U.S. Equity Markets ended Friday’s session higher, led by the 2.17% gain in the NASDAQ 100. This move higher saw the VUX close 3.5% lower at a price of 22.79. Markets closed higher as stocks snapped a three-week losing streak. Federal Reserve Governors continue to push aggressive narratives regarding interest rates, with expectations that rates could remain high for some time. Investors await Tuesday’s August Consumer Price Index (“CPI”) numbers to get a better idea of whether the Federal Reserve will raise rates by 50 or 75 basis points (“bps”) at the policy meeting on September 20 and 21, while the Dollar fell more than 1% against major currencies – an end to a three-week winning streak where the greenback gained over 3.5%. The Euro is headed higher, because the ECB needs to get much more aggressive with rate hikes. Inflation in Europe is out of control. Recent data from the Statistical Office of the European Communities shows that cost growth for both businesses and households – as measured by the Producer Price Index (“PPI”) and the Consumer Price Index (“CPI”) – continue to make new highs since the formation of the currency union. A big part of the problem is the plummeting value of the Euro. You see, as the Federal Reserve has raised rates from 0% to 2.5% this year, the ECB has more or less stood still. The U.S. Federal Reserve began raising rates in March while the ECB waited until July for its first rate increase in 11 years. That change brought the Deposit Facility Rate back to 0%, ending its experiment with negative interest rates. The divergence has meant the ECB has little choice but to raise rates and try to play catch up to the Fed. Otherwise, if it does nothing, the Euro’s value will continue to drop, worsening inflation further. On Thursday, the ECB raised rates another 0.75%. The change gets the deposit facility rate back to 0.75%. This marked the largest-ever rate hike by the central bank and the second increase in the last two meetings. Until a couple weeks ago, investors had anticipated the central bank would raise interest rates 0.25% to 0.5%. However, recent inflation metrics caused a change of plans. Economists anticipate the ECB will need to get rates to 1.5% just to achieve the “neutral level” – neither hurting nor helping the economy. In other words, the current interest rate is not so low that it’s pushing prices higher, but is not elevated enough to weigh on them, either. However, the regional inflation outlook is worsening. Uncertainty surrounding natural gas supplies and the inability to completely fill up storage facilities ahead of the coming winter have caused prices to rise. Russia’s recent decision to halt gas flows to Germany only compounds the problem. So, rate hike expectations probably need to move higher. That means the ECB will remain aggressive on rate hikes going forward. European benchmark Dutch Title Transfer Facility (“TTF”) natural gas prices averaged $235.78 per megawatt-hour (“MWh”) during August compared with $52.65 per MWh a year ago. That is an increase of 348% year over year and compares to a 255% jump in July and a 270% gain in June. Housing, electricity, and gas constitute the majority of the ECB’s Harmonised Index of Consumer Prices (“HICP”) at almost 18%. This specific component of HICP measures the annual rate of change in the cost of housing, water, electricity, gas, and other fuels. It has also been the largest driver of inflation, rising 16.9% in June and 17.7% in July. The gains had previously crested in March with the jump in gas prices at 17.2% but have since begun rising once more. Based on current fuel prices for commercial and residential use, one would expect the HICP could rise even more when the August data is released later this month, indicating worsening inflation. The ECB revised its inflation forecast for 2022. It now predicts an inflation rate of 8.1% instead of 6.8% for June, an inflation rate of 5.5% instead of 3.5% for 2023, and an inflation rate of 2.3% instead of 2.1% for 2024. It also adjusted its economic growth forecasts. Its 2022 projection increased from 2.8% in June to 3.1%, but its expectations for 2023 dropped from 2.1% to 0.9%. The ECB’s 2024 projection also decreased from 2.1% to 1.9%. It specifically cited energy costs as the culprit for the adjustment. The central bank said it wants to frontload rate hikes going forward. In other words, it wants to get more aggressive in its fight against inflation now rather than wait for prices to pull back. The ECB’s Governing Council said it will need to keep raising rates in order to suppress demand because inflation remains too high. In fact, the ECB expects the HICP to remain above the 9% level for the rest of this year. This would support another ECB rate hike of at least 0.25% at the next policy meeting in late October. And based on the fact that the inflation rate continues to hit new highs, it’s more likely that another 0.5% increase is in the works. The timing points to a shift in central bank policy outlooks. The Fed makes its latest policy announcement next week. Policymakers have been coy about the size of the rate hike, but market expectations are between 0.5% and 0.75%, favouring the latter. That would get interest rates somewhere in the range of 3% to 3.25%. The change would mark the