Initial reaction to the Fed minutes was on the dovish side putting the US Dollar under pressure amid a rally in US Treasury Yields. The dovish take also boosted US equities, but we saw a major reversal in US equities into the close with the Dow now trading 600 points lower than where we were at 8.00 pm last night while the S&P is some 60 Handles lower. The UST yield curve is steepening led by the back end of the curve and USD indices are stronger after dropping about 0.30% immediately after the Minutes release.
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Markets were essentially marking time ahead of the Minutes and as seen in previous days, the USD was still on its slow but merry way higher. US equities were also edging a little bit higher while UST yields were essentially going sideways. All that changed post the Minutes, several officials acknowledged an upgrade to their growth and inflation forecast, but the killer line was that only “a couple” of officials were worried about the possibility that the economy would overheat. So the market initially ran with the idea that even though there has been a mark up to the growth and inflation outlook, no more fruit juice will be added to the punch bowl anytime soon. In the end, however, common sense appears to have prevailed, my take is that the Minutes reflect events prior to the jump in hourly earnings seen in the January Jobs report and also prior to the extra spending bill passed by Congress early in February. This would suggest that there is a good chance that the current FOMC thinking has evolved towards a more hawkish tone since. Today we have a lot of Fed speakers and next week’s Fed Chair Powell testimony before Congress will be important in this regards.
So looking at the post Minutes market reaction in more detail, US equities closed 0.70% lower, although immediately after the Minutes the S&P 500, DJ and the NASDAQ were all up by more than 1%. The UST curve has bear steepened, as I type the 10y rate is at 2.95% and the 2y rate is at 2.27%, a week ago the 2 year rate was 10bps lower at 2.16%.
After a sharp drop immediately post the Minutes, the USD is up across the board. In index terms DXY is up almost a full 1% over the past 24 hours and now trades above the 90 mark for the first time since February 12th. In G10, AUD is the worst performer, down 0.94%. The pair currently trades at 0.7811, after briefly trading to an overnight high of 0.7879 just after the Minuets were released.
Sterling is the second biggest loser, down 0.54%. The pound initially fell after the UK labour market report showed the UK Unemployment Rate unexpectedly ticking up and employment grew less than expected. On the positive side, UK wages data surprised on the upside. The Pound then moved higher after hawkish comments from BoE Chief Economist Haldane who said the risks around their most recent projections were to the upside while ‘’the long-awaited’’ pickup in wages is starting to take root. BoE Governor Carney, speaking in front of the Treasury Select Committee, would not be pinned down on when he expected the next BoE rate rise, but the market places around an 80% probability it will be in May. All this gains have essentially reversed post the Minutes and cable now trades at 1.3880, close to the overnight lows.
The Euro was under a little bit of pressure prior to the Fed Minutes amid softer EU PMI data. The Flash February German and French PMI data revealed activity in both manufacturing and services rolled over, leaving the impression that although activity levels remain very elevated, the best has past. That said Euro- Zone Composite PMI eased from 58.8 to 57.5, so the reading remains comfortably in expansionary mode. The Euro traded to an intra-day high of 1.2359 after the Minutes, but now is down to 1.2260, a level not seen since Valentine’s day.NZD and CAD have shown more resilience, nevertheless both currencies are down around 0.3% against the USD. The kiwi now trades at 0.7324 and the Canadian Dollar is at 1.2695.
Looking at the commodity space, oil prices have come under pressure post the Minutes on the back of a stronger USD. WTI is now -1.1% and Brent is -0.35%. Meanwhile, Copper, steam coal and iron ore are a little bit stronger at 0.20%, 0.29% and 0.27% respectively.
This morning on the Economic Front we have German IFO Business Climate and Current Assessment/Expectations at 9.00 am. This is followed by UK GDP and Index of Services at 9.30 am, ahead of the CBI Reported Sales at 11.00 am. At 12.00 pm we have the latest ECB Minutes from the last meeting and at 1.30 pm we have US Weekly Jobless Claims. Finally we have US Leading Index and the Kansas City Fed Manufacturing Index at 3.00 pm and 4.00 pm respectively.
