernoble.com for details.
For anyone following my Platinum Service it made 8 points yesterday and is now ahead by 1233 points for November having made 1582 points in October. The previous four months saw gains of 1142, 1782, 1682 and 2550 points respectively. Since I started this Platinum Service in June 2015 it has averaged a monthly gain of over 1900 points.
As for future policy, Yellen was wary about being drawn into discussions about the outlook under a Trump Presidency. In an oblique reference to how the Fed is likely to see it, she noted that markets saw inflationary consequences from an expected US fiscal expansion under a Trump Administration (note breakeven inflation rates in the US are now at 1.9% up from the 1.7% level prior to the election – but still only 20bps higher). And in response to a question about the economic outlook, Yellen said that “perhaps [there would be a need to] adjust our outlook”. Nevertheless, Yellen continued to temper expectations for Fed policy into next year (likely in case markets were getting ahead of themselves) stating risks “were roughly balanced” and the economy only warrants “gradual increases”.
As Yellen’s comments hit the wires, the US Dollar rose across the board by around 0.5%. It’s also worth noting here that Yellen made no comment on whether the recent rise in the Dollar was leading to tighter US financial conditions (it’s up 3.2% since just before the US election) so perhaps a green light for the US Dollar to rise further – at least that’s how the market is likely to interpret it. The Australian Dollar was the underperformer yesterday, down 1.0%. Much of the weakness in the Aussie came after Yellen’s testimony so does not appear to reflect the soft labour market figures released yesterday. The UK Pound was the outperformer, down only 0.2% after a stellar Retail Sales number which say sales up 1.9% in the month and an incredible 7.4% in the year – the fastest annual pace since 2002! The Stats office suggests colder weather and Halloween were the drivers, but it’s also possible UK residents are spending more at home given the lower pound since Brexit.
US economic data was very positive with US Jobless Claims coming in better than expected and now at a 42-year low at 235k. While election hiring may have helped, it also suggests the labour market is close to its full employment levels. The US CPI for October was broadly in line with consensus, with the Headline at 0.4% m/m and 1.6% y/y, and the Core Measure at 0.149% and 2.1% y/y. US Housing starts were also strong, up an incredible 25.5%.
With positive data and Yellen, US equities rose with the S&P500 up 0.4% and within a hairsbreadth of its all-time high. Again financial stocks seem to be the main drivers with the financials sub-index up 1.1% with prospects of less financial regulation under a Trump administration continuing to buoy financials. European equities were also higher with the Dax up 0.2% and the FTSE up 0.7%.
US Treasury yields resumed their upward moves, with 10 year Treasuries closing 5 basis points higher at 2.27%. Global yields elsewhere mainly took their lead from moves in Treasuries the previous day with German Bund yields down 1.8 bps to 0.41%.
As for commodities, oil was down with the WTI measure down 0.7% to $45.24 a barrel. Markets remain sceptical about an impending OPEC agreement to cap production – formal meeting to be held on Nov 30 – despite continued optimistic remarks from Saudi Ministers. As for Australia’s key export prices, iron ore was up 1.6% to US$73.6, while coal was mixed with coking up 0.5% to US$298.8 and thermal down 1.5% to US$104.9.
Finally Mexico hiked its key policy rate as expected by 50 bps to 5.25% – its highest level since 2009. The moves are centred on countering the inflationary impact of the sharp fall in the Peso following the US election. Despite the interest rate increase USD/MXN rose 0.5% to close at 20.53. Just over 12 months ago the USD/MXN was trading at 14.
This morning on the economic front we already had the release of German PPI which came in much stronger than expected with a 0.7% rise versus a consensus of just 0.2%. It looks likely finally we are starting to see inflation pick up given the weakness in the Euro. The Bundesbank will not be happy. Next we have the ECB Current Account at 10.00 am and the US Leading Index at 3.00 pm. Finally at 4.00 pm we have the Kansas City Fed Manufacturing Index.
