Yesterday the ECB over-delivered versus market expectations because as well as the 10 basis point cut in both the Lending and Deposit Rates (the latter to an incredible -20bps) they promised both an ABS and Covered Bond Buying Programme to commence in October. The ABS will include residential mortgage backed securities, a move which was contrary to the consensus opinion, given that the housing market is currently the one bright spot in the Euro-Zone economy.
Along with the upcoming roll-out of the TLTRO’s, Dragi, in his press conference, said that he hopes to produce an inflation of the ECB’s balance sheet back to its 2012 peaks which implies that they expect to print at least €1 Trillion in the coming year or more. This is not as much as the Fed, to date, but relative shifts in the Fed/ECB’s balance sheet is likely to keep the Euro/USD under pressure. Somewhat incredulously Mr Dragi refused to classify the ABS/CBP as ‘QE’ and also admitted there was only a majority of Council Members supportive of yesterday’s decision which suggests that the hurdle to Sovereign Bond style QE remains very high.
Alongside the ECB’s announcement and the plunge in Euro/USD to a low of 1.2920 we had US data that either fell short of or significantly exceeded expectations. The ADP Employment Report printed +204k versus +220k but is not taken seriously enough to dislodge anyones expectations for a 200k+ Payrolls Report later today. Initial Jobless Claims rose 4k to 302k but more important than any of these releases the Non Manufacturing ISM rose to 59.6 from 58.7 and 57.7 expected with the Employment sub-component rising to 57.1 from 56.0. We also had a narrower than expected July Trade Gap of $40.5 billion which suggests net exports will be making a decent positive contribution to Q3 GDP.
On the economic front we already had the release this morning of German Industrial Production which rose 1.9% versus 0.4% expected and French Consumer Confidence which printed at 86.0 versus 85.0 but so far these data releases have had no effect on the markets. At 10.00 am we have Euro-Zone GDP and in Brussels, at the same time, the ECB’s Nouy will speak to a Banking Panel and it will interesting to see his take on yesterday’s surprise ECB decision. Then at 1.30 pm we have the US Non Farm Payroll data which is expected to show a rise of +209k. Finally at 3.15 pm the Fed’s Plosser will speak on the Economy in Florida.
September S&P 500
The S&P plan worked well yesterday as shortly after the ECB announced their surprise decision the market traded up to my 2009 sell level. It held this level for a good part of the trading session before being hit hard and fell down to a low of 1991 which enabled me to cover this position at 2001. Later, after the S&P hit my 1994 buy level I covered this position near the close at 2000 and I am now flat. Given that today is Non Farm Payroll day I am going to stay flat until the data is released. If we get a weak number I will again be a small buyer on any dip to 1985/1990 with a tight 1982 stop as a break and close below 1985 will be short term bearish. This 1985/1990 support has been tested on numerous occasions over the past two weeks and I believe eventually we will take out this level. If on the other hand the payroll number is stronger than expected I will again be a seller on any rally to 2007/2011 with a 2016 stop.
Euro/USD
The Euro had its biggest one day fall in nearly a year yesterday after the surprisingly aggressive decision by the ECB. Thankfully I covered my long position at 1.3150 ahead of the announcement as shortly after the Euro traded down to my 1.3060 buy level I was very quickly stopped out of this position for a small loss at 1.3030 and I am now flat. I was very surprised at how easily the market took out the key 1.2990 support level to trade to a new low of 1.2920. Despite how oversold the Euro is trading at present it makes it very difficult to buy the market when the Central Bank is determined to weaken its currency. As I mentioned yesterday this 1.2990 level is key and I want to see the Euro hold below this level for at least 2/3 trading session before committing myself to going short. I am going to stand aside today unless the Euro breaks back above 1.2990 in which case I will go long in small for a trade with a tight 1.2950 stop. Otherwise I will take another look on Monday.
US Dollar Index
I am glad I lowered my stop to 83.20 on my 82.75 short position as I was very quickly taken out of this trade after the ECB announcement and I am now flat. Despite the Dollar being overbought on a Daily Basis I have to respect the fact that it has now broken out to the upside with the break and close over the previous strong resistance at 83.00. This level will now act as strong support and I will look to buy any pull-back to 83.30/93.60 with a 82.75 stop over the coming trading sessions.
September DAX
The Dax plan worked well yesterday as just as I posted it was trading at my 9550 buy level. As I mentioned yesterday the idea of buying the Dax whilst selling the S&P might not be a bad idea but I did not expect the reaction that we got with the Dax trading nearly 200 points higher whilst the S&P closed lower. I covered my long position too early at 9670 and I am now flat. As I mentioned yesterday despite the weakness of the US markets it is very difficult to go short the Dax especially with the ECB about to start a process of buying up to €1 trillion in bonds over the next 12 months. Today I will again be a buyer on any dip to 9650/9680 with a 9625 stop.
September FTSE
The FTSE traded heavily yesterday as the market only got a very brief kick from the ECB decision. After the S&P fell late in the US trading session the FTSE traded down to my 6860 buy level and after a brief rally overnight I have covered this position at 6880 as I want to be flat ahead of 1.30 pm. Today I will again be a buyer on any dip to 6825/6845 with a 6795 stop. I still do not want to be short the FTSE at this time.
Dow Rolling Contract
The Dow plan also worked well yesterday as shortly after the ECB decision the market traded up to my 17150 sell level. Despite the positive European sentiment the Dow still cannot break and close over its July high. After I went short the Dow was hit hard and I was able to cover this position at 17070 and I am now flat. If we get a positive payroll print today and the market rallies I will again be a seller from 17140/17170 with a 17195 stop. I still do not want to be long the Dow at this time.
September BUND
Finally the Bund plan worked out yesterday as it traded up to my 151.40 sell level after the ECB decision and after a nice sell-off I was able to cover this position at 150.70 and I am now flat. Today I am rolling to the December Contract which trades at a discount of 195 points to the September Contract. For the December Contract I will be a small seller on any rally to 149.40/149.65 with a 149.80 stop. I do not want to be long the market at this time.
Gold Rolling Contract
Gold did not react well to yesterday’s ECB decision and finally the market traded down to my 1259 buy level overnight. I am still long and I will leave my stop the same at 1249.
Silver Rolling Contract
No change as I am still long at 19.40 in small size with the same 18.80 stop. Again if I am stopped out of this position I will be a more aggressive buyer in front of 18.50 with a 17.95 stop.
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