The time arrived but the Fed couldn’t bring itself to raise rates for the first time since the Financial Crisis. In a hugely anticipated FOMC meeting, the market had priced just over a quarter percent chance of a hike, while 50% of economists expected a move, but they remained on hold. The statement was relatively unchanged, but the addition of “monitoring developments abroad” cued markets as to the cause for the delay. The commentary on the labour market and inflation were relatively unchanged, and show a level of comfort with their path. Indeed, the median forecasts for Unemployment were lower, while the outlook for the core PCE (the Fed’s favoured inflation rate) were only marginally lower. So it is the uncertainty surrounding global demand, and volatile Emerging Markets in particular, that is holding them back.
For anybody following my new Platinum Service it made 340 points yesterday and is now ahead by 2400 points for September. The previous three months saw gains of 2195, 1810 and 3045 points respectively.
The argument goes that this volatility and growth concern strengthens the USD and lowers Oil prices; both of which lower inflation and make it more difficult for the Fed to achieve their inflation target. The thing to note is the circularity of this problem: they don’t hike because EM is under pressure, EM is under pressure because the Fed is going to hike, the Fed doesn’t hike, EM rallies, the Fed turns hawkish again, EM comes off – and so it may go. We need a circuit breaker; hopefully one to the upside, not the downside of the risk spectrum.
Markets initially reacted as you would expect to the lowering of the median ‘dot points’ for the Fed Funds expectations (these dropped to 0.375% for 2015 from 0.625%, but more importantly, showing a slow and low profile for the hiking cycle, to 1.375% for 2016, from 1.625 and 2.625% for 2017 from 2.875%). Equities rallied, Bond Yields were lower and the USD was lower. Then we had Yellen’s speech, where she went on to elaborate on their concerns. She basically provided a guide to the fact that this was a postponement of a hike, not a cancellation. I quote:
“Returning to monetary policy, we recognize that there has been a great deal of focus on today’s policy decision. The recovery from the Great Recession has advanced sufficiently far. And domestic spending appears sufficiently robust. That an argument can be made for a rise in interest rates at this time. We discussed this possibility at our meeting. However, in light of the heightened uncertainties abroad and the slightly softer expected path for inflation, the Committee judged it appropriate to wait for more evidence, including some further improvement in the labor market, to bolster its confidence that inflation will rise to 2% in the medium term. Now, I do not want to overplay the implications of these recent developments. Which have not fundamentally altered our outlook.”
You can find dovish and hawkish commentary through the speech and the statement. Concerns about the labour market, the difficulties of achieving 2% inflation. The lower Fed Funds rate profile. But they are still looking to normalise rates at some point. Given this, the next Meetings remain ones at which the Fed may raise interest rates. And as such, markets will likely remain in that Fed obsessed limbo.
Perhaps in recognition of this, equity markets and the higher risk currencies (AUD, NZD in particular) have faded their initial enthusiasm. Yields remain broadly lower, in recognition of the delay in hike and lower Fed Funds profile. We may now see some stabilisation in risk markets, in recognition of the delay but if we do get a weaker USD and Oil prices stabilise, expect the merry-go-round to resume.
December S&P 500
The idea of going into the FOMC announcement flat with both a buy and sell level above and below the market worked extremely well yesterday as both levels got hit in another wild two hour post-FOMC. Shortly after we got the no change in Interest Rates the S&P traded higher to my 1995 sell level before having a nice sell-off which enabled me to cover this position at my 1986 T/P level. Subsequently the market went on a tear to the upside before selling off on Fed Chair Yellen’s remarks that the rate hike was only postponed which saw the S&P slammed for nearly 40 Handles with the market eventually hitting my 1973 buy level. Overnight the S&P had a nice rally which enabled me to cover this position at my 1980 T/P level as again outlined to my Platinum Members and I am now flat. Today is one of the hardest trading days of the Quarter to get an edge on as it is the day that the September Futures and Options Contracts expire which can lead to quick moves in either direction for no apparent reason. Given the fact that I do not want to be short on a day like today I will be a small buyer on any dip to 1967/1973 with a tight 1962 stop.
EUR/USD
I am glad that I stayed out of the Euro yesterday even though my bias was for a weaker Euro. The Fed are in a tricky situation as you saw by yesterday’s economic data where Unemployment continues to fall mainly due to low paid jobs while the Philly Fed Survey had one of its biggest misses to the downside in the last three years. I have to respect that the Euro managed to close over 1.1360 and today I will be a small buyer on any dip lower to 1.1340/1.1370 with a 1.1315 stop. I still do not want to be short the Euro at this time.
December Dollar Index
I am still flat the Dollar and to day given the fact that we broke and closed below 95.00/95.20 I have to lower my sell level to 94.90/95.20 with a 95.45 stop. I do not want to be long the Dollar at this time. Dragi and the ECB must be very annoyed with the Fed’s actions last night and it is now clear that no Central Bank wants a strong currency. The next ECB Meeting and Dragi press conference should be very interesting.
December DAX
Unfortunately the DAX just missed my 10350 sell level by a few points post the FOMC last night before following the US Indices lower and I am still flat. Today I will lower my sell level to 10270/10320 with a 10350 stop which is just above yesterday’s high. I still do not want to be long the DAX at this time.
December FTSE
Thankfully just as I posted yesterday morning the FTSE was selling off hard which enabled me to cover my short 6255 September position at 6215 and I am now flat. Just like the DAX above I was very unlucky with my 6245 December sell level as the market reached a high of 6235 before selling off by over 100 points and I am still flat. Today I will lower my sell level to 6190/6225 with a 6250 stop. I still do not want to be long the FTSE at this time.
Dow Rolling Contract
The Dow plan also worked very well yesterday as the market had a nice spike higher post FOMC which enabled me to go short at 16850. Subsequently the Dow sold off hard and this enabled me to cover this position at my 16740 T/P level as again outlined earlier to my Platinum Members and I am now flat. Just like the S&P above the Dow had a wild trading session as after I managed to T/P on my short position the Dow rallied to a 16935 high before selling off 300 points. As I have mentioned over the past few days I still believe this market is by no means out of the danger zone and I still expect at least a re-test of the August 24 low at 15250. Today I will again look to sell the market on any rally higher to 16750/16810 with a 16850 stop. If I am taken short and subsequently stopped out of this position I will be a more aggressive seller in front of 16910 with a 16970 stop.
December BUND
Thankfully I had raised my sell level in the BUND yesterday as my fear was the FED would do nothing. This morning the BUND has traded higher to my 154.70 sell level and I have decided to stand aside and so I have covered this position for a small loss at 154.90 and I am now flat. My only interest in selling the BUND today is on a further rally higher to 155.35/155.65 with a 155.80 stop.
Gold Rolling Contract
Gold unfortunately just missed my 1114 buy level with 1115.50 low before having a nice $20 rally and I am still flat. I still believe that Gold and Silver are trying to put in a bottom that will hold for more than a few weeks and for this reason I will move my buy level higher to 1113/1123 with a 1107 stop.
Silver Rolling Contract
The Silver plan worked very well yesterday a shortly after I posted Silver traded lower to my 14.80 buy level before having a nice rally post the FOMC which enabled me to cover this position at my 15.30 T/P level. This morning Silver is trading lower and I have decided to buy the market here at 15.10. I will leave a tight 14.75 stop on this position.
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