I am not sure this was the reaction the Fed were looking for when they decided to pause and give a shout out to the struggling Emerging Markets economies and global economic risks. Markets decided on Friday, in the European and US sessions (Asia, not so much) that there was truly something to fear from the Fed’s concerns. Accordingly, equities were very soft (S&P -1.6%, DAX -3%, Shanghai +0.4%).Bond Yields closed lower (US 10yr 2.13%, Bund 10yr 0.662%). The irony is that the USD was higher (DXY 95.15) and the EUR was lower. Oil prices were lower (QWTI 44.68), Gold 1132, just marginally up and Iron ore $57.69. What the Fed has done, and we can see why they are concerned about the stronger USD and lower Oil price effects, is to lay their indecision at the feet of policy makers in other countries.
For anybody following my new Platinum Service it had its first loosing day in September as the Service lost 85 points on Friday but is still ahead by 2315 points for the month. The previous three months saw gains of 2195, 1810 and 3045 points respectively.
But these policy makers face the same conditions, and not everyone can have a weak currency at the same time. Cue the increased probability of easier Monetary Policy in other markets to compensate for the Fed’s freeze. That pushes the USD higher, so the Fed baulks, and so we go. Currency wars through unconventional policy. And this time equities don’t like the thought of more QE because the underlying economies are tipping to worsen, not improve, given the incremental benefit of QE from these levels is questionable. We had a lot of this talk in the last 36 hours and it is only going to continue:
The ECB: Praet and Coeure both highlighted the fact that the ECB is ready to do more to support the economy if necessary. “Won’t hesitate if inflation is at risk” says Praet, “can adapt QE asset purchases if there is a downward risk to inflation” says Coeure. He also noted that they could extend QE beyond 2016. The ECB are not going to be content with EUR rising in this environment so expect more commentary as and when it does. This raises the changes of a policy move in October.
The BoE: The BoE’s Haldene also raised concerns about the level of GBP, noting that they “needed to take the effect of a strong pound seriously” and that the case for a hike is not pressing. This brought GBP off its highs.
The Fed: The Fed speakers post the decision helped the USD and didn’t calm equity markets as it was the day of the Hawks. Bullard (hawk, voter 2016) said he would have been a dissenter and that they are ready for lift-off in 2015. He acknowledges market volatility, but still feels they are getting behind the curve. The sheer circularity of this global environment is shown by Bullard blaming the ECB and their QE for the Fed’s strong USD problem. Lacker was the hawkish dissenter and spoke accordingly. And Williams (voter, neutral to hawkish) did acknowledge the uncertainties but worries they may get behind the curve. The one thing he did note that was a little different was the Fed was not out of “ammunition” (ie more easing) but didn’t feel they would need it. (But you know, if the other Central Banks go down this path and the USD strengthens, just saying).
There are many Central Bank speakers this week, and little data, we should expect more of the same.
This morning on the economic front we already had the release of German PPI which printed -0.5% for August versus -0.3% expected thus leading to a lower DAX. At 9.00 am we have the ECB Current Account. This afternoon on a very light day for economic releases we have US Leading Index and Household Change in Net Worth at 3.00 pm and 5.00 pm respectively.
December S&P 500
As I mentioned in Friday’s commentary the fact that we had the September Futures Expiration makes this trading day each Quarter one of the most difficult to one to read and thus get an edge. This certainly proved to be the case but thankfully I had only a small buy level in the S&P which was hit at an average of 1970 before very quickly stopping me out of this trade at 1962 and I am now flat. In the process the S&P surprisingly left a small ‘Open Gap’ from Thursday’s close at 1975 to Friday’s afternoon rebound high at 1967. Remember the S&P still has a large ‘Open Gap’ from two weeks ago at 1909 to 1923 in the December Contract and I would expect this ‘Gap’ to be filled over the coming days. As I mentioned in my commentary above the Fed did not expect to see this massive negative reaction to the S&P after it left Interest Rates unchanged on Thursday with the S&P now over 60 Handles lower from Thursday’s spike high following the FOMC Statement release. Today I will be a small seller on any rally higher to 1964/1970 with a 1977 stop. My only interest in buying this market is on a dip lower to 1909/1915 with a 1904 stop.
