The biggest news yesterday was the release of the FOMC Minutes, which were interpreted cautiously by the market as confirming the likelihood of a June rate hike, but casting some uncertainty over the trajectory for rates thereafter. The US dollar fell on the news, while bond yields declined. Overall the US Fed seems content to hike rates again in June, noting “most participants judged that if economic information came in about in line with their expectations, it would soon be appropriate [to hike rates]”. Markets agree with market pricing for June sitting at around a 76% chance while around 1.4 rate hikes are priced by the years end. However, the trajectory for rates thereafter seems slightly more uncertain after today’s Minutes – the key source of uncertainty coming from the inflation outlook.
To mark my 1350th issue of Tradernoble Daily Commentary I am offering a special 2 year rate of Euro 2750 for my Platinum Service which includes 1 to 4 updated emails throughout the trading day. This offer is open to both new and existing members and if anyone is interested can you please contact me on bryan@tradernoble.com for details.
For anyone following my Platinum Service it made 22 points yesterday and is now ahead by 820 points for May, having made 1276 points in April, 1335 in March, 1481 in February and 1734 in January. The previous seven months saw gains of 1351, 1971, 1582, 1142, 1782, 1682 and 2550 points respectively. Since I started this New Platinum Service in June 2015 it has averaged a monthly gain of over 1750 points.
One camp (called the “couple”) is becoming concerned that the unemployment rate is running below the full-employment level which could pose upside risks to inflation – their case reinforced by “several Districts reported a pickup in wage increases, shortages of workers in selected occupations, or pressures to train workers”. Another camp in contrast (“several others”) continued to see downside risks to the inflation outlook, particularly given the low inflation print and still-low measures of inflation expectations. They also view the possibility the labour market could tighten further without giving rise to inflationary pressures. Against such a backdrop it was deemed “prudent to await additional evidence indicating that the recent slowing in the pace of economic activity had been transitory”. The one point of agreement was that “most” saw the weak Q1 GDP data as “transitory” and likely to rebound.
Moves to unwind the balance sheet are likely to occur “this year” and The FOMC broadly supported a staff proposal for a gradual approach. “Under the proposed approach, the Committee would announce a set of gradually increasing caps, or limits, on the dollar amounts of Treasury and agency securities that would be allowed to run off each month, and only the amounts of securities repayments that exceed the caps would be reinvested each month. As the caps increased, reinvestment would decline” “The caps would initially be set at low levels and then be raised every three months, over a set period of time, to their fully phased-in levels.”
Markets emphasised slightly cautious tone and with the US dollar (DXY) falling 0.3% across the board. Correspondingly, most currency pairs were higher against the US dollar: EUR (+0.3%); JPY (+0.2%); AUD (+0.3%).
The Canadian dollar was the outperformer, up 0.7% following the Bank of Canada Meeting. Although rates were unchanged, the Statement was less dovish with an assessment that the “economy’s adjustment to lower oil prices is largely complete” and optimism on the global economy which will also help domestic growth.
While the Australian construction data did not have an enduring impact on the currency (-0.7% q/q v expectations of -0.5%), the sharp fall in residential construction (-4.7% q/q) has led many to wonder whether residential construction is topping out at high levels, and on this note the level of construction has been broadly unchanged since mid-2016. The data also feeds into Q1 GDP (out June 7) and combined with other partial data to date is suggestive of a real risk of a flat or even a small negative GDP outcome.
China’s credit rating downgrade by Moody’s to A1 from Aa3 did not ruffle too many feathers. The move reflects concerns over leverage, debt and shadow banking and a view that growth could suffer as China seeks to rein in these risks. Unsurprisingly, the Chinese authorities defended their reform policies and criticised Moody’s methodology and misunderstanding of the situation.
Finally the ECB released its latest Financial Stability report along with a speech by the ECB’s Draghi who downplayed the side effects from negative rates and that “there is no reason to deviate from the indications we have been consistently providing in our introductory statement”. All eyes will be on the June ECB meeting for any changes in policy guidance.
This morning on the Economic Front we have UK GDP, Index of Services, Total Business Investment and BBA Loans For House Purchase at 9.30 am. This is followed at 1.30 pm by US Trade Balance, Wholesale Inventories and the Weekly Jobless Claims. Finally we have the Bloomberg Consumer Comfort Index and the Kansas City Fed Manufacturing Activity Index at 2.45 pm and 4.00 pm respectively.
