Fed Chair Jay Powell’s remarks late in the New York day on Wednesday suggesting that the Fed is still a long way from neutral, have continued to reverberate around global markets in the last 24 hours, compounding the earlier US data-inspired rise in bond yields. The latter are now hurting rather than helping US equities or so it seems, while the contagion effects into Emerging Markets from the rising US yields/rising USD backdrop in Asia especially yesterday – have meant that AUD/USD has made a new post-March 2016 low, of 0.7066. On Wednesday night, or at least right up until the last hour or so of New York trading, rising US bond yields and rising US equities were happy bedfellows, justified on the basis that the undeniable strength of the US economy evident in incoming data means that US corporate earnings should continue to rise at a sufficient rate to more than offset the negative impact on valuations associated with a rising ‘’risk free’’ interest rate. That may be so, but the rise on 10-year bonds yields from around 3.15% at Wednesday’s US equity close to a high of 3.23% in Thursday’s trading session, does look as though it has spooked equities somewhat.
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Equities
This plays heavily into the view that the Sino-US trade stoush is not just about Trump’s infatuation with the size of the US-China bilateral trade balance, but is a much more geopolitical affair (some call it the new Cold War) as well as being related to China’s desire to dominate the technology sphere in years to come (epitomised via its Made In China 2025 strategy). It means that an early resolution of Sino-US trade issued is not a realistic prospect. Anyway, suffice to say the IT sector was the biggest driver of yesterday’s US equity weakness, down 1.8% relative to the overall 0.8% drop in the S&P500 (and bigger 1.8% fall for the NASDAQ).
Bonds
From the aforementioned 3.23% cycle high seen yesterday, 10 year Treasuries have edged back down, now at 3.185% (so up less than 0.5bp on Wednesday’s NY close) while the 2-year note yield is actually 0.4bp down so the steeper curve themes from mid-week remains in place. European bonds followed the lead from US treasuries on Thursday with Bunds ending the day 1.5bps higher, helped too by the absence of fresh upward pressure on Italian yields amid more signs of the government backtracking on earlier fiscal deficit proposals (or at least rising market confidence that they ultimately will, in order to stave off the risk of a ratings downgrade to ‘’junk’’):
As for Powell’s comments from late Wednesday that ‘’we may go past neutral, but we’re a long way from neutral at this point, probably”, I do not regard this as a change of thinking by either him or the wider FOMC relative to the just-gone FOMC meeting (last week). There, recall, the median member view of the neutral rate sat at 3% versus the current 2.0-2.25% Fed Funds target range, so effectively three rate rises away. That does not seem a lot does it, though you could argue that it means the Fed is only about 70% of the way to neutral relative to zero. Semantics really, but what Powell’s remarks have done is to shift the market further toward pricing in what the Fed’s median dot profile suggest the Fed themselves think they will need to do in 2019 and 2020, with now about 2.2 rate hikes priced for 2019 (against the Fed’s median dot suggesting three).
Currencies
Reflective of the more risk adverse market tone, now in developed as well as Emerging Markets, the Japanese yen is the second strongest G10 currency of the past 24 hours, USD/JPY down over 0.5% to just back below 114. Sterling has just pipped the yen to top spot, with reports that both EU officials and the (Northern Irish) DUP party that props up the Tory government, are not dismissing out of hand the latest suggestion for a ‘’backstop’’ on the thorny Irish border question that needs resolution in order to secure a Brexit Withdrawal (transition) Agreement. This in effect means at least a temporary border down the Irish Sea. The three bottom slots on the G10 scoreboard are occupied by the NZD, CAD and AUD, all 0.4-0.5% lower with NZD just faring worse.
Commodities
Oil has flipped from tailwind to headwind with WTI crude off almost $2 and Brent almost $1.50, some of the speculative froth of late seemingly being blown off. But it is the combination of USD strength and weaker Emerging Market currencies that goes most of the way to explaining the weakness here (most of the fall in AUD to below 0.71 and in NZD to below 0.65 yesterday occurred before oil started falling. Higher/lower oil is a negative/positive for the Kiwi via the impact on its terms of trade, the opposite for the Aussie given the link to LNG prices. Other commodity prices are mixed, though base metals are mostly lower, including iron ore, as is metallurgical coal (-1.9%).
