The two big events in the past 24 hours were a 4.8% slide in the oil price and a surge in European risk assets. The oil price is now back to its lowest point since mid-November with WTI oil sitting at $44.51 a barrel having fallen below $44 overnight and below the level that prevailed before OPEC’s oil production ceiling. In the words of ABBA, it seems US shale oil production is presenting a Waterloo moment for OPEC. Meanwhile European markets have been buoyed by the prospects of centrist Macron winning the second round in the French presidential election on Sunday (May 7). European equities rose 1.2% with the French CAC40 closing 1.4% higher. Betting markets currently ascribe Macron a 91% chance of winning against the Eurosceptic Le Pen while polls put Macron at 61% of the vote.
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For anyone following my Platinum Service it made 143 points yesterday and is now ahead by 261 points for May, having made 1276 points in April, 1335 points in March, 1481 in February and 1734 in January. The previous seven months saw gains of 1351, 1971, 1582, 1142, 1782, 1682 and 2550 points respectively. Since I started this New Platinum Service in June 2015 it has averaged a monthly gain of over 1750 points.
The Euro too is higher with the EUR up 0.9% (since I marked prices 24 hours ago) and at its highest level for 2017 at $1.0984. Given the strength in European data to date and the abating of geopolitical risk, there is continued speculation that the ECB may communicate a change in its policy guidance at its upcoming June Meeting. ECB Board member Praet played into this tone stating “this is a judgement which will be very much data-dependent”. Consistent with this, 10-year Bund yields rose 6.9bps to 0.39%. Strength in the Euro dragged down the US dollar with the BB DXY closing down 0.6%. Other currency pairs were mixed with strength in the UK Pound (+0.4%) and Yen (+0.3%), but weakness in the commodity-linked currencies of Aussie, Kiwi, CAD and Norwegian Krone.
The Australian Dollar fell 0.3% overnight to 0.7390. Since Tuesday the AUD has fallen 1.8% having broken through its 100 day moving average. The decline appears largely due to the fall in commodity prices – particularly oil and iron ore – with little reaction to the Trade Balance or Governor Lowe’s speech. The Iron ore price fell 5.1% yesterday to $65.2 a tonne, but coal prices have been more resilient with thermal coal unchanged overnight at $78.0 a tonne and coking coal down 2.5% to $175.5 a tonne. Driving weakness in commodities has been softer Chinese PMIs of late while the PBoC has also been engineering tighter liquidity conditions.
The surprise for me has been the resilience in Bond Yields to the moves in the oil price. US 10-year bond yields actually rose 3.3bps to 2.35% with a rise in the real component (+5.2bps to 0.48%) outpacing a fall in the breakeven (-1.7bps to 1.87%)
Part of the resilience in yields may be due to the market not willing to fade the post Fed optimism given Non- Farm Payrolls this afternoon. Recall the FOMC statement on Wednesday viewed the slow Q1 GDP data as “likely to be transitory” and the Fed continues to expect gradual adjustments in policy with labour market conditions expected to strengthen further.
Consistent with this, the market is currently pricing in a 69% chance of a rate hike in June and 37bps of hikes are priced for the rest of the year – or 1.5 hikes left for the year.
Supporting the Fed’s assertions of inflation picking up despite the moves lower in the oil price, unit labour cost (ULC) growth was stronger than expected. ULC growth was 3% against expectations of a 2.7% outcome. Unit labour costs are a key driver and input into models of core inflation and would likely support the Fed’s inflation forecasts; conversely any further acceleration in ULCs would likely see their models predicting a breakout of inflationary pressures.
Finally, the US House of Congress passed the Republican healthcare bill to replace Obamacare by a narrow margin – 217 to 213. It now heads to the Senate where most commentary suggests it has little chance of being passed in its current form and will have to be re-written. Estimates suggest the bill could deliver savings of $150bn over 10 years and partly fund a tax cut plan.
This morning on the economic front we have no economic data from either the UK or the Euro-Zone as France goes to the polls on Sunday. At 1.30 pm we have the US Non-Farm Payrolls. The key to this Report is to what extent payrolls will rebound from the weather affected March read. The market expects a 190k payrolls print while the Atlanta Fed’s jobs calculator suggests only 121k payrolls are needed to keep the Unemployment Rate unchanged assuming a constant participation rate. Nevertheless the market is expecting a slight change to the participation rate and expects the Unemployment Rate to tick-up to 4.6% from 4.5%. Jobless claims released yesterday were again at very low levels and are suggestive of a strong payrolls print. Focus will also be on the average hourly earnings component given the soft inflation numbers and the market expects average hourly earnings will increase 0.3% m/m which would give an annual rate of 2.7% y/y. Finally at 8.00 pm we have US Consumer Credit.
There are also a number of Fed speakers later this afternoon/this evening tonight with the ones to watch being Chair Yellen, Fischer, and Williams. Yellen is speaking in Brown University at 6.30 pm.
