After two consecutive days of steep declines, US equities have rebounded yesterday with gains led by energy shares and small caps. Amid a low trading environment ahead of Thanksgiving holiday today, gains in oil prices have been one supporting factor while US economic data printed on the softer side of expectations. Improvement in risk appetite sees the USD give up some ground with AUD and NZD among the main beneficiaries within G10 currencies. Meanwhile UST yields are a touch higher and BTPS rallied on hopes of an Italian budget compromise.
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Currencies
An improvement in risk appetite alongside an increasing number of commentary suggesting the Fed could well be considering a pause to its gradual tightening plan next year has seen the USD give up some of its recent gains. The narrow DXY Index now trades at 96.69, down 0.14% on the day while the broader BBDXY is at 1204.78, down -0.15%. That said declines in both Indices are relatively minor and both remains comfortably in their upward trends established late in September. Meanwhile Emerging Market FX (+0.36%) and ADXY (Asian Currency index, +0.23%) have made bigger gains reflecting the risk on mood.
An MNI report suggesting the Fed may be looking to pause next year got a fair bit of air time and has played a role for the small pullback in the USD over the past 24 hours. The report suggested the Fed could end its cycle of interest rate hikes ‘’as early as the spring, as it starts to consider at least a pause to its gradual monetary tightening’’, according to senior Fed sources. The report also noted that the Fed is just one or two hikes away from a point where major decisions have to be made about the outlook, so while a December rate hike is all but assured, the debate will become more lively beginning at the Central Bank’s March meeting and certainly by June. It added that last week’s seemingly more dovish comments by Fed vice-chair Clarida in a CNBC interview was part of a coordinated step, following the market reaction to Chair Powell’s upbeat remarks in early October.
To some extent the report is not new news, but it has helped reaffirm the repricing in Fed expectations seen in recent weeks. Early in the month the market was looking for 1.5 Fed hikes in 2019 and now these expectations have declined to 1.15.
AUD and NZD have made decent gains overnight (~0.70%) boosted by the improvement in risk appetite that has seen the VIX index ease back from Tuesday’s intraday high of 23.81 to close at 20.80 last night. Risk sentiment looks to be the current main driver for both antipodean currencies, thus focus is now likely to shift towards Black Friday, the day after Thanksgiving, which marks the traditional start to the U.S. holiday shopping season. Amid concerns of a slowing economy and softer equity market, the level of shopping on Friday is likely to be treated as an important gauge of the US consumer state of mind.
After Black Friday, focus is likely to shift back to US-China tensions ahead of the G20 summit next weekend. On that front the news flow is not that reassuring. US-China trade tensions have not gone away. Yesterday the Office of the US Trade Representative released an updated report on the investigation of China’s trade practices regarding technology transfer, intellectual property, and innovation. The report concluded that ‘’China fundamentally has not altered its acts, policies, and practices’’ in this area and ‘’indeed appears to have taken further unreasonable actions in recent months.’’ The report increases the pressure on China to come up with something ahead of the Xi-Trump meeting on December 1st.
The improvement in risk sentiment has seen USD/JPY climb back above 1.13, while the Euro got a small boost on hopes of an Italian budget truce. The union currency now trades at 1.1405. No Brexit news sees the pound unchanged at 1.2785.
Commodities
Oil prices have rebounded helping improve the mood in equity markets. Brent is +2.29% to $63.32 and WTI is +1.42% to $54.45. The bounce in oil prices is interesting considering the stream of negative headlines and as a result it suggests that the market has become short-term oversold. Those headlines included Saudi oil production rising strongly in November, and production across Saudi Arabia, the US and Russia at a near-record level, a report that oil production in the US Permian basin might soon been profitable at a price of just $30 a barrel, and the pipeline bottleneck in Texas set to ease by the end of next year. President Trump tweeted ‘’Oil prices getting lower. Great! Like a big Tax Cut for America and the World. Enjoy! $54, was just $82. Thank you to Saudi Arabia, but let’s go lower!’’. I see this as a slightly odd comment when the US is now the world’s largest oil producer and the country and its trade balance would benefit from higher oil prices.
The lift in risk appetite also helped other commodities perform with copper +0.94%, LMEX +0.73% and gold +0.52%. Iron closed unchanged at $74.86.
