The Euro and Australian Dollar this week look set to remain in the hands of broader USD and Emerging Market (EM) moves amid a sparse economic calendar. Broader USD moves in turn are likely to be heavily dependent on whether EUR/USD can build on Friday’s bounce. We will know soon enough with Italy’s response to last week’s EU ‘’please explain’’ letter, due this afternoon, will be important here, as will the EU’s subsequent reply. EU’s Moscovici says EU won’t meddle in Italy’s economic affairs. Meanwhile Moodys downgraded Italy to one notch above junk, but outlook now stable. Also of interest is whether GBP/USD can extend Friday’s gains that came from news that UK PM May was considering an ‘’indefinite’’ stay in a Customs Union in order to break the impasse with respect to the Irish border.
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Equities
A mixed performance from US stocks Friday (Dow up small, S&P flat and NASDAQ -0.5%). The IT sector remained pressured, while it was defensive stocks (consumer staples, utilities) that held up the overall S&P. Honeywell’s warning after its earnings beat street estimates that Chinese and US tariffs were set to add ‘’hundreds of millions of dollars’’ to its costs, weighed on the broader IT sector (down 1.13% within the S&P 500).
Shanghai ended Friday ahead by 2.6% in the wake of China’s small Q3 GDP miss (6.5% from 6.7% in Q2 and versus 6.6% expected) and mixed activity readings. Whether it was the presence of the ‘’big red hand’’ or confidence inspired by official comments that growth targets would be met, something which is corroborated by the acceleration in credit growth reported earlier in the week I could not say. Shanghai is still down 2.2% on the week even with Friday’s 2.6% gain. The S&P finished flat.
Currencies
The DXY Dollar Index was 0.2% softer on Friday thanks largely to rallies in both EUR and GBP, EUR on comments from the EU’s Moscovici that it would not interfere in Italy’s economic policies and Sterling on reports UK PM May was moving toward accepting indefinite participation in the Customs Union in order to solve the Irish border issue. Whether she can sell such a plan to her own parliament is a very open question of course, but GBP/USD initially jumped over half a cent on the news before gains were later pared.
The NZD fared best within G10 on Friday, not on any obvious NZ-positive news so probably more short covering amid record short speculative futures market positioning, while AUD got as high as 0.7150 in London before giving back 30 pips or so in the New York afternoon. CAD lost ground on much weaker than expected CPI, down to 2.2% from 2.8% and weaker than expected Retail Sales. This did not undermine confidence in a quarter point Bank of Canada Rate hike this coming Wednesday (to 1.75%) but the implied policy rate for the March 2019 meeting date came in to 1.99% from 2.04%:
On the week the USD is up over 0.5% in Index terms with NZD the only G10 currency to show any meaningful rise (+1.34%) with CPI and a very short speculative market both doubtless playing a role. Thursday’s sharp drop in the Australian Unemployment rate has meant that the AUD at least finishes the week higher, albeit only marginally. EUR and GBP are both lower on the week notwithstanding Friday’s gains.
Bonds:
Treasury yields were higher across the curve Friday but not by much, 2s up 2.9bps and 10s a lesser 1.3% in what was a slightly more risk on than off night (e.g. VIX to 19.89 from 20.06). On the week 2s are +5bps and 10s +3bps. The bigger price/yield action was in Europe where BTPs went as high as 3.81% (highest since May 2014) and the ‘’low spread’’ (to Bunds) to 341bps at one point, the widest since April 2013. The rally came on comments from European Commissioner For Economic Affairs, Pierre Moscovici, who said that the bloc would not interfere in the new government’s economic policies.
Late in the New York day, Moodys dropped Italy’s credit ratings by one notch to Baa3 from Baa2, so to now just one notch above junk, but put the outlook at stable from negative. This was probably already in the price of BTPs. Certainly the FX market was not perturbed in late NY trade, with EUR/USD actually rallying slightly, though the market was effectively shut by the time the news came out (about 4.30pm NY time). Note S&P is due to pontificate on Italy by Friday next week, where at a minimum it seems likely to shift the outlook on its BBB rating (two notches above junk) to negative from stable.
