The Bank of Canada is the latest Central Bank to deliver a shock by cutting its main Policy Rate to 0.75% from 1% in a move which none of the 22 analysts surveyed had anticipated. Saying that the collapse in Oil prices will slow inflation and weigh on the economy, Bank Of Canada Governor, Poloz, said the bank has room to manoeuvre should its forecast prove to be either too pessimistic or too optimistic. USD/CAD rose to a 6 year high at 1.2400.
In Europe, as the big day finally arrives, it is hopes for QE which are clearly driver of equity outperformance and certainly not the current economic conjecture or the immediate outlook for corporate earnings. A series of well-crafted leaks over the past few weeks has framed a narrative where first the amount was discussed, then the practical methodology and thirdly the time frame. So, we heard of a €500bn Sovereign Bond programme, then that it might be the responsibility of National Central Banks and yesterday afternoon that it could be a fixed monthly purchase facility mirroring that of the Federal Reserve.
To sum up briefly, the biggest bang for the Euro will come if the programme is big, quick and driven by the ECB. Size matters! To get the balance sheet up to 2012 levels would imply buying assets worth €1trillion in total, comprising around €100-€200 billion of Covered Bonds and ABS, €300-€400 billion of TLTRO lending and the remainder by Sovereign or Corporate Bond buying. €500-€600 billionn should be the absolute minimum and time is of the essence because the sooner the programme starts, the quicker the impact can be felt, while delaying until March serves no practical purpose whatsoever. Finally the identity of the purchaser matters.
This morning on the economic front we have UK Public Sector Net Borrowing at 9.30 am. This is followed at 12.45 pm by the ECB QE announcement and Dragi press conference which follows at 1.30 pm. Also at 1.30 pm the US will release its latest Weekly Jobless Claims. At 2.00 pm we have the FHFA House Price Index. Finally the US Manufacturing PMI and Consumer Confidence will be released at 2.45 pm and 3.00 pm respectively.
March S&P 500
The S&P plan worked out really well as both my buy level and sell level were triggered. Shortly after lunch the S&P got hit hard with the market trading lower to my 2005 buy level, before a huge 28 handle rally ensued which enabled me to cover this position at 2019. The S&P subsequently made a new high at 2033 which enabled me to go short at 2028. It then had a nice drop after making this high and this helped me to cover this 2028 short position at 2018 and I am now flat.
In the ECB’s QE announcement at 12.45 pm it is very difficult to predict what they may or may not do and this will lead to extreme volatility in both directions. I have outlined the main scenarios in the market commentary above. The S&P is still stuck by and large in the neutral 2016/2031 trading range. If it sells off after the announcement I will be a small buyer from 1990/2002 with a 1983 stop. I have to use a much wider range given the expected volatility. My only interest in selling the S&P is on a rally to 2060/2073 with a 2080 stop. A break and close below 1972 will be extremely bearish and will see the market accelerate lower. I am only going to trade in very small size and I as expecting a really volatile trading session.
Eur/USD
I do not expect to see the same volatility in the markets as that caused by the SNB last Thursday but the Euro could easily trade on three, four or even five different big figures following the announcement from the ECB and especially the Dragi press conference that follows. Given the extreme levels of positioning towards the Euro I prefer to watch from the sidelines unless the Euro trades lower to the 2003 ‘Open Gap’ from 1.1212/1.1374 where I will be a small buyer with a 1.1095 stop. I certainly do not want to be short the Euro today as the risk is a major move higher if the ECB and Dragi again disappoints.
US Dollar Index
My short 92.80 position from last week finally worked out yesterday as the Dollar had a nice sell-off following all the leaks in relation to today’s key ECB Meeting which enabled me to cover this position at 92.50 and I am now flat. Today I will again be a small seller on any further rally to 93.60/94.20 with a 94.50 stop.
March DAX
The idea of buying the Dax on dips ahead of today’s key QE announcement certainly paid dividends again yesterday as shortly after lunch the Dax traded lower to my 10170 buy level before exploding to the upside which enabled me to cover this position at 10280 and I am now flat. I am going to stay flat until I see what the ECB does and if the market rallies hard after the announcement I will be a small seller from 10420/10520 with a 10600 stop. My only interest in buying the Dax is on a dip to 10050/10160 with a 9985 stop. Again given the expected volatility following the announcement I have to use much wider levels.
March FTSE
The FTSE has not been as volatile as the other major Indices over the last two weeks with the market trading higher most days. Thankfully I have not been short as this is what the price action has been telling me. I am, not going to chase this market higher today and I will leave my buy level the same at 6510/6540 with a 6475 stop.
Dow Rolling Contract
The Dow plan also worked out very well as shortly after I posted it traded lower to my 17400 buy level before exploding higher which enabled me to cover this position at 17520 and I am now flat.This morning the Dow is trading another 100 points higher as optimism returns to the US markets ahead of today’s expected QE announcement by the ECB. If the Dow continues to rally my only interest in going short is from 17780/17900 with a 17950 stop. I will also be a small buyer on any dip back to 17350/17420 with a 17280 stop.
March BUND
Finally my short 157.85 Bund position worked out very well yesterday as the market had a nice sell-off in the afternoon which enabled me to cover this position at 156.80 and I am now flat. My only interest in selling the Bund today is on a rally back to 157.20/157.60 with a 157.80 stop.
Gold Rolling Contract
Gold is finding it difficult to move higher given how overbought it is after the $100 move higher so far in 2015. I am still flat and today I will lower my buy level slightly to 1260/1270 with a 1249 stop.
Silver Rolling Contract
Silver is now up nearly 30% since its low last month. With Silver reaching a new high at 18.52 yesterday after I posted, I raised my stop to 18.30 on my 16.30 long position which was finally exercised and I am now flat. Just like Gold above Silver is overbought and my only interest in buying the market today is on a dip to 17.30/17.60 with a 16.95 stop.
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