Market responses to the Fed 7.00 PM London time pronouncement has been clouded by news very soon thereafter that President Trump will tomorrow unveil a list of up to $50bn worth of imports from China to be hit with tariffs. Not that this is really ‘’new news’’ but it has had the effects of reversing all of the roughly 0.5% gain in the US Dollar, seen US Treasury yields pare about half of their immediate post-FOMC gains and pulled the S&P500 down further into negative territory on top of initial post-Fed losses motivated by the apparent need to incorporate the risk of a somewhat faster pace of Fed tightening, as implied by the new Fed’s dots. The S&P closed 0.4% lower.
To mark my 1600th issue of TraderNoble Daily 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 25 points yesterday and is now ahead by 207 points for June, having made 1927 points in May, 1657 points in April, 1760 points in March, 2256 points in February, 879 points in January and 946 points in December. Since I started this New Platinum Service in June 2015 it has averaged a monthly gain of over 1600 points
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The US Federal Reserve hiked interest rates 25bps as widely expected, for the seventh time in this cycle, taking the Fed Funds target range to 1.75%-2.0%. The FOMC also upped its rate hike profile via its ‘’dot’’ projections which now foresees four hikes in total in 2018, an unchanged three further hikes in 2019 and one in 2020. That leaves the 2018 median dot point at 2.375% from 2.125%.
As I had forewarned last month, it was only going to take one member to lift their 2018 estimate to get to four hikes, which is indeed what occurred (now 8 of 15 members). There were no changes to the 2019 or 2020 estimates for the number of additional hikes seen (three and two respectively) but which means that the end 2019 median do is now at 3.125% (2.875% previously) with 2020 unchanged at 3.375%. So we get to 3.5% earlier than implied by the prior iteration.
There were small changes to 2018 core PCE inflation forecasts (2.0% this year from 1.9% previously) Unemployment (3.6% this year from 3.8% previously) and GDP growth (2.8% this year from 2.7%).
The FOMC statement shifted the characterisation of economic activity to ‘’solid’’; from ‘’moderate’’ and has dropped the paragraph that previously said that ‘’the Federal Funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run’’. In short, because we are getting closer to ‘’neutral’’ which the Fed still puts at 2.875% (1% above the new current rate mid-target rate of 1.875%).
In his press conference chairman Powell said the economy was doing ‘’very well’’. He will now hold a press conference after each six-weekly meeting from January which he said is for communication and has no inference for monetary policy.
Following a mention in the May FOMC Minutes, the Fed also raised the rate on excess reserves parked at the Fed (IOER) by just 20bps. This is a technical move at this stage, given the effective Fed Funds rate has of late been trading in the upper half of the target range, with it being too early to draw conclusions on what this may mean for Fed balance sheet reduction. Indeed Chair Powell said the Fed ‘’needs to have the Fed Funds trade in a range and that’s what this minor adjustment accomplishes ‘’don’t expect it to happen again and again’’.
The news broken by the Wall Street Journal soon after the Fed announcement is that the U.S. is preparing tariffs on ‘’billions of dollars’’ of Chinese goods as early as tomorrow, with the decision awaiting Trump’s final approval and the exact amount of goods to be subject to tariffs yet to be finalised. What is notable for markets is that despite the intention to ‘’Make America Great again’’ via the various actions designed to reduce US imports and spur more US exports, the FX market has consistently responded to escalating tariff frictions by marking down the USD, suggesting a vote of no confidence in policy coherence and allied to a belief that the US may end up doing its own economy more harm than good.
For the AUD, the initially weakness from above 0.7600 to below 0.7550 (low of 0.7530) on the pop higher in the US dollar post Fed has reversed by about 50% as the USD gave back all its Fed-related gains on the tariff story. Not that it is a good news story for the AUD by any stretch of the imagination, save that if China ends up more dependent on domestic industrial activity to preserve growth, this can support demand for commodity imports. Indeed, there have been some signs of this in recent months, in the face of apparent deepening worries inside the US-instigated tariff ‘’war’’ escalating further. Let’s see what today’s China Industrial Production numbers suggest in this regards.
In Brexit news, the UK government narrowly defeated the Lords Amendment that would have compelled it to include remaining in the Customs Union in its negotiations. This though does not rule this out as an eventual outcome, while the bigger (Sterling positive) outcome of this week’s Commons events is that May has given assurances that Parliament will have a meaningful say in whether whatever deal May brings back from Brussels is acceptable. GBP is actually flat relative to Tuesday’s New York closing level.
This morning on the Economic Front we have Chinese Industrial Production at 3.00 am and this is followed by German CPI at 7.00 am. At 9.30 am we have UK Retail Sales and the Swiss National Bank are holding a press conference at 10.00 am. At 12.45 pm we have the ECB Rate Announcement. Various officials have indicated that this meeting should feature a discussion on the Asset Purchase Programme (APP) and which I expect will lay the foundations for a taper after September taper and December expiry, but will likely fall short of an official commitment seen in July.
