A mild risk-off theme quickly emerged shortly after I posted yesterday morning following North Korea’s statement that the US has effectively “declared war” and that North Korea has every right to “make countermeasures”. While the White House has called both statements “absurd”, this does represent a significant escalation in rhetoric and raises the risk of a tactical misstep. Safe havens were consequently bid, with increases in the Yen (+0.3%) and Swiss Franc (+0.2%), Gold rose (+1.2%), Equities fell (S&P500 -0.2%) and Treasury yields were lower (-3.0bps).
To mark my 1425th 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 33 points yesterday and is now ahead by 289 points for September, having made 1560 points in August, 1096 in July, 1023 in June, 1076 in May, 1375 in April, 1335 in March, 1481 in February and 1734 in January. Since I started this New Platinum Service in June 2015 it has averaged a monthly gain of over 1700 points.
How worried should we be? It is clear that over the past few weeks both sides have been upping their rhetoric. Stratfor who has more expertise than most in this area points to the North Korean threat being equivalent to recent US threats – the US has discussed shooting down North Korea’s next missile test and North Korea has responded in kind with the threat of possibly shooting down US bombers. Statfor concludes that the probability of intentional war is still relatively low, but the potential for an accident or miscalculation is rising (see Stratfor worldview for more).
Now to markets! There was US Dollar strength with the DXY up 0.5%. Much of that strength appears to have come from weakness in the Euro (-0.9%) with the Euro under pressure as the market digested the results of the German election. Also contributing to US Dollar strength was expectations of US tax reform, with the press suggesting tax reform details could be released on Wednesday.
As for the German elections, while Merkel’s conservative bloc gained the most votes at 33%, she needs to negotiate to form a government. The two likely partners are a “Jamaican” coalition with the FDP and the Greens who are likely to insist on lower immigration and argue for a less of a push towards Euro-Zone integration; the alternative is to form a coalition with the Social Democrats though they have not expressed a willingness to do so to date. The other clear winner of the election was the rise of the far right with the Alternative for Germany (AfD) winning 12.6% of the vote, a 7.9% point increase from the last election in 2013. It seems Germany is not immune from global trends and a breakdown of voters reveals half of the support for the AfD came from people who normally do not vote in elections.
It is no surprise then to see the Euro down 0.9% to $1.1847. Also weighing on the Euro was a softer IFO Business Confidence (107.4 vs 108.0 expected), while remarks by Draghi to the European Parliament did not yield much of a reaction. There is good support for the Euro at this level, though a break below $1.18 could be possible if US Dollar strength continues on the back of a possible US tax reform plan.
Other currency pairs showed only modest slippage against the USD: Aussie (-0.3%); Canadian Dollar (-0.3%). The Yen was bid on safe haven concerns (+0.3%), with Japanese markets little affected by the decision for a snap election (it was mooted some weeks ago) and to PM’s Abe’s economic stimulus package (worth ¥2trillion Yen or around US$18bn ).
German Bund yields also fell, down 4.7bps to 0.40%. Some of the fall does relate to risk aversion following the North Korean statements early yesterday morning and US Treasury yields are also down similarly by 3.0 bps to 2.22%.
As for Fed Talk, Evans (voter) and Dudley (voter) hit the wires with slightly contrasting views on inflation. Dudley reinforced that weak inflation over the past six months reflected temporary factors that will fade and thus expects “inflation will rise and stabilise around the Fed’s 2% objective”. Evans in contrast wants to see “clear signs of building wage and price pressures before taking the next step in removing accommodation” and that a “gradual and cautious approach” is appropriate. It is clear that the next few months of CPI prints will be crucial in determining whether the FOMC sees the recent low inflation as transitory, or a more permanent feature.
The other big mover yesterday was the oil price. WTI rose 2.9% to $52.13 while Brent was stronger (+4.2% to $59.24). The move higher reflects political tensions between Turkey and the Iraqi area of Kurdistan which held an independence referendum yesterday – counting has begun but no results are available as yet. Turkey also has a sizeable Kurdish population and the fear is that if Kurdistan succeeds it could lead to a fragmentation of Turkey. It’s no surprise then to see Turkey threatening “to close the valves” on Kurdistan’s oil exports.
This morning on the Economic Front we have no data of note due from either the Euro-Zone or the UK. At 3.00 pm we have US Home Sales. Richmond Fed Manufacturing Index and the Conference Board Consumer Confidence Index.