This afternoon we have the Fed’s Brainard speaking at 3.00 pm and the ECB’s Constancio at 6.00 pm.
June S&P 500
For the third consecutive trading session the S&P has missed my initial buy range by small margins before rallying to shy of new all-time highs and I am still flat. I am reluctant to chase this market higher from here as so far the S&P is holding below its 2404 all-time high and key one year trend line resistance. If stocks top here then we will have a Double Top which is potentially very bearish especially if the Dow continues to fail to break its March 1, high at 21,169. Given the huge amount of data releases yesterday on top of speeches from Dragi and key Fed Members op top of the FOMC Minutes, rarely have I seen a market trade in such a narrow range. There is no doubt traders are scared to buy and afraid to sell as in my opinion the Central Banks stepped in to prop up the US and European Markets after last Wednesday’s aggressive sell-off. Today I will leave my buy range unchanged from 2388/2394 with the same 2383 stop. My only interest in selling the S&P is still on a rally higher to 2414/2420 with a 2425 stop.
EUR/USD
I am still flat the Euro which again traded in a narrow range despite comments from Dragi who was speaking in Madrid. The Euro has very strong resistance from 1.1270/1.1310 and today I will again look to sell in this area with a 1.1340 stop. My only interest in buying the Euro is still on a dip lower to 1.1030/1.1070 with a 1.1005 tight stop. It was interesting that on Monday the Daily Sentiment Index reading closed at 78% bulls for the Euro which is the highest rate since May 2, 2016. This reading gives me more confidence that the Euro is due a decent pull back over the coming weeks.
June Dollar Index
After the Dollar eventually traded lower to my initial 97.20 buy level, the market frustratingly missed my revised 97.40 T/P level with a 97.37 rebound high. I am still long and as I emailed my Platinum Members I will only add to this position on a dip lower to 96.90 with the same 96.60 stop. As I go to print my second buy level gas been executed at 96.90 and I am now long at an average rate of 97.05.
June DAX
This has been a very uneventful week for trading the DAX. I am still flat and I will continue to look to buy the market on any dip lower to 12530.12580 with the same 12470 tight stop. As mentioned yesterday the DAX has very strong resistance from 12790/12840 and today I will be a seller in this range with a 12875 tight stop.
June FTSE
Unfortunately the FTSE missed my initial 7440 buy level with a 7457 low print shortly after the European markets opened yesterday morning and I am still flat. Given the lack of volatility it looks like the UK market is on hold ahead of the Election which is on this day two weeks. Today I will move my buy level higher to 7420/7450 with a 7395 tight stop.
Dow Rolling Contract
Finally the Dow has traded above last week’s 20979 ‘’Open Gap’ as the market closed over 21,000. I am still flat the Dow and today I will now raise my buy level to 20880/20940 with a 20835 stop. I still do not want to be short the Dow at this time.
June BUND
I am still flat the Bund which closed firm on the back of the higher US Treasuries. There is no doubt that the Bond markets on either side of the Atlantic do not believe in this world recovery especially with growth so weak. It was interesting that the US Bond Yields fell despite the Fed saying in the FOMC Minutes that the weak Q1 growth is just a blip. I am not going to chase this market higher and I will leave my buy level unchanged from 160.00/160.40 with a 159.70 stop.
Gold Rolling Contract
Gold is still trading below its 1264 key resistance level ahead of the mega 4.5 year trend line resistance at 1285. I am still flat and given the lack of volatility I am reluctant to chase this market higher. For this reason my only interest in buying Gold is still on a dip lower to 1240/1247 with a 1233 stop.
Silver Rolling Contract
Yesterday morning Silver traded lower to my second buy level at 16.90 thus putting me long at an average rate of 17.02. Thankfully Silver rallied following the release of the FOMC Minutes and as I wanted to bank some points for yesterday’s trading session I covered this position at my revised 17.24 T/P level and I am now flat. Today I will again look to buy Silver on any dip lower to 16.85/17.15 with a 16.55 stop. If Silver can break and close over 17.80 over the coming days, then it will only be a matter of time before we break the next key resistance level at 18.69. As I go to print I have just been filled at 17.15 and I will only add to this position on any further move lower to 16.85.
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