EUR/USD
No Central Bank wants a strong currency including the Fed and this point was reiterated again over the weekend with the comments from the two ECB Members namely Praet and Coeure. Friday’s move in the Euro turned out to be a Key Day Reversal as the Euro made a higher high on Friday over 1.1440 before turning around very late in the New York trading session and close below Thursday’s low at 1.1285. The Euro plan did not work out well for me as shortly after the market traded lower to my 1.1355 buy level I was stopped out of this position for a small loss at 1.1315 and I am now flat. The key level to watch for the Euro is at 1.1250 as a break and close below here again opens up a move lower to the 1.1100 major support which held the market following the ECB Meeting and Dragi press conference two weeks ago. The fact that no Central Bank wants a strong currency makes trading the Euro difficult as if the Euro rallies the ECB will hit the newswires by saying they will do more QE in order to push the Euro lower while if the Dollar strengthens the Fed will leave Interest Rates unchanged which in turn will push the Dollar lower. Today I will be a small seller on any rally higher to 1.1350/1.1380 with a 1.1410 stop. I will also be a small buyer on any dip lower to 1.1220/1.1250 with a 1.1195 stop.
December Dollar Index
The Dollar rallied to my 95.15 sell level after I posted on Friday. I am still short and today I will leave my stop unchanged at 95.45 which came close to been hit overnight with a 95.42 high. If I am stopped out of this position I will be a more aggressive seller from 95.70/96.00 with a 96.30 stop.
December DAX
Thankfully I had no buy level in the DAX on Friday which ended up falling nearly 400 points from Thursday’s post FOMC Statement release and I am still flat. I really believe these equity markets are in serious trouble but remember in a Bear Market, the Bear wants everybody to loose so you have to be very careful where you go short as in a Bear Market the market can have massive violent rallies and sell-offs for no reason as we have witnessed over the past few weeks. Today I will be a small buyer on any further dip lower to 9730/9780 with a 9680 stop. Given the huge move lower over the past two days I do not want to be short the DAX at this time.
December FTSE
I am still flat the FTSE and today I will lower my sell level to 6150/6180 with a 6205 stop.
Dow Rolling Contract
I read a very interesting commentary over the weekend. The recent sell-off in US Stocks from the May 2015 top has wiped out $1.86 trillion of wealth from the economy as measured by the Wilshire 5000 Stock Index as of this weekend. This is incredible when you think that the total QE done by the Fed was $5 trillion, to think we have now wiped nearly 40% of this QE in a few short months. This move lower does not tie in with the Fed’s rhetoric that the US economy is strong and improving. This is a very dangerous scenario. I still believe that the Fed will have no choice but to do QE4 as the stock market continues to work lower over the coming months. Thankfully I had no buy level in the Dow on Friday and I am still flat. Today I will lower my sell level to 16510/16570 with a 16640 stop buy only in small size given the volatility. I still do not want to be short the Dow at this time.
December BUND
Thankfully the BUND was trading 20 points lower from where I cut my short 154.70 position on Friday morning which was at 154.90 by the time that I posted. Subsequently the BUND rallied hard to my 155.35 sell level before having a nice sell-off which enabled me to cover this position at my 155.00 T/P level as outlined earlier to my Platinum Members and I am now flat. Today I will again be a small seller on any rally higher to 155.40/155.70 with a 155.95 stop. I still do not want to be long the BUND at this time despite the weak equity markets.
Gold Rolling Contract
I am still flat Gold and today I will raise my buy level slightly to 1122/1130 with a 1115 stop.
Silver Rolling Contract
I am still long Silver at 15.10 from early Friday morning as the market just missed my 15.50 T/P level with a 15.45 high. I will leave my stop level unchanged at 14.80 while today I will use any rally higher to 15.50 to go flat.
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