US equities rallied at the New York open on Friday, aided by JP Morgan’s pre-open earnings beat, but never really managed to build on opening gains. It turned out to be an up, down, up session with the S&P 500 ending 1.4% higher, so recovering a little of Wednesday and Thursday’s sharp losses but to still be 4.1% lower on the week. The VIX gave back 3.7 points from its 25.0 Thursday closing level but at 21.3 remains above its long term average. Despite JP Morgan as well as CitiiGroup beating the street consensus estimates for their Q3 earnings, the S&P 500 Financial sub-sector was one of the worst performers Friday, up just 0.1%, with the IT sector – that has led the charge lower this month – predictably leading the 1.4% rebound in the overall index with a 3.2% rally. Shanghai turned out to be the worst performing major stock market on the week, but its 7.6% loss contained an element of catch-up to the prior week’s loses in other markets during the Golden week holiday. In currencies Sterling was under the pump Friday and again this morning with Brexit talks at an impasse on the Irish border issue.
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Currencies
Having unusually – failed to draw much safe-haven support during the Wed/Thu equity sell-offs, the USD was a bit firmer on Friday amid a mini-revival in risk appetite. Sterling weakness was the main contributor to the 0.2% rise in the DXY along with a 0.3 fall in EUR/USD. This was amid no signs as yet of a Brexit agreement, or reconciliation between the EU and Italy on the latter’s budget ambitions and where all EU countries are this week supposed to be submitting their FY19 plans for EU Commission approval. AUD and NZD were both slightly softer, by 0.14% and 0.18% respectively. Sterling was by far the worst performing G10 currency on Friday (-0.6%) with no confirmation that a Brexit Withdrawal agreement was any closer ahead of Thursday’s EU Summit at which the hope was/is to be able to agree the outline of a UK Withdrawal Agreement to then be inked at a special EU Summit in November.
Talks on Sunday in Brussels to this end have reportedly ended with no breakthrough with the Irish border question still the sticking point. According to the UK Guardian newspaper on Saturday, Northern Ireland’s DUP is now ‘’ready’’ to trigger a no-deal Brexit and which the DUP now see as the ‘’likeliest outcome’’ following a ‘’hostile and difficult’’ exchange with EU’s chief negotiator, an explosive set of leaked government emails reveal.
At the same time, we have reports of potential Cabinet rebellions against UK PM May’s latest proposals to extend the Brexit transition agreement beyond its currently proposed end-2020 deadline, in order to allow more time to sort out future trade relationships in a manner that would solve the Irish border conundrum.
There remains a huge amount to play for this week and Sterling will likely be significantly higher or lower than it is now by the end of the week (it has started trade Monday losing about 0.4% on top of Friday’s 0.6% drop).
In Emerging Markets, USD/TRY fell to as low as 5.83 on news that the Turkish courts had limited US pastor Andrew Brunson’s sentence to time served, allowing for his immediate release, but there was actually something of a ‘’sell the news’’ response given that USD/TRY had fallen from about 6.08 to sub-5.85 in anticipation of his release. It ended in NY at 5.8732.
On the week it is USD slippage – despite the spike in risk aversion – that stands out. JPY confirms its pre-eminent safe haven status (in particular when DM rather than EM markets are selling off) while the CHF no longer seems to have any. AUD and NZD are both the best part of 1% stronger, confirming just how much bad news looks to be already priced in and confirming their abilities go key off better EM FX performance (the global EMCI currency index rose by about 0.8% last week largely thanks to big moves up in ZAR, BRL and TRY.
Also to note is just how short speculative positioning in the AUD and NZD appears to be, at least judging from the weekly Chicago futures market positioning data (where shorts in the NZD extended to a new record extreme in the week through last Tuesday, with AUD now not too far behind). On the flip side, this market is very long US dollars.
Bonds:
A small scale sell off across the Treasury curve saw yields +1bp on average, consistent with the modest recovery in risk appetite. The prior couple of weeks bear-steepening theme predictably gave way to bull flattening last week with the 2/10s curve about 4bps flatter.
