Another relatively calm and comfortable session heading into the FOMC meeting. I’d like to think the same could be said this time tomorrow, but am far less convinced about that. With markets and economists split on the outcome, something will move if the Fed does, or it doesn’t. So enjoy the quiet next 10 hours, ahead of 7.00 pm this evening. Market moves were not all that consistent. Equities are higher across the board, even Shanghai had a strong day, as the markets suggest no change in the Fed. But Bond Yields were again higher; albeit less convincingly so.
For anybody following my new Platinum Service it made 115 points yesterday and is now ahead by 2060 points for September. The previous three months saw gains of 2195, 1810 and 3045 points respectively.
Commodities were up and the USD was lower. So overall, most markets heading into the Fed possibly thinking there will be no change, this and given the pricing, the bigger surprise will be a hike. The data wasn’t strongly suggestive of one way or the other. US NAHB housing was better than expected, but the more important CPI was slightly on the soft side. Services prices were up, but goods were down, dragged lower by gasoline. The US TIC data for long term assets showed net buying of US assets, but on Treasuries, there was selling for the first time since January. This isn’t unheard of, but markets will be waiting to see if it is persistent. And yes, there was selling from Belgium, but also from China itself. That is likely to get some attention. But it is definitely worth noting that foreigners were still buying other US assets, even if the reserve managers were potentially selling. All is not lost.
Final European CPI was a little lower than expected at just 0.1%yoy (0.2E, P). Things were a little stronger in the UK, with their Employment and Average Earnings data showing some strength. Amid all the anticipation tonight, the UK releases its Retail Sales, so we shall see if GBP can hold its gains. JPY underperformed yesterday after S&P cut Japan’s sovereign rating to A+ from AA- as it seems they are as unconvinced about the present policy accommodation as the growing economics consensus. Ratings don’t often move a currency, so the risk-on move might have had something to do with it too.
This morning on the economic front the ECB will publish its Economic Bulletin at 9.00 am. This is followed at 9.30 am by UK Retail Sales. At 10.00 we have Euro-Zone Construction Output. At 1.30 pm we have US Housing Starts, Initial Jobless Claims and Current Account Balance. Next up is the very important Philly Fed Business Outlook at 3.00 pm. Finally at 7.00 pm we have the FOMC Rate decision and Yellen press conference. The market is pricing only a 28% chance of a 25bp hike today, but the behaviour in a multitude of markets expresses a little more nervousness about the potential for a move today. In the Bloomberg survey, 51 of 113 economists look for a hike. So it is a close call. On balance I see December as a more likely outcome, but again, acknowledge that it is close. While if we follow the cues from the Fed, there won’t be a move today: the Employment market meets the criteria but there are some structural issues, while more needs to be seen on inflation. They suggest we are almost there, but not quite. However, the rhetoric has persistently been that the move is near. And markets hate to operate in a vacuum, and they aren’t terribly patient. We have been waiting years now, since former Fed Chairman Bernanke raised the possibility that, at some time, policy might begin the slow move toward normalisation. And so the nervousness isn’t necessarily around 25bp today (or in the next few months) but about the cycle and how the rest of the world copes with a US cycle. If we are worried about 25bp only by the Fed, then there are far bigger worries in the Global Financial System and ones that monetary policy alone just cannot fix.
If there is no hike today, the information from the Fed becomes critical. The ‘dot points’ of where they see Fed Funds at the end of each year and the forecasts. There should be much assurance that the rate profile will be low and relatively flat over the forecast horizon. The forecasts may be lowered, which should ease some concerns about a strong hiking cycle.
If there is a hike, we could equally see a higher USD, higher Bond Yields and possibly some equity market concerns. That could again be short lived as markets look ahead and are hopefully reassured by the promise of a very slow cycle. That reassurance is going to have to be in the ‘dot points’, forecasts and from Yellen’s speech, or risk markets will fret. If there is no move, then we settle in for more of the same for another, interminable, month or two. If it’s a hike, then the US may get, somewhat unfairly, blamed for any volatility in EM in this interconnected world. It promises to be an eventful evening.