first point in the current cycle where rates are above the perceived neutral level (neither hurts nor helps the economy) of 2.50%. That would mean interest rates should start to weigh on inflation growth, despite the move lower that has begun to materialise. From there, the tightening cycle should ease. Last Thursday, Chicago Fed President Charles Evans discussed his view on monetary policy. He said he would like to see rates head to the 3.5% to 4% level before the central bank considers pausing. And when that happens, he would like to see interest rates stay there for a while to study the longer-term economic effects. The dynamic means ECB policy will tighten faster as the Fed can afford to slow the pace. The Fed only has to raise rates by a total of 1% to 1.5% to get to 3.5% to 4% over the last three policy meetings this year. At the same time, ECB hawks (those inclined to raise rates) want to get to a level between 1.5% and 2% sooner than later, to get to their perceived neutral. So, their policy path needs to rise considerably. The net effect would be a rallying Euro… and an easing Dollar. That should function as a tailwind for the S&P 500 Index. A move lower in the greenback increases the potential for sales of American goods abroad because it means they will become cheaper. It will also support margins because companies would not be forced to discount items. About 56% of domestic information-technology companies’ revenues come from overseas. That is important because tech stocks are the single largest weighting in the S&P 500 at about 25%. So, a catalyst that can rally the tech sector will also do the same for the broader index. The last time the Euro was this low was in September 2002. A year later, it gained 18.2%. And over that same period, the S&P 500 rallied 24.4%. So, while the near-term outlook may be fraught with uncertainty, the long-term picture is where we should focus. Within the S&P 500, all of the 11 sectors finished higher. European Markets closed higher. Markets continued to digest Thursday’s 75 bps rate hike by the European Central Bank (“ECB”) and the possibility of another 75 bps hike at the next policy meeting. European Union Energy Ministers met in Brussels on Friday to discuss proposals to curb energy prices and action to prevent rationing over winter. And major European currencies surged, with the Euro, Pound Sterling, and Swiss Franc all seeing gains of roughly 1% versus the Dollar. In Asia, Japanese Prime Minister Fumio Kishida ordered a new economic package for October with the possibility of an extra budget. The Yen gained some traction following Bank of Japan Governor Haruhiko Kuroda’s comments suggesting it’s willing to act to prevent further depreciation. And China’s August inflation numbers were softer than expected. Elsewhere, Oil closed 3.23% higher while Gold rose 0.40%.
To mark my 2625th issue of TraderNoble Daiy Commentary I am offering a special 2-Year Rate of Euro 2750 for my Platinum Service which includes 1 to 4 updated emails throughout the trading day to demonstrate this value, a monthly subscription over the same period would cost 4440 euro in total This offer represents a 38% discount and is open to both new and existing members. If anyone is interested in this offer can you please email me on bryan@tradernoble.com for details
For anyone following my Platinum Service it made 130 points on Friday and is now ahead by 2325 points for September, after closing August with a gain of 2228 points, having made 2660 points in July, following a gain of 3371 points in June. The Service made 3651 points in May, after making 762 points in April, following a gain of 5883 points in March. The Platinum Service made an impressive 5324 points in February, after ending January with a gain of 3878 points, more than making up for December’s 932 points loss. Since I started this New Platinum Service in June 2015 it has averaged a monthly gain of over 1600 points. I have a YouTube Channel which contains recent interviews I have given This can be viewed by clicking HERE Please subscribe to this for new interview notification
Equities
The S&P 500 closed 1.53% higher at a price of 4067.
The Dow Jones Industrial Average closed 377 points higher for a 1.19% gain at a price of 32,151.
The NASDAQ 100 closed 2.17% higher at a price of 12,588.
The Stoxx Europe 600 Index closed 1.5% higher.
This morning, the MSCI Asia Pacific Index rose 0.7%.
This morning, the Nikkei closed 1.05% higher at a price of 28,511.
Currencies
The Bloomberg Dollar Spot Index closed 0.3% lower.
The Euro closed 0.2% higher at $1.0061.
The British Pound closed 0.3% higher at 1.1617.
The Japanese Yen fell 0.1% closing at $143.44.
Bonds
Germany’s 10-year yield closed 36 basis points lower at 1.70%.
Britain’s 10-year yield closed 5 basis points lower at 3.11%.
US 10 Year Treasury closed 4 basis points higher at 3.34%.
Commodities
West Texas Intermediate crude closed 3.23% higher at $84.32 a barrel.
Gold closed 0.40% higher at $1715.90 an ounce.
This morning on the Economic Front we already had the release of U.K. GDP for July which rose 0.2% versus +0.4% expected. The ECB’s De Guindos and Schnabel are due to speak at 10.30 am and 1.00 pm respectively. There is no U.S. data today. However, we do have a 3 and 10 Treasury Auction at 6.00 pm.