December S&P 500
Unfortunately while having the correct view in the S&P since the US election the market again missed my 2171 buy level with a 2171.50 low print before rallying to just below its all-time high. As I have mentioned countless times it is a waste of capital in trying to pick a top in the US equity market especially with Yellen stating yesterday that she will serve her full term. Helping the S&P yesterday was the much stronger than expected economic data but we have to keep an eye on the US Bond market where yields rose again yesterday and continued overnight. Today I will now raise my buy level to 2173/2178 with a 2168 stop. Next week is Thanksgiving which is traditionally a bullish period and for that reason I still do not want to be short the S&P at this time.
EUR/USD
Having made nice money on my aggressive 1.0675 long Euro position when I exited this trade at my 1.0720 T/P level, I unfortunately gave it all back after I bought the Euro again at 1.0710 before finally getting stopped out of this position late yesterday at 1.0625 and I am now flat. Both ECB President Dragi and Bundesbank’s Weidmann are speaking at the Euro Finance Week in Frankfurt this morning. I am particularly interested in what Weidmann has to say especially as mentioned above the Bundesbank will not be happy with the weak Euro given the very strong PPI released earlier this morning. Remember a strong US Dollar is not good for the Emerging Markets as we have seen with the hammering that the Mexican Peso has taken over the past year. As long as the Euro can hold over its December 2015 low at 1.0525 and its April 2015 low at 1.0450 we still have negative divergence against the Dollar Index which finally closed above its 100.56 major resistance level and previous Double Top from the two dates above last year. Today I will again look to buy the Euro on any dip lower to 1.0530/1.0580 with a tight 1.0495 stop. Remember the Daily Sentiment Index reading for the Euro is still in single figures, so not a time for chasing this market lower.
December Dollar Index
The Dollar finally broke its key 100.56 resistance level to close at a 14 year high. Yes the Dollar is overbought but I have to respect that fact that this key level was broken. Yesterday I was lucky as after the Dollar hit my 100.55 sell level I emailed my Platinum Members to exit this position at 100.33 and I am now flat. The Dollar is trading at 101.30 this morning and I will now look to buy the market on any dip lower to 100.30/100.65 with a 99.90 stop. Given the significance of this break I do not want to be short the Dollar at this time preferring instead to buy the Euro on dips.
December DAX
I am still flat the DAX which is again trying to rally. I still believe the key 10800/10850 resistance level will eventually get broken, but I do not want to chase the market higher from here especially given how heavy the DAX is trading at this time. Today I will raise my buy level to 10570/10630 with a 10530 stop.
December FTSE
Unfortunately the FTSE just missed my 6725 buy level with a 6735 low print before rallying strongly and I am still flat. Today I will raise my buy level slightly to 6710/6740 with a 6675 stop.
Dow Rolling Contract
The Dow continues to consolidate in a very narrow range after it explosive move higher following the Trump victory. The narrowness of the market is shown by the McClellan Oscillator which closed at +87 last night for the third consecutive trading session within a couple of points of each day. Today I will again look to buy the market on any dip lower to 18730/18800 with a 18680 stop. My only interest in selling the Dow is still on a rally higher to 19075/19140 with the same 19200 stop.
December BUND
My Bund plan worked well with the Bund trading lower to my 160.40 buy level before having a nice 50 point rally which enabled me to cover this position at my revised 160.66 T/P level. This morning the Bund has opened lower following the continued sell-off in the US Bond market and I have now bought the Bund again at 160.12. I will leave my stop unchanged at 159.70. If I am stopped out of this position I will be a more aggressive buyer on any further dip lower to 158.90/159.30 with a 158.55 tight stop.
Gold Rolling Contract
Just before the New York close, Gold hit my 1213.50 buy level with a then 1210.50 low print. As I wanted to make up for my Euro loss plus the fact that I did not want to have a long Gold position overnight as I was already long Silver I emailed my Platinum Members to exit this Gold position at 1218 and I am now flat. Gold is also oversold with the market not helped by the continuing strength in the US Dollar. Gold is testing the key 1200 level as I post my commentary and today I will again be a small buyer on any dip lower to 1185/1195 with a 1178 stop.
Silver Rolling Contract
No change as I am still long Silver at 16.95 with the same 16.25 stop. I will now lower my T/P level on this position to 17.10.
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