Equities
US equities closed the day in positive territory although well off their best levels, after starting the week with two days of solid declines. Gains have been led by the energy sector after a decent rebound in oil prices ( more below) while small caps (Russell 200 Index is up to just under 2%) and technology shares have also joined the party. That said with questionable factors driving the rebound in oil against a backdrop of light trading volumes before Thanksgiving holiday, it is probably fair to day that the rebound looks to the function of an oversold rather than a fundamental change on the outlook for equities. If anything the softer than expected US data releases yesterday played to the view that a slowdown in growth looks to be in the offing.
Early in the session European equities also closed higher with the Eurostoxx 50 climbing 1.51% after 5 consecutive days of negative returns.
Bonds
US Treasury yields are up 1-2bps across the curve, reflecting the risk-on backdrop and higher oil prices. Italy’s 10-year rate is down 15bps as the market takes a more optimistic view on the budget stand-off with the European Commission. As expected, in its annual review the commission said that Italy’s budget is in ‘’particularly serious non-compliance’’ of EU limits. But the market hooked on to Italian Deputy Premier Salvini’s comment that although he won’t compromise on core items such as tax cuts and a basic income for the poorest, he is willing to make tweaks and is open to dialogue.
Economics
US Core Durable Goods Orders were +0.1% against expectations of a 0.4% rise. There was also a sizeable downward revision to the prior month to -0.6% m/m from the initially reported 0.0% outcome.
US Existing house sales (Oct: 5.22 vs. 5.20 exp. ) were stronger than expected, although the data showed a rise for the first time in 7 months after significant recent weakness.
US Jobless Claims also rose (week to Nov 17: 224k vs 215k exp) linger hurricane influences could be at play or there could also be signs of some weakness creeping up in the labour market. Watch this space.
Today on the Economic Front with the US Markets closed for the Thanksgiving Holiday the only data of note is Euro-Zone Consumer Confidence which will be released at 3.00 pm.
December S&P 500
The S&P which rallied to an intra-day high of 2671 subsequently fell 20 Handles into the close which was surprising given how seasonally strong this week tends to be. I am still flat and today I will now lower my sell level to 2678/2692 with a 2702 stop. Meanwhile I will leave my buy range unchanged from 2605/2618 with the same 2596 stop. The S&P has major long-term support from 2560/2585 and I will be an aggressive buyer on any plunge to this area with a 2545 wider stop. Remember if the S&P trades below the 2560 for a period of 2/4 weeks then we can say that the market has put in a long-term top which will signal a major recession in the US starting in 2019.
EUR/USD
I am still flat the Euro and today I will leave my 1.1310/1.1350 buy range unchanged with the same 1.1265 stop. If the Euro can break and close over 1.1505 then this will be the breakout to higher prices that I have been looking for. I still do not want to be short the Euro at this time.
December Dollar Index
The Dollar came close to my 96.35 initial T/P level after I posted. As the Dollar Index is closed today for the Thanksgiving Holiday I emailed my Platinum Members to exit any short position at 96.45 and I am now flat. With the market closed I will stay flat until tomorrow’s commentary.
December DAX
The DAX had a nice rally yesterday to close near the high of the day as it continues to build value of the 11000 low on Tuesday. I am still flat and today I will raise my buy level slightly to 11030/11090 with a 10975 stop.
December FTSE
The FTSE also traded strongly yesterday helped by the fact that Sterling is again weak. Today I will now raise my buy level to 6940/6980 with a 6895 stop.
Dow Rolling Contract
The Dow missed my 24800 sell level with a 24666 high print before following the S&P lower into the close with a 200 point fall. I am still an aggressive buyer on any plunge lower to 23900/24100 with the same 23750 wider stop. I will now lower my sell level to 24750/24950 with the same 25120 wider stop.
December NASDAQ
The NASDAQ was the best performing Index of the three US markets that I cover. I am still flat and today I will continue to be a strong buyer on any dip lower to 6400/6480 with the same 6345 stop.
December BUND
The boring sideways action in the Bund continues with the market still trading at an insane yield of just 35 basis points. Today I will leave my 161.10/161.50 sell range unchanged with the same 161.80 stop.
Gold Rolling Contract
I am still flat Gold and today I will now raise my buy level slightly to 1209/1217 with a higher 1201 stop.
Silver Rolling Contract
My long 14.30 Silver position worked well with the market trading higher to my 14.45 T/P level shortly after I posted. As long as Silver can hold the December 2015 low of 13.62 and this month’s low of 13.87 then Silver should work it way higher to the 14.90/15.10 key resistance area. Today I will again look to buy the market on any dip lower to 14.10/14.40 with a 13.75 stop.
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