Markets interpreted Wednesday’s Fed Minutes as slightly dovish which saw the US dollar decline 1.1% across the board in the past 24 hours with Bond yields also lower. China’s efforts to address capital outflows and hence stabilise the yuan likely added to moves. There was little reaction to US economic data. Markets took a slightly dovish read on the Fed Minutes yesterday concentrating on the sentence that several Fed Members thought a further rise in the US Dollar might continue to hold down inflation or in other words tighter US financial conditions may do some of the work for the Fed and that only a gradual pace of rate hikes was likely. The OIS market now prices in a 37% chance of a rate hike by March compared to 44% prior to the Minutes, and is now just pricing in 2.1 rate hikes for the year compared to the Fed’s median dot points of 3.
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For anyone following my Platinum Service it made 66 points yesterday and is now ahead by 162 points for January having made 1351 points in December, 1971 in November and 1582 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.
The slightly dovish interpretation is likely to come under some challenge today following remarks by the Fed’s Williams (a non-voter but a respected centrist) who said 3 rate hikes next year was a reasonable view given unemployment is at 4.6%. Interestingly, Williams also said that ”he had built in some fiscal stimulus in his forecasts but in reality we don’t know what is going to happen and as we learn more we’ll change our forecasts”. The Minutes also indicated that these sentiments were the view of almost all officials at the meeting, so to your scribe that suggests risks of a more hawkish Fed than currently priced by the market if Trump were able to implement his agenda post inauguration.
In the FX space, the US Dollar fell 1.1% across the board with all G10 currency pairs higher. The standout performer was the Yen up 1.4% with most other currencies up by around 1-1.1% including the Euro. The Aussie, Pound and Kiwi all underperformed up by only around 0.7% yesterday though there does not appear to be any catalyst for the underperformance.
Part of the reason for moves in global currency markets yesterday is likely reaction to China’s attempts to stabilise capital outflows and hence the Yuan which occurred in the Asian timezone yesterday. These moves caused a massive spike in CNH and CNY funding costs which has led to a liquidation of long USD/CNH and USD/CNY positions (i.e. those going long the USD and hence short the Chinese currency). The CNH overnight deposit rate hit 80%! whilst the Hibor fixing was at 38.3%.
Bond yields were also mostly lower with Treasury yields down 7.1bps to 2.37% and German Bunds down 3.3bps to 0.24%. Aussie CGS also followed, down 5bps to 2.74%.
Equities were mostly lower to flat across the board with the S&P500 down 0.2%, and the Eurostoxx unchanged.
In more Trump-related news, Trump expanded his border tax threat to companies planning to offshore work to Mexico. Trump tweeted that Toyota would have to reconsider building a plant in Mexico: No WAY! Build plant in US or pay big border tax. The tweet follows Ford’s decision to scrap plans to build a new Mexican factory following a similar tweet barrage. Although Trump’s tweets have mostly targeted Mexico, it is likely to see other firms reconsider offshoring plans beyond Mexico.
The Central Bank of Mexico waded into currency markets overnight selling US Dollars in an attempt to support the Peso. That saw the Peso appreciate sharply by around 2.2%, though most of these gains are now reversed with the Peso back to around 21.40, almost back to the 21.6 point prior to intervention.
In economic news, ADP payrolls rose 153k in December and suggestive of downside risks to the consensus for this afternoon’s Payrolls of 175k (more on that below). The Non-Manufacturing ISM beat expectations being unchanged at 57.2 against expectations of a small decline to 56.8. It appears Trump euphoria continues to buoy the ISMs with a rise in new orders, but a fall in the employment sub-index. Weekly Jobless claims remained at low levels printing at 235k below the consensus of 260k. Internationally it was very quiet with only the UK services PMI which was strong registering a 17 month high of 56.2 and in line with the recent strength in retail sales.
In commodities, Oil rose between 0.7-0.9% with the WTI measure at $53.74. Support for oil came as reports emerged that Saudi Arabia was sticking to OPEC’s agreement to cut production with one source stating Saudi Arabia had cut output by at least 486k barrels a day to 10.06m barrels. Prices for Australia’s major commodity exports were mixed, with falls in coking coal (-5.0% to $213.8) and thermal coal (-3.3% to $85.7) and a rise in iron ore (+2.2 to $78.9 a tonne).
This morning on the economic front we already had the release of German Factory Orders and Retail Sales which both came in below expectations at -2.5% and -1.8% respectively. At 10.00 am we have Euro-Zone Business Climate Indicator and Retail Sales. This is followed at 1.30 pm by US Trade Balance and the Non-Farm Payrolls. While most focus is traditionally on Payrolls, focus will also likely be on Average Hourly Earnings which fell 0.1% last month against expectations of a 0.2% increase. Subsequent analysis revealed much of the drop in earnings was due to the volatile Utilities and Mining sectors which I estimate dragged 0.2% off monthly wages growth so the market is expecting a small bounce back to 0.3% though this could be greater. As for Headline Payrolls the consensus is at 175k, while the Unemployment Rate is expected to rise to 4.7% from last month’s low of 4.6%. The Atlanta Fed’s job calculator suggests only around 122k payrolls are needed to keep the Unemployment Rate unchanged so a weaker Payrolls print is unlikely to worry the Fed too much – especially given the prospects of greater fiscal spending. Finally at 3.00 pm we have US Factory Orders.