Commodities:
A mixed performance for commodities Friday, with copper faring best and zinc the worse. Strong indications from China Friday that it is doing whatever it takes to protect growth in the face of trade tariffs may have helped (China demand was also mentioned in dispatches as behind the firming in oil prices). On the week, it has metallurgical coal and coking coal that have again done well, as too steaming coal and gold. On the latter, Friday’s CFTC data shows speculative positioning flipping from a net short of 38,175 to a net long of 17,667.
Economic Data, Central Bank Speak
Atlanta Fed President Raphael Bostic said on Friday. Asked about the risks to the U.S. economic outlook at a community group lunch in Macon, Georgia, Bostic mentioned geopolitical risks generally, the Brexit talks and ‘’the Saudi Arabian situation and the question about whether what happened to that journalist is going to lead to sanctions that could impact oil markets.’’
China Sep house prices (out Saturday) 0.9% m/m, 7.9% y/y (vs. 1.4%/7.0% in August)
US Sep Existing Home Sales -3.4% to 5.15mn saar (5.29mn or 09.9% expected, 5.33mn P)
Canada September CPI 2.2% (2.7%E, 2.8%P). 16% fall in air transport line fares (reversing a prior jump) the biggest contributor to the unexpected drop, along with traveller accommodation, autos, gasoline and travel tours.
Average of three core Canada CPI measures 2.0% from 2.1% in August
Canada August Retail Sales -0.1% (0.3%E, 0.2%P revised from 0.3%)
This morning on the Economic Front we have no data of note due form either the UK or the Euro-Zone. The only US data is the Chicago Fed National Activity Index at 1.30 pm.
December S&P 500
The S&P which opened strongly quickly reversed course shortly after the US Markets opened with the S&P spiking to a high of 2800 which was just below my 2810 sell level.. The S&P closed bang on its 200 Day Moving Average and has not closed higher for two consecutive trading sessions since September 20th. Overnight the S&P finally traded lower to my 2753 buy level with a 2749.50 low print before rallying so far to a rebound high of 2762 and this move higher enabled me to cover this long position at my revised 2757 T/P level and I am now flat. Today I will again look to buy the S&P on any dip lower to 2735/2745 with a 2728 stop. Meanwhile I will now lower my sell level slightly to 2798/2808 with a 2815 stop.
EUR/USD
Late in the afternoon the Euro traded higher to my 1.1535 sell level. As I had no interest in holding a short Euro position over the weekend I covered this position at my revised 1.1525 T/P level and I am now flat. Today I will now raise my buy level to 1.1400/1.1440 with a 1.1370 stop. My only interest in selling the Euro is on a further rally higher to 1.1580/1.1630 with a 1.1665 stop.
December Dollar Index
No change as I am still a small seller on any rally higher to 96.20/96.60 with a 96.95 stop.
December DAX
The DAX is trying to hold support above 11400 but really needs to break back above 11800 for the market to negate the current Head & Shoulders pattern. I am still flat and today I will lower my buy level to 11290/11360 with a 11235 stop. Given how close we are to long-term support I still do not want to be short the market at this time.
December FTSE
I am still flat the FTSE and today I will now lower my buy level slightly to 6900/6940 with a lower 6855 stop.
Dow Rolling Contract
So far the Dow is holding is 200 Day Moving Average at 25160. If we do break this level then we have key long-term support at 25,000 which a support line on the Point & Figure Chart that has held every correction since 2003. This 24900/25150 area must hold or else we could well see a large move lower that could well develop into a nasty correction. I am still flat the Dow and today I will lower my buy level to 24950/25150 with a now lower 24850 stop. Given how close we are to this key support area I still do not want to be short the market at this time.
December NASDAQ
Just like the S&P above, in the last few hours the NASDAQ finally traded lower to my 7060 buy level before rallying to my revised 7082 T/P level and I am now flat.. Today I will again look to buy the market on any dip lower to 6940/6995 with a 6905 tight stop. I will also be a small seller on any rally higher to 7250/7310 with a 7360 stop.
December BUND
The Bund broke the 160 area on Friday before selling off 100 points and I am still flat. Today I will be a seller on any rally higher to 159.95/160.35 with a 160.80 stop.
Gold Rolling Contract
No Change as I am still a buyer on any dip lower to 1200/1212 with the same 1192 stop.
Silver Rolling Contract
I am still long at 14.65 with the same 14.75 T/P level and 13.80 stop. I will continue to add to this existing position on any dip lower to 14.25. If any of the above levels are hit I will be back with an update for my Platinum Members.
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