As we headed into the US Employment Reports last Friday, Equities, Bond Yields and the US Dollar were all modestly drifting lower. On the release, the positive headlines of strong Payrolls growth saw all the above markets shoot higher before more than fully retracing those moves. The softer wages picture won the day with Bond Yields and the US Dollar closing significantly lower. A late session drop in Oil futures helped Equities and Bond Yields lower. Overall risk sentiment remained poor.
The headline numbers in the US Employment Reports were strong. The US economy added 252K jobs in December, better than the 240K expected, and an additional 50K of upward revisions to October and November to boot. The Unemployment Rate fell faster than expected, from 5.8% to 5.6%, though this was partly helped by a fall in participation. The broader U-6 measure fell by 0.2% to 11.2%. However a soft result in wage growth attracted the most focus. Average Hourly Earnings fell by 0.2% m/m in December against expectations for a 0.2% rise. That and downward revisions to previous months meant that the annual pace of wage growth was just 1.7% y/y, not the 2.2% expected. This outcome will fuel the debate on whether the Fed will trust the usual relationship between falling unemployment and rising wages to eventually bear fruit or sit on its hands until it sees some real wage pressures. The likely scenario is the Fed will now wait to hike rates.
The Euro still managed to rally despite a Bloomberg Report noting that ECB Governing Council Members had been presented with options for a possible QE of up to Eur 500bn in size, which if this report was accurate would likely surprise the markets.
Today we have no economic data of note due on either side of the Atlantic. At 5.40 pm the Fed’s Lockhart will speak on US Economic Outlook in Atlanta. It will be very interesting to hear his views on the very weak Average Earnings from last Friday’s Payrolls.
March S&P 500
The S&P after another wild trading session on Friday ended the day with another Key Day Reversal to the downside. As expected the S&P traded lower into the huge ‘Open Gap’ left from last week. The market still has left a sizeable 2020/2033 ‘Open Gap’ to be filled, and I would expect most, if not all of the ‘Gap’ to be filled this week.
However the S&P plan worked well on Friday as after the Payrolls were released the market traded lower to my 2045 buy level before having a quick rally which enabled me to cover this trade at 2050 and I am now flat. Today my only interest in buying the market is on a dip to 2023/2028 where I will be a decent buyer with a 2017 stop. I will also lower my sell level to 2052/2057 with a 2061 stop but only in small size.
Euro/USD
The Euro plan worked very well on Friday as after the Non Farm Payrolls were released the Euro was hit hard to the downside with the market trading lower to my 1.1780 buy level. It then had a strong rally which enabled me to cover this position at 1.1840 and I am now flat. The sentiment towards the Euro remains at extreme levels with last Friday being the 14th consecutive day of 10% or fewer bulls tallied in the Daily Sentiment Index. In my opinion these measures indicate that the Euro is on the verge of a solid rally and when this rally starts prices should move several handles higher in a swift manner. Today I will again look to buy the Euro on a dip to 1.1780/1.1820 with a 1.1745 stop, which is just below last week’s low print.
US Dollar Index
No change as I am still short from last week at 92.70 with the same 93.20 stop as sentiment remains at extreme levels towards the Dollar.
March DAX
After I posted on Friday the Dax just missed my 9870 sell level by a few points before again getting slammed to the downside. It eventually hit my 9730 buy level before having a very quick rally to 9785 which enabled me to cover this position at 9770 and I am now flat. The next decent support for the Dax is at this morning’s low at 9640 and today I will be a small buyer from 9630/9670 with a 9595 stop. I will still be a small seller on any rally back to 9840/9880 with a 9905 stop.
March FTSE
The market is unable to make up its mind as to which way it is going to break with the FTSE still trading at the key 6480 pivot point. I am still flat and I am going to stay neutral as I want to see which way the market is going to break from here.
Dow Rolling Contract
No change as I am still flat the Dow. It is still extremely overvalued but until we get a sell extreme that holds, it is very hard to be short for more than a few days as the market keeps bouncing back. Today I will lower my sell level to 17890/17940 with a 17980 stop. I still do not want to be long the Dow at this time.
March BUND
No change as I am still a small seller on any rally higher to 156.70/157.00 with a 157.30 stop which is just above last week’s all time high.
Gold Rolling Contract
My long 1207 Gold position worked out well on Friday as after a nice rally I was able to cover this position at 1225 and I am now flat. I really like Gold and the price action is telling you not to be short the market at this time. In my opinion it is only a matter of time before Gold accelerates higher. Today I will again be a buyer on any dip to 1209/1216 with a 1199 stop.
Silver Rolling Contract
No change as I am still long from last week at 16.30 with the same 15.75 stop. A break and close over 16.70 will be short-term positive.
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