Later at 5.15 pm in Chicago the Fed’s Evans will speak on the Economy and Monetary Policy.
March S&P 500
My S&P plan worked well yesterday with the market trading lower to my 2255 buy level before having a nice 9 Handle rally. As I wanted to be flat ahead of today’s NFP data plus the major fact that I want to get the year off to a positive start I cut my long S&P position too early at 2258 and I am now flat. As most members know at this stage I will always go into the NFP data flat with both buy and sell levels above and below the market. Today I will again look to buy the S&P on any dip lower to 2250/2256 with a 2245 stop. If we do continue to sell-off today or in the coming days the S&P has strong support from 2215/2222 and this level should hold and lead to a resumption of the bull trend. If the S&P drops to this area over the coming days I will be an aggressive buyer here with a 2208 stop. My only interest today in selling the S&P is on a rally higher to 2274/2280 with a 2285 stop.
EUR/USD
The idea of buying the dip in the Euro continues to pay off so far in 2017 with the Euro hitting my 1.0485 buy level before trading to a 1.0615 high print yesterday evening. As I have mentioned countless times the FX market is ”all in” in being short the Euro and long the US Dollar Index. Given the sentiment readings this is not sustainable hence the aggressive moves higher in the Euro that we have seen since the Euro made a new 14 year low at 1.0341 on Tuesday. In keeping with my theme of getting 2017 off to a positive start I cut my long Euro position at 1.0505 and I am still flat. The Euro just missed my 1.0640 sell level before moving lower overnight. This morning I will again look to buy the Euro on any dip lower to 1.0490/1.0530 with a 1.0455 stop. Today I will move my sell level higher to 1.0650/1.0680 with a 1.0720 tight stop. A break and close over 1.0710 this evening is a new buy signal targeting a move to 1.0820.
March Dollar Index
The main reason that I cut my long Euro position so early was the fact that I had a nearby sell level in the Dollar at 102.60 which unfortunately just missed with a 102.54 high before the Dollar sold off aggressively and in the process closed below the key 101.91 support level as outlined in yesterday’s commentary. The Dollar has now fallen 2.5% since its 103.85 high print on Tuesday. Today I will lower my sell level to 102.10/102.50 with a 102.85 stop as I want to give some room given the expected volatility surrounding the NFP data at 1.30 pm. I still do not want to be long the Dollar at this time. Remember if the Fed continue with their strategy of saying they are going to hike rates as they did for the past two years and then only do the minimum hike, the US Dollar is way too strong in this scenario.
March DAX
Given the strength of the Euro I am surprised that the DAX continues to trade firm but in a very narrow range. The market has been dull for a few weeks now as yet again we traded sideways for most of yesterday’s trading session. I am still flat the DAX and today I will leave my buy level unchanged at 11450/11510 with the same wider 11395 stop. Despite the overbought condition of the DAX and the stronger Euro I still do not want to be short the market at this time.
March FTSE
The FTSE is also trading sideways as we await the NFP data later today. The market is continuing to hold the 10 year trendline at 7150 and obviously this level is key to direction now in severely overbought conditions. Today I will leave my sell level unchanged at 7180/7220 with the same 7255 stop. I will also look to buy the market on any dip lower to 7025/7060 with a 6995 stop.
Dow Rolling Contract
Despite the weaker US Dollar the Dow still refuses to break the 20,000 resistance level. Maybe today we will finally see this break occur especially with the McClellan Oscillator which only fell slightly yesterday to +96 despite the heavy price action in the Dow. Today I will leave my sell level unchanged at 20040/20100 with a 20150 stop. I will also be a small buyer on any dip lower to 19710/19775 with a 19650 stop.
March BUND
My Bund plan also worked well with the Bund hitting my 162.85 buy level before rallying to just shy of my 163.80 sell level with a 163.74 high print yesterday afternoon. Again I covered my long position too early at 163.01 and I am now flat. Today I will again look to buy the Bund on any dip lower to 162.60/162.90 with a 162.30 stop. Given the fact that we have the NFP data I will now raise my sell level to 164.05/164.35 with a 164.75 stop.
Gold Rolling Contract
No change as I am still flat the market with my only interest in buying Gold still on a dip lower to 1154/1162 with a 1145 stop.
Silver Rolling Contract
No change as I still long from yesterday morning at 16.55 with the same 16.05 tight stop. If I am stopped out of this position I will be a more aggressive buyer on any further dip lower to 15.70/16.00 with a 15.20 stop.
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