Commodities:
Most industrial metals were stronger Friday, Thursday night comments suggesting a Trump-Xi meeting was possible next month offering a glimmer of (probably false) hope for an early easing of Sino-US trade frictions. Gold failed to maintain all of Thursday’s sharp, short-covering driven, gains while coking coal finally showed signs of losing a bit of its earlier invincibility to be the weakest commodity on Friday. On the week, it is the 4% losses for both Brent and WTI crude that stands out and which is certainly consistent with the general theme of ‘’risk reduction’’ across all asset markets last week, augmented by the big build in crude stock reported on Thursday:
Economic Data
University of Michigan preliminary Consumer Sentiment 99.0 (100.5E, 1001.P). 5-10 year inflation expectations were down to 2.3% from 2.5%
This morning on the Economic Front we have no data of note from either the UK or the Euro-Zone. At 1.30 pm we have the New York Empire Manufacturing Index and Retail Sales. Finally at 3.00 pm we have Business Inventories.
December S&P 500
While the other four Stock Indices that I cover all entered my buy ranges the S&P unfortunately did not before have a strong rally into the close. This morning the Futures Markets are trading lower from Friday’s close after President Trump’s threat against Saudi Arabia saw their markets get hit hard yesterday. My own view is that last Thursday’s 2713 low print for the December S&P will hold for the time being and that we will continue to build gains against this now key support level. It will not be straight forward but with the VIX closing at 21.31 on Friday well below Thursday’s spike to 29 which is positive. If the VIX can get back to a sub 18 reading then we should see higher prices. Today I will raise my S&P buy level to 2708/2723 with a 2695 stop. My only interest in selling the market is still on a rally higher to 2810/2825 with a 2833 stop.
EUR/USD
I am still flat the Euro and today I will now lower my buy level slightly to 1.1450/1.1490 with a 1.1415 stop.
December Dollar Index
No change as I am still a seller on any rally higher to 95.30/95.70 with the same 96.05 stop.
December DAX
It took a while but finally the DAX traded lower to my 11450 buy level before rallying to my 11510 T/P level and I am now flat. Today I will again look to buy the market on any dip lower to 11310/11390 with a 11265 stop. I still do not want to be short the DAX at this time.
December FTSE
The FTSE continues to struggle with the market trading lower to my 6950 buy level. Thankfully we had a late rally into the New York close which enabled me to cover this position at my 6990 T/P level and I am now flat. With Sterling weak this morning we may have seen the best of the sell-off for the FTSE last Thursday. Today I will again look to buy the market on any dip lower to 6895/6935 with a 6860 tight stop.
Dow Rolling Contract
The volatility in the Dow continues to hit incredible levels. After the Dow peaked above 25500 on Friday the market subsequently fell 500 points. This move lower saw the Dow hit my 25180 buy level but unfortunately fell short of my second buy level at 24950 before rallying nearly 400 points into the close. This move higher saw the Dow hit my 25280 T/P level and I am now flat. This morning the Dow is opening weaker but as long as the market can hold the 24898 Thursday low then we should start to recover a lot of the 2000 points lost since the all-time high made 10 days ago. The McClellan Oscillator did improve to close at a still oversold -224 print while the Fear & Greed Index closed with Extreme Fear with a reading of 11 which is just above Thursday’s near record low of 5.Today I will again look to buy the market on any dip lower to 24900/25110 with a 24780 tight stop.
December NASDAQ
My NASDAQ plan also worked well with the market trading lower to my 7070 buy level before rallying to my 7105 T/P level and I am now flat. I said on Friday that the NASDAQ needs ‘’hold in’’ as this market can lead the recovery from last Thursday’s severely oversold markets. Today I will again look to buy the market on any dip lower to 7040/7090 with a 6995 stop.
December BUND
No change as my only interest in buying the Bund is still on a dip lower to 157.10/157.55 with the same 156.65 wider stop.
Gold Rolling Contract
Gold gave back some of Thursday’s 3% rally on Friday but crucially has so far held the 1212 support level. Today I will lower my buy level slightly to 1200/1210 with a 1193 stop.
Silver Rolling Contract
No change as I am still a buyer on any dip lower to 14.10/14.50 with the same 13.70 stop.
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