The Fed has dropped the word ‘patience’ from its post-FOMC Meeting Communique, which saw the Dollar sharply lower, as are Bond Yields and equity markets are sharply higher in one of the most volatile three hours of trading that I have witnessed in a very long time.
All the surrounding atmospheric, created by downward revisions to the Fed’s central GDP and inflation forecasts, the median ‘dot point’ forecast for the Fed Funds rate at the ends of 2015,2016 and 2017, and the rhetoric from Fed Chair Janet Yellen at the post-FOMC press conference, mark this out a still very dovish Fed. It is fair to say we now have somewhat stronger doubt that Fed rates ‘lift-off’ will begin as early as June, than we did heading into the FOMC. As Fed Chair Yellen just remarked, dropping ‘patient’ does not mean the Fed is now impatient, adding that while she cannot rule out an increase in June, neither does the change in language mean that an increase will occur in June. Ms Yellen states that the stronger Dollar is a factor driving the downside to the 2015 growth forecast from a mid-point of 2.8% down to 2.4%. She thus states that ‘asymmetric risks’ point to wait longer to hike interest rates.
The change in the Fed’s median ‘dot points’ are quite dramatic. For end-2015, the median forecast is now 0.625% versus 1.125% last December. In effect the FOMC is now saying that instead of a 1-1.25% target range for the Fed Funds Rate by the end of this year, and meaning four quarter point rate rises, it now expects to deliver only two.
For 2016, the median ‘dot point’ is now 1.875% versus 2.5%, and for end 2017, now 3.125% down from 3.625%. The Fed’s central estimate for the long term remains at 3.75% though Ms Yellen stated in her press conference that downward revisions to the Fed’s estimates of the longer run jobless rate (the so called NAIRU) were cause to lower the ‘dot points’ forecast through 2017 at least. The central tendency for the unemployment rate is now put at 5.0-5.2% from 5.2-5.5% back in December.
From here, the key takeaway is that Ms Yellen has successfully established in the market’s mind the data, rather than date dependency of Fed policy. This has prevented the market ructions that might otherwise have accompanied the dropping of ‘patient’, though arguably it does no more than postpone the eventual inevitability of fresh US Dollar appreciation as we are seeing this morning, lower equity valuation and a sell-off in emerging markets.
Elsewhere yesterday, the biggest surprise was a further cut in policy rates in Sweden from -0.1% to -0.25% and a step-up in their QE programme to SEK 30bn from 10bn. This has left the SEK weaker against everything bar the US Dollar.
This morning on the economic front the Euro-Zone will publish its Economic Bulletin at 9.00 am. This is followed by the US Weekly Jobless Claims and Current Account Balance at 12.30 pm. Finally at 2.00 pm we have the Philly Fed Business Outlook where the consensus is a print of 8 versus 5 last month.
June S&P 500
As the March Contract expires tomorrow at 1.35 pm, I have today rolled to the June Contract which is trading at a 7.5 handle discount to the cash S&P. Thankfully I had no levels to go short the S&P yesterday in what was a truly remarkable day for trading across all markets. Just before the FOMC announcement the March Contract was trading at my 2062 by level and I decided to buy a small piece of the S&P but unfortunately after I went long I covered this position way too early at 2076 before watching the S&P rally another 30 handles to 2107 and I am now flat. The fact that the market has broken back above 2080 means the bulls are back in charge making it difficult to go short again.
For the June Contract today I will be a buyer on any dip lower to 2077/2085 with a wider 2069 stop. Given the volatility I am trading in smaller size with a wider stop. I still do not want to be short the S&P at this time as I want to see the reaction of the market today after last night’s dramatic upside break-out.
EUR/USD
What can you say about yesterday’s up move following the FOMC announcement which has seen the Euro trade six different big figures in three hours. Going into the FOMC the market was all one way in been long the US Dollar as shown by last Friday’s IMM/currency futures data which showed record long US Dollar positions amongst the speculative trading community and was one of the reasons why I refused to go short the Euro over the past few weeks. However with the Euro trading as high as 1.1040 last night we are back trading at 1.0680 this morning. Today I will move my buy level higher to 1.0620/1.0670 with a 1.0580 stop. If I am taken long and subsequently stopped out of this trade I will be a more aggressive buyer in front of 1.0530 with a 1.0460 stop which is just below last Friday’s low.
June US Dollar Index
Unfortunately the Dollar just missed my 100.30 sell level after I posted yesterday before incredibly the Dollar Index traded down to a low of 95.20 before trading back to 99.50 this morning. It is a very long time since I have seen volatility of this nature. I have decided to go short the Dollar Index at 99.45 this morning and I will leave a tight 99.90 stop on this position. If I am stopped out of this trade I will be a more aggressive seller in front of 100.30 with a 100.80 stop.
June DAX
I have now rolled to the June Contract as the March Contract will expire tomorrow morning. In contrast to the S&P above the June DAX is trading at a 22 point premium to the cash market.
I was very unlucky yesterday as after the March DAX traded lower to my 11880 buy level I was stopped just at the low point of the day at 11830 and I am now flat which is very frustrating when you see the rally that had ensued in the market after I was stopped out. Today in the June Contract I will be a small buyer on any dip lower to 11840/11900 with a 11780 stop. I do not want to be short the DAX at this time especially with the Euro back on the defensive this morning.
June FTSE
I have now rolled to the June contract which is trading at a 59 point discount to the cash market. I am still flat the FTSE which had a dramatic move higher following the UK Budget yesterday morning. As I have mentioned over the past few days the 6800 level was a key pivot for the market and this certainly proved to be the case yesterday. This morning in the June Contract I will be a small buyer on any further dip lower to 6850/6880 with a 6825 stop. I still do not want to be short the FTSE at this time.
Dow Rolling Contract
Following the FOMC announcement the Dow just went straight up before eventually hitting my 18010 sell level. The Dow briefly sold off from here before re-grouping and finally stopped me out of this trade near the close at 18070 and I am now flat. The tendency is that when we get a confirmed Hindenburg Omen is that the Dow will rally first before selling off. I am very nervous for the Dow going forward despite the very positive price action yesterday and today I will again look to go short on any further rally to 18150/18200 with an 18240 stop. I still do not want to be long the Dow at this time.
June BUND
The relentless move higher in the German Bund market continues as one resistance point after another gets taken out. I will continue with my strategy of selling rallies with a tight stop as this idea has worked very well so far in 2015. Today I will be a small seller on any further rally to 158.90/159.20 with a 159.40 stop.
Gold Rolling Contract
Gold just missed my 1140 buy level before having a $30 rally and I am still flat. As I have mentioned over the past few weeks the 1130/1150 level is really key support for Gold as break and close below here could be very nasty. Today I will raise my buy level to 1151/1159 with a 1143 stop.
Silver Rolling Contract
My long 15.75 Silver position finally worked out overnight as following a nice rally I was able to cover this position at 16.10 and I am now flat. Today I will again look to buy Silver on any dip lower to 15.40/15.80 with a 14.90 stop.
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