In contrast to a sparse economic calendar, today is replete with Central Bank speak. This afternoon we have the ECB’s Praet at 1.00 pm in Frankfurt and this is followed by the Fed’s Mester, Brainard, Brostic at 2.30 pm, 3.30 pm and 5.30 pm respectively. In between at 5.00 pm the clear highlight will be US Fed Chair Yellen who is speaking on “Inflation, Uncertainty, and Monetary Policy” at the NABE Conference.
December S&P 500
My S&P plan worked well yesterday with the S&P trading lower to my 2487 buy level before rallying back to a 2498 rebound high and this rally enabled me to cover my long position at 2490 revised T/P level and I am now flat. The 2492 level is key for today, as a break and close below here opens up the possibility of a move lower to 2466/2476 which will be a good area to go long. Alternatively if the S&P can hold this 2492 level then we should see a move higher to 2520/2526 where I would be an aggressive seller with a 2532 stop. Despite the Sell-off in all main US Indices yesterday the McClellan Oscillator did not move and closed with a +79 print. Remember if the S&P cannot sell-off aggressively in the next month then there is a strong possibility of a melt-up for the market as detailed in yesterday’s commentary. Today I will now look to buy the S&P on any dip lower to 2474/2480 with a 2469 stop. If the S&P does settle above 2492 this evening I will then move my buy level higher. If I am taken long and subsequently stopped out of this position I will be a more aggressive buyer from 2460/2466 with a 2455 stop.
EUR/USD
After the Euro traded lower to my initial 1.1855 buy level I emailed my Platinum Members to exit any long position at 1.1858 and I am now flat as I did not want to have a long position overnight especially given the increasing geo-political risk with North Korea. Today I will look to buy the Euro on any dip lower to 1.1765/1.1805 with a 1.1730 stop. The 1.1740/1.1770 is strong support for the Euro. However a break and close below 1.1660 could well see a move lower to 1.12/1.14 before the Euro re-groups and moves higher. The Euro has strong resistance at 1.1970 and a break and close above here will see me look to set up a long position at a higher level.
December Dollar Index
I am still flat the Dollar and today I will now move my buy level higher to 91.80/92.15 with a 91.45 stop. We are currently trading at 92.40 ahead of strong resistance at 92.60.
December DAX
Given the geo-political risks I am not going to chase the DAX higher and today I will leave my buy level unchanged from 12420/12480 with a 12375 stop. This buy area is strong support and I would expect a decent rally on the first attempt. Given the weakness of the Euro I do not want to be short the DAX at this time.
December FTSE
The big question here is when will the FTSE move again as it has been stuck in a 220 point range for nearly four months. I am still flat and today I will leave my buy level unchanged from 7175/7205 with the same 7145 stop.
Dow Rolling Contract
At yesterday’s 22216 low print the Dow had fallen over 220 points since its high last Thursday as finally after nine straight up day’s the Dow saw some profit taking. As mentioned over the past few days I will be an aggressive buyer on any dip lower to 21830/21910 with a 21770 stop. I am still short in tiny size at 22030 and today I will add into this position on any move higher to 22350/22420 with a 22465 tight stop.
December BUND
Just after I posted yesterday morning the Bund rallied hard and thankfully we had no sell levels as yet again anyone shorting this market got slammed. I find it insane that eight years into an economic recovery that the 10 year yield for the German Bund is below 40 basis points but as Keynes famously said ‘’Markets remain illogical longer than I remain solvent’’ is certainly apt for nearly all bond and equity markets at this time. Technically yesterday’s move higher in the Bund was a buy signal which has to be respected and today I will now raise my buy level to 161.30/161.65 with a 160.95 stop.
Gold Rolling Contract
Unfortunately Gold just missed my 1283 buy level before rallying strongly on the worsening geo-political situation. Gold has strong resistance from 1314/1323 and given the Commitment of Traders Managed Money Index I have no interest in chasing this market higher. As I have mentioned consistently over the past few months everyone I talk to is long Gold which worries me. Today I will raise my buy level to 1288/1295 with a 1280 stop.
Silver Rolling Contract
I have never had a month when so many of my orders have missed by fractions as shown by Silver yesterday which missed my 16.80 buy level with a 16.82 low print before having a near 50 cent rally and I am still flat. Given the fact that the Daily Sentiment Index never got back to a single digit reading concerns me and today I will only raise my buy level in Silver to 16.75/17.05 with a 16.45 tight stop.
Recent Comments