June S&P 500
Finally we are seeing some volatility pick up in the US Stock market with the S&P having its largest intra-day range in over a week. Initially the market rallied before selling off on the lower oil price with the market hitting my average buy level at 2378 before rallying on Congress passing the Obamacare Bill and this rally enabled me to cover my long position at my revised 2383.50 T/P level and I am now flat. With so many of my positions hitting yesterday, it was a day of taking your profit when available and moving on to the next trade. We still have this large ‘’Open Gap’’ in the S&P from two weeks ago when the S&P closed in Chicago at 2345 to the following Monday’s Chicago day session low at 2366. All ‘’Gaps’’ in the S&P get filled over time and if the market sells off this afternoon or following a major surprise in Sunday’s French Election I will be a very aggressive buyer from 2347/2353 with a 2342 stop. I expect that the first sell-off to this large ‘’Gap’’ will result in at least a 10/15 Handle rally. For today I will as usual stay flat ahead of the NFP at 1.30 pm and if the market sells off I will be a buyer from 2367/2373 with a 2362 stop. My only interest in selling the S&P is still on a rally higher to 2403/2410 with a 2416 wider stop. Remember if the market cannot make new highs over the coming week then we may well press the downside in a more meaningful manner.
The relentless rally in the Euro continues despite how overbought the market is trading. Yesterday after I posted the Euro just missed my 1.0860 buy level with a 1.0872 low print and I am still flat. This morning the Euro is testing its 500 Day Moving Average at 1.10 and given how overbought the Euro is trading it may well be worth a short on any further move higher to 1.1065/1.1105 with a 1.1135 tight stop. The main support for the Euro comes in at 1.0800 which is a one year trend line ahead of the 1.0777 key support level which was the high in the week ahead of Round One of the French Election two weeks ago. Today I will move my buy level higher to 1.0880/1.0925 with a 1.0845 stop.
June Dollar Index
Yesterday the Dollar fell to my 98.70 buy level. I am still long and I will now raise my stop on this position to 98.25. The Dollar is oversold, however a break and close below 98.00 has a target price of 95.00 over the coming weeks. Remember the Dollar had a Downside Key Month Reversal in January which as pointed out numerous time by me over the past few months is extremely rare and very bearish.
The beauty of my Platinum Service is that it gets posted 20/30 minutes after my normal commentary and yesterday this helped as I was able to move my sell level higher in the DAX which got filled at 12645 on the back of the stronger German PMI. Subsequently the market traded to a low at 12610 and in keeping with my strategy of banking points when available for the least amount of risk we were able to cover any short position at 12620 and I am now flat. Thankfully for anybody still short the market the DAX traded below 12600 this morning. Despite the DAX being severely overbought it is very hard to stay short ahead of the French Election on Sunday and if we are taken short today I would exit ahead of the close at 9.00 pm despite the fact that a Macro victory is well priced in the market. Yesterday the DAX topped at a new all-time high at 12668 and today I will again try a short position on any further rally to 12670/12720 with a 12760 stop but only in small size. Despite the positive price action I do not want to be long the market at this time especially given the strength of the Euro.
Yesterday the FTSE which was strong initially, sold off the whole of my buy range which put me long at an average rate of 7192. With the market unable to make a meaningful move higher on the back of Congress passing the Health Bill I emailed my Platinum Members to exit this position at 7202 and I am now flat. This morning the FTSE is probing the downside and my only interest in buying the market is on a further sell-off to 7115/7150 with a 7085 tight stop. I still do not want to be short the FTSE ahead of the French Election.
Dow Rolling Contract
My Dow plan worked really well yesterday with the market trading the whole of my 20845/20905 buy range which put me long at an average rate of 20875. Thankfully after my last buy level was filled the market rallied strongly and this move higher enabled me to cover this long position at my revised 20928 T/P level and I am now flat. Obviously I will stay flat until we get the NFP at 1.30 pm and if the market sells off I will be a buyer from 20790/20850 with a 20745 tight stop. Until we get a sell extreme that sticks the path of least for the Dow is still to the upside and for this reason I do not want to be short the market at this time. The ‘’buy the dip’’ has worked well all year and until we get this sell extreme there is no reason to change it. Also the weaker Dollar will help the earnings of the major Dow companies.
My Bund plan worked well but you had to be quick with the Bund trading lower to my 160.90 buy level with a 160.87 low print before rallying 30 points and this rally enabled me to cover this position at my revised 160.13 T/P level and I am now flat. I cannot emphasise enough the importance of my updated emails and as volatility increases over the coming months these emails will become even more important. The next important support level for the Bund is at 160.30 and today I will again look to buy the market on any further dip to 160.10/160.45 with a 159.85 stop. Despite the negative price action I still do not want to be short the Bund at this time.
Gold Rolling Contract
Frustratingly Gold missed my 1225 buy level with a 1225.30 low print before rallying to my T/P level and I am still flat. Today given the prospect of some increased volatility surrounding the NFP release I will leave my buy level unchanged at 1218/1225 with the same 1211 stop.
Silver Rolling Contract
Silver continued its losing streak yesterday with the Futures Market now closing lower for the 13th consecutive trading session, a sequence that last happened in 2001. Unfortunately the DSI is not weak enough to justify a major long position and yesterday’s move lower stopped me out of my 16.63 long position for a small loss at 16.35 and I am now flat. The low yesterday was at 16.18 and today given the fact that we have had a good week’s trading despite the two loses in Silver I will again look to buy the market from 16.10/16.40 with a 15.70 stop which is just below the late December low at 15.80 which should act as strong support.