Cash S&P 500
The S&P ended last week on a strong note after falling for the previous three weeks. Yet again the McClellan Oscillator proved itself to be one of the best buy signals as the S&P has now rallied over 200 Handles off Wednesday’s low print. The MO closed Friday at -19 so there is still plenty of room for the S&P to rally further. Once the 50-DAY MA was broken on Friday (4030) the S&P surged, hitting an overnight high at 4086. I am still flat as the market never came close to Friday’s buy level. The S&P is now short-term overbought after this stunning 48-hour rally. We have resistance from 4098/4118 where I will be a small seller with a tight 4133’Closing Stop’’. The 50-DAY MA will act as strong support. I will now be an aggressive buyer from 4020/4040 with a wider 3999 ‘’Closing Stop’’.
EUR/USD
I have written at length again about the Euro above, believing that all dips should be bought. On Friday, this plan worked well with the market trading lower to my 1.0035 buy level before opening last night at my revised 1.0090 T/P level and I am now flat. Today, I will again be a buyer on any dip lower to 1.0000/1.0060 with no stop. If I am taken long I will have a T/P level at 1.0130.
March Dollar Index
The Dollar continued Wednesday’s reversal falling a further 40 points, to sit at 108.20 this morning. Central Banks need a weaker Dollar and it was interesting that both Lagarde and the Bank of Japan Finance Minister Suzuki speaking about strengthening their respective currencies against the Dollar. The Monthly RSI for the Dollar Index is at an unstainable 78.9. This shows how overvalued the Dollar is currently trading as it continues to press a major trendline with no sustained break as yet. The last time the Dollar was this overvalued, at the end of 2016, we quickly saw a 10% decline in the Dollar over the following 12 Months. I am expecting a similar outcome, I just do not know what the catalyst will be. Based on a longer-term outlook, the risk/reward is skewed to the downside. In my view, a key source of prior support has disappeared (strong economic growth) and another is fully discounted and may be on the verge of reversing which of course is a divergence in Central Bank rate hike expectations. I am still short the Dollar at an average rate of 107.50. Given how overbought the Dollar is trading I will have no stop on this position, fully believing that we are close to a reversal in the Greenback. I will now raise my T/P level on my short position to 107.10. I am convinced we will see a reversal in the Dollar and I will add to my existing short position on any further move higher to 109.80. If this price is triggered, I will come back with a new update for my Platinum Members.
Cash DAX
The DAX is now trading over 300 points from where I marked prices last Friday. This move is not unexpected as I have flagged how oversold the DAX was trading all last week. I am still flat. I will now raise my buy level to 12960/13040 with a tight 12885 stop. I still do not want to be short the DAX at this time.
Cash FTSE
The FTSE never came close to Friday’s buy range and I am still flat. Thankfully, we had no sell level in this market. The FTSE is short-term overbought. We have resistance from 7430/7490 where I will be a seller with a 7555 stop. If I am taken short I will have a T/P level at 7385.
Dow Rolling Contract
After the Dow traded higher to my 32120 sell level on Friday we saw a quick 140 point sell-off. This move lower enabled me to cover this position at my revised 32045 T/P level as emailed to my Platinum Members and I am now flat. This morning, the Dow is testing its 50-Day MA (32205) as I go to press. We have short-term resistance from 32370/32570 where I will be a small seller with a 32705 tight ‘’Closing Stop’’. The Dow has support from 31700/31900. I will now raise my buy level to this area with a higher 31495 ‘’Closing Stop’’.
Cash NASDAQ 100
The NDX closed just above its 50 Day MA on Friday (12578). This morning we are seeing some follow through as the NDX is now trading at 12635 as I go to press. I am still flat the market. I will now raise my buy level to 12400/12550 with a 12295 ‘’Closing Stop’’. I still do not want to be short the NDX at this time.
December BUND
No Change. I am still long from last week at 144.15 with the same 142.95 ‘’Closing Stop’’. I will now lower my T/P level to 144.50. If any of the above levels are hit I will be back with a new update for my Platinum Members.
Gold Rolling Contract
No Change. As I am still long Silver, I will not chase the price of Gold higher. We have support from 1685/1700 where I will again be a buyer with the same 1669 ‘’Closing Stop’’.
Silver Rolling Contract
I am still long Silver from two weeks ago at 18.80. This morning Silver is trading higher at 19.10. I will leave my T/P level unchanged at 19.25. If this level is triggered, I will come back with a new update for my Platinum Members.
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