There will be a likely upgrade to the staff’s inflation forecasts after the April readings came in well above prior ECB projections. Even without a firm commitment to end QE by year end, this should still be seen as a significant development, implying the ECB policy cycle is turning. If so, it should at least underpin the recovery in all things EUR if not providing a strong catalyst for further near term gains. Next we have the Dragi press conference at 1.30 pm. At the same time we have US Retail Sales, Weekly Jobless Claims and Import/Export prices. Finally we have US Business Inventories at 3.00 pm
September S&P 500
Complacency continues to dominate the US Indices on what has been the slowest month of the year so far. The CBOE Volatility Index (VIX) closed at 11.64 on June 6, reflecting the highest degree of complacency since the January 26 top (11.08) in the blue-chip stock Indexes. The CBOE equity put/call ratio (5-day) declined to .54 on June 7, showing that equity options traders are making their largest bets on a continued stock market advance since January 29, the day of the top in the Financials Index and the day after the top on the Dow. The Daily Sentiment Index of S&P traders rose to 76% on June 11, indicating a level of trader optimism that is the biggest since the January 26, top. And now the CBOE total put/call ratio (8-day), a broader measure of options trading than the equity-only ratio, has moved to .81, it’s most extreme level since the days surrounding the January high. With the June Contract expiring tomorrow, markets may well hold in until the end of the week but there is no doubt that risk is building. I have now rolled to the September Contract which trades at a 4.3 Handle Premium to the June Contract. Today my buy level for September will be from 2761/2769 with a 2454 stop. My only interest in selling the September S&P is still on a rally higher to 2801/2809 with a 2815 stop. Again if I am taken short and subsequently stopped out of this position I will be a more aggressive seller from 2827/2845 with a 2853 stop.
EUR/USD
The Euro initially sold off on the back of the US Rate hike before reversing course after the Tariff story broke in the Wall Street Journal. I am still flat the Euro as we wait for the ECB Rate Announcement at 12.45 pm. Today I will leave my buy level unchanged from 1.1635/1.1675 with the same 1.1595 stop. I am also going to leave my sell level unchanged from 1.1870/1.1920 with a 1.1955 stop.
September Dollar Index
The boring sideways action in the Dollar continues and I am still flat. Today I will raise my sell level slightly to 94.05/94.55 with a 94.85 stop. I still do not want to be long the Dollar at this time.
September DAX
I have now rolled to the September Contract which trades at a 17 points Discount to the June Contract. It is easier to roll when you have no ‘’Open’’ positions. Today my only interest in buy the DAX is on a dip lower to 12640/12720 with a 12585 stop. Ahead of the ECB Meeting I still do not want to be short the market at this time.
September FTSE
I have now rolled to the September Contract which trades at a hefty 70 point Discount to the June Contract. This huge Discount makes it very difficult to be short the market. Today my buy level for the September Contract is from 7525/7570 with a 7485 stop.
Dow Rolling Contract
The Dow had a late sell-off into the New York close with the market stopping 10 points short of my initial 25170 buy level. As I did not want to run the risk of an overnight position I emailed my Platinum Members to lower their Dow buy level to 24950/25090 with a 24880 stop. Ahead of the Options and Futures expiry tomorrow I still do not want to be short the Dow at this time, although risk is building as shown by my S&P commentary above.
September NASDAQ
I have now rolled to the September Contract which trades at a 27 point Premium to the June Contract. Unfortunately the June Contract just missed my 7270 sell level with a 7263 high print before selling off into the close and I am still flat. Today I will now look to sell the September Contract on any rally higher to 7275/7325 with a 7365 stop. I do not want to be long the NASDAQ at this time as the price action is now negative.
September BUND
I am still flat the Bund and ahead of today’s key ECB Meeting I will now lower my Bund buy level to 158.80/159.20 with a lower 158.45 stop.
Gold Rolling Contract
Gold has now traded sideways for three weeks as the market struggles to follow Silver higher. Gold just missed my 1288 buy level before rallying back to 1300 into the New York close and I am still flat. Today I will continue to be a buyer on any dip lower to 1281/1288 with the same 1274 stop.
Silver Rolling Contract
The beauty of my Platinum Service is my updated emails. Yesterday after Silver just missed my 16.75 buy level I emailed my Platinum Members to raise their buy level to 16.85 and this was filled following the release of the FOMC Statement with a 16.81 low print. Subsequently Silver rallied and as I wanted to bank some points for yesterday’s trading session I emailed them again to exit any long position at 17.10. The fact that Silver again closed over 16.85 is bullish for higher prices. As I post this commentary I have bought Silver again at 16.95 with a higher 16.45 stop and a 17.20 T/P level. If any of these levels are hit I will be back with a new update for my Platinum Members.
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