The Fed’s Dudley speaks in New York at 3.00 pm while later at 5.30 pm Bostic speaks at a conference in Atlanta.
March S&P 500
The S&P rallied shortly after I posted yesterday morning with the market trading higher to my 2742 sell level with a 2748 high print following the release of the FOMC Minutes. Mistakenly I thought the S&P would subsequently rally to my 2755/2775 resistance level before reversing and unfortunately I covered my short position at my revised 2739 T/P level. The last hour saw an aggressive sell-off in the S&P with the market trading to an initial low at 2693. As I was already long the Dow I waited to buy the S&P which I did at 2697 before covering this position on the re-open of the Futures Market at 2701 and I am now flat. The S&P has strong support at 2680 ahead of more important support at 2650. There is a fair chance that last weeks 2753.50 high and yesterday’s retest at 2748 marks the end of this rally with a subsequent test of the 2531 double bottom from nearly two weeks ago. Today I will be a small buyer on any dip lower to 2674/2681 with a 2668 stop. If I am taken long and subsequently stopped out of this position I will be a more aggressive buyer on any further dip lower to 2648/2655 with a 2641 stop. I have to respect yesterday’s late sell-off and I will now look to sell the S&P on any rally higher to 2710/2724 with a 2735 wider stop.
EUR/USD
The Euro traded lower to my 1.2285 buy level. As this move happened late in the New York session I emailed my Platinum Members to exit any long position at 1.2298 and I am now flat. There is no doubt the likely test of 3% in the 10 Year Treasuries is helping the US Dollar. The Euro has support at 1.2245 but a break and close below here could well see the Euro trade down to at least 1.2150. Today I will be a small buyer from 1.2210/1.2245 with a 1.2180 stop.
March Dollar Index
This morning the Dollar has traded higher to my 90.15 sell level. I will only add to this position on any further move higher to 90.55 with a 90.80 tight stop. I will now raise my T/P level on this position to 89.95 and if my second level is filled I will then raise my T/P level to 90.20.
March DAX
For those Members trading on a spreadbetting firm the DAX traded lower to my 12325 buy level overnight before rallying to my 12360 T/P level and I am now flat. The weakness of the Euro is helping the DAX to outperform the US Indices at this time but that may well change when we get the latest ECB Minutes at 12.00 pm. The DAX has initial support at 12240 and today I will again look to buy the market on any dip lower to 12180/12245 with a 12130 stop.
March FTSE
No change as I am still a buyer on any dip lower to 7110/7145 with a 7075 stop. I still do not want to be short the market at this time.
Dow Rolling Contract
The Dow had a wild trading range yesterday with the market selling off over 500 points in the last hour of trading to hit the whole of my 24740/24820 buy range for an average long position at 24780. Thankfully in the last five minutes of trading the Dow rallied to my revised 24803 T/P level and I am now flat as emailed to my Platinum Members. These updated emails are key, especially when markets are as volatile as they are now. The Dow has strong support from 24480/24580 and today I will be a buyer in this area with a 24425 tight stop. Given how close we are to support I do not want to be short the Dow at this time.
March NASDAQ
No change as my only interest in buying the NASDAQ is still on a dip lower to 6530/6575 with the same 6490 stop.
March BUND
After the FOMC Minutes were released I emailed my Platinum members to lower their buy level in the Bund to 158.20 which was filled just before the close. As I want to get all members on the same page I covered this position earlier this morning at my revised 158.33 T/P level and I am now flat. The Bund continues to outperform the US Treasuries and today I will again look to buy the market on any dip lower to 157.50/157.90 with a 157.20 stop.
Gold Rolling Contract
Gold is weakening as expected and I am still flat. Gold has huge support at 1300 and 1290 and I would expect a decent rally on any test of this key support area over the coming days. Today I will lower my buy level to 1298/1308 with a 1285 wider stop.
Silver Rolling Contract
No change as I am still a buyer on any dip lower to 15.85/16.25 with a 15.50 stop.
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