This morning on the Economic Front we have no data again from either the Euro-Zone or the UK. At 1.30 pm we have US Trade Balance and the all- important Non-Farm Payrolls. They are expected to rise by 185k, but the risk is to the upside given the strong US Economic data this week. As much or more attention will likely be paid to Average Earnings after last month’s jump to 2.9% y/y. 0.3% is my forecast and consensus, implying 2.8% yr/yr. The Unemployment rate is seen falling to 3.8% from 3.9%, matching its post 1969 low. Finally at 5.30 pm the Fed’s Kaplan speaks in Waco on the economy.
December S&P 500
Yesterday was the most volatile trading session for the S&P in many months. Thankfully after I posted the S&P rallied to my 2922 T/P level on my 2920 long position. Subsequently I emailed my Platinum Members to re-buy the S&P at 2907 with a 2911 T/P level with both prices then hit and I am now flat. If you did buy the S&P at my second 2894/2902 level as mentioned in yesterday’s commentary (I did not) then this worked well with the S&P rebounding into the close and this rally continued overnight to a high so far of 2915.50. With NFP at 1.30 pm I will stay flat until we get the release. The S&P has strong resistance at 2920 and if we can break and close over this level this evening it will be a buy signal for next week. The S&P has strong support from 2888/2896 and I will be a buyer on any dip to this area with a 2881 stop.
EUR/USD
I am still flat the Euro and I will continue to be an aggressive buyer on any dip lower to 1.1400/1.1440 with a 1.1365 stop. Yesterday the Euro just missed my 1.1550 sell level with a 1.1543 high print before selling off into the close. As we have the NFP this afternoon I no longer want to be a seller of the Euro at this time.
December Dollar Index
I am still flat the Dollar and today I will now lower my sell level slightly to 95.90/96.30 with a 96.65 stop.
December DAX
Frustratingly the DAX just missed my 12120 buy level with a 12130 low print before having a strong rally into the New York close. I am still flat and today I will raise my buy level slightly to 12060/12135 with the same 11995 stop. I still do not want to be short the market at this time.
December FTSE
My FTSE plan worked well with the market trading lower to my 7395 buy level before rallying to my revised 7415 T/P level and I am now flat. The FTSE has good support from 7300/7340 and today I will be a buyer on any dip to this area with a 7265 stop.
Dow Rolling Contract
The Dow saw a large price movement in both directions before a late 200 point rally again saved the day, making it so difficult to be short. Yesterday after the Dow hit my 26580 buy level we saw a nice 60 point rally and this move higher enabled me to cover this position at my revised 26615 T/P level and I am now flat. The Dow is trading higher this morning at 26680 as we wait for the NFP data. Today I will again look to buy the market on any dip lower to 26330/26500 with a 26250 tight stop. As it is Friday ahead of another weekend I no longer want to be a seller of the market at this time. Remember the US Equity Markets are closed on Monday for the Columbus Day Holiday.
December NASDAQ
My NASDAQ plan did not work well as after the market hit my 7550 buy level I was quickly stopped out of this position at 7495 and I am now flat. The NASDAQ has very important support from 7400/7440 which needs to hold or we could see a further move lower. Today I will be a buyer on any dip to this area with a 7365 stop.
December BUND
It took a while but finally the Bund traded higher to my 158.35 T/P level on my average long 158.25 position and I am now flat. The Bund is oversold and I certainly would not be chasing the market lower from here especially given the ongoing political problems in Italy. The Bund has support from 157.10/157.50 and today I will be a buyer on any dip to this area with a 156.75 stop.
Gold Rolling Contract
Gold continue to have difficulty in breaking above the key 1212 resistance area. I am still flat and today I will leave my buy level unchanged from 1181/1189 with the same 1174 stop.
Silver Rolling Contract
No change as I am still long at 14.87 with the same 14.38 stop and now lower 15.00 T/P level. If any of the above levels are hit I will be back with a new update for my Platinum Members.
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