December S&P 500
I have now rolled to the December Contract which trades at an 11 Handle discount to the Cash S&P. Yesterday long after I posted the September S&P traded higher to my 1993 sell level before having a nice sell-off to a 1985.50 low print which enabled me to cover this position at my new T/P level at 1989.50 as outlined to my Platinum Members and I am now flat. The reason that I covered this position is that I did want to have a position ahead of this evening. Just a note for new members the only two times per month where I am flat going into a major announcement is the Non- Farm Payrolls and a Fed Meeting. Yet again the mantra of not been short in an FOMC Meeting week proved itself again with the 60 Handle rally in the S&P over the past 48 hours. To me this is free money on every FOMC week. This evening is going to be critical as if the Fed hike Interest Rates and the market drops hard I would not chase this market lower especially with the Yellen press conference to follow plus we have the September Contract maturing tomorrow. My game plan this evening is to buy a dip on any move lower (following the announcement) in December to 1965/1973 with a 1960 stop. I will also look to see the market on any rally higher to 1994/2000 with a 2006 stop.
EUR/USD
The idea of buying dips in the Euro worked well again yesterday with the market trading lower to my 1.1225 buy level before having a nice 100 point rally which enabled me to cover this position at my 1.1260 T/P level as outlined earlier to my Platinum Members and I am now flat. Given the fact that we have such a critical FOMC Meeting this evening and the fact that the Euro could be trading anywhere following the announcement I am going to stand aside for 24 hours as I honestly do not have an edge in to what the Fed will announce later. This is the first time in my 3 ½ years in writing tradernoble that I have stood aside in the Euro but to me it makes perfect sense given the potential risk later.
December Dollar Index
Similar to the EUR/USD above I will also stand aside in the Dollar Index especially given the expected volatility that follows the evening’s FOMC rate decision.
December DAX
I have now rolled to the December Contract which trading at a small 4 point premium to the Cash DAX. I am still flat the DAX as the market just sold off shortly after I posted yesterday morning. I think a lot of the underperformance by the DAX over the past week is the Refugee crisis as if you look at the smaller Balkan State Equity markets they have got slammed over the past few weeks. Today I will be a small seller on any rally higher to 10350/10420 with a 10480 stop. I do not want to be long the DAX at this time.
September FTSE
I am staying with the September Contract for one more day. The main reason for this is very late in yesterday’s trading session the FTSE traded higher to my 6255 sell level. I am still short and today I will use any dip to 6230 to cover this position and stand aside. I will also lower my stop to 6255 as either way I want to be flat ahead of 7.00 pm.
Following the FOMC announcement this evening I will then roll to the December Contract which is trading at a 35 point discount to the Cash FTSE. If the market rallies following the FOMC I will look to go short the December Contract from 6245/6275 with a 6305 stop. I do not want to be long the FTSE at this time.
Dow Rolling Contract
Just like the FTSE above, just before the close last night the Dow traded higher to my 16755 sell level. Given the fact that I want to be flat ahead of this evening I have just covered this position for a small gain at 16740 and I am now flat. I will stay flat until we get the Fed decision later and if the market rallies following the announcement I will look to go short from 16820/16880 with a wider 16950 stop. Given how overvalued the Dow is I still do not want to be long the market at this time.
December BUND
No change as I am still a small seller on any rally higher to 154.50/154.80 with a 155.10 stop.
Gold Rolling Contract
Finally we are seeing Gold start to move higher. There is no doubt that Gold has very strong support from 1080/1100. I am still flat Gold and today I will move my buy level higher to 1105/1114 with a 1096 stop.
Silver Rolling Contract
My long 14.40 Silver position from last week finally worked out yesterday as the market had a nice rally which enabled me to cover this position at my 14.70 T/P level as again outlined to my Platinum Members and I am now flat. Today I will again look to buy Silver on any move lower to 14.50/14.80 with a 14.10 stop.
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