Amid light trading both the Dow and S&P made new all-time highs yesterday while the NASDAQ closed flat dragged down by lower prices in the FANG stocks. Meanwhile European equities closed in positive territory. US Dollar indices have edged a little bit higher too reflecting strength against EUR, GBP and CAD while SEK and AUD have outperformed. The former boosted by higher inflation while the latter has been supported by M&A activity. Higher inflation did not help the pound, but hopefully Governor Carney is a fan of Al Green as he will need some inspiration for his letter to the Chancellor explaining why inflation is more than 1% away from the official 2% target.
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M&A activity has been the big driver for the AUD with the currency quickly reversing losses incurred after a softish NAB survey yesterday. The survey headlines saw the currency trade to a low of 0.7520, but then take-over news lifted the pair to an overnight high of 0.7580. USD strength after a stronger PPI dominated later in the session and the AUD now trades at 0.7560. Unibail- Rodamco, a European owner of shopping malls, has agreed to buy Westfield for A$32.7bn, of which around 35% will be paid in cash. While the deal will not likely be closed until mid-2018, the FX market has moved to anticipate the associated hedging of the cash proceeds back to AUD. In addition to the Westfield deal, Zurich Life yesterday announced that they would buy ANZ’s Australian life insurance business for A$2.85bn.
The US Dollar strengthened a bit against the major currencies yesterday while US Bond Yields edged up a few basis points ahead of the all-important CPI release and Fed meeting this afternoon. US PPIs – both headline and core – were a little higher than expected and although the historic relationship between PPI and CPI is not very strong, the PPI release appears to have been a factor for the higher USD and UST yields. Another factor could be linked to press reports suggesting House and Senate Republicans are on track to agree a final wording of the tax reform bill this week with a vote now expected next week Tuesday. Both the USD and US Bond Yields remain within recent trading ranges, but of note 10y UST yields are back above 2.40% for the first time since the end of November.
As for the Swedish Kroner, its meteoric rise is entirely due to better than expected CPI figures. Headline CPI was 0.2% m/m and 1.9% y/y (0.1/1.7% expected). SEK (+0.72%) now trades at 8.43 and EUR/SEK is -1.15% at 9.8954. The Riksbank meets next week and the current quantitative easing programme is set to expire at the end of the year. At the October meeting the Riksbank indicated they could extend that into 2018, but there were divisions on the board.
In contrast to SEK, Sterling could not sustain a rally following a better than expected headline CPI. Headline CPI was 0.3% m/m against expectations of a 0.2% result, while the y/y rate is now 3.1% against expectations of 3.0%. More importantly, core CPI was unchanged and in line with expectations at 2.7% and market pricing for the next BoE hike have not shifted from the end of 2018. Sterling initially rallied to 1.3380 before falling back and is currently trading at 1.3330 – around where it was prior to the release. Also possibly tempering expectations were newspaper reports that the EU has ruled out early Brexit trade talks stating this would not begin until March.
The other notable event was a natural gas plant explosion in Baumgarten, east of Vienna. 2 are dead and 18 are injured. The explosion sent shivers through a wintery Europe with front end UK Nat Gas futures jumping as much as 20% – the biggest rise since 2011.
Looking at other commodities, Iron ore (0.52%) and Copper (0.33%) managed to eke out small gains while oil prices reversed yesterday’s gains amid an ease in concern over the North Sea oil pipeline crack.
This morning on the Economic Front we already had the final release of German CPI for November which came in as expected with a + 0.3% print. At 9.30 am we have UK Employment and Average Earnings and this is followed at 10.00 am by Euro-Zone Industrial Production and Employment Rate. Next we have US CPI at 1.30 pm. Finally we have the FOMC Rate announcement at 7.00 pm followed by Fed Chair Janet Yellen’s press conference at 7.30 pm.
As for the Fed decision, a hike this evening is already in the price. Focus of course will be on the dot plot and my sense is that the 2018 dots are likely to remain unchanged, but there is some risk that the longer run get revised lower. If so that might be a bit of a downward force on longer dated UST yields and the USD, but what Yellen says at the press conference probably carries the day. Although this will be her last conference, as usual her comments will reflect the view from the FOMC.
US politics may also prove to be a source of volatility with the Alabama senate vote result coming out overnight. This was not good for Trump’s tax reform as the Republican candidate Roy Moore was beaten.
December S&P 500
My S&P plan worked well with the market trading higher to my 2669 sell level before selling off to a 2656.50 low print so far. Unfortunately as my sell level got hit late in the US trading session I did not want to stay short ahead of the FOMC this evening and I cut this position too early at 2668 and I am now flat. There is no doubt the rotation out of Technology stocks into Financial and Telecos is weighing on the S&P especially as the FANG stocks make up over 30% of the S&P. The US Indices have had huge gains so far this year with the Dow, S&P and NASDAQ up 18.0%, 19.2% and 30.0% for the year to date. The one worry that I have with these gains is that fact that since 1915 that only once in the 17 rate hiking cycles has the US not gone into recession. I do not believe that this time is different especially as the Fed has said it will reduce its Balance Sheet by $450 billion next year. The Fed thinks that QE helped to bring about the rising asset prices (stocks, bonds and housing) yet somehow they believe that Quantitative Tightening (QT) will not have any effect on the markets. This will end badly especially if the Fed continue to hike rates while reducing its balance sheet at the same time. The S&P is getting nearer and nearer my 2680/2700 target level and today I will be a seller on any further rally to 2673/2683 with a 2692 wider stop. I am sorry for the wide calls today but as we get nearer my target level I will narrow my range. Meanwhile I will leave my buy level unchanged from 2642/2650 with the same 2637 stop.
EUR/USD
The Euro traded lower to my 1.1750 buy level but unfortunately just missed my second buy level at 1.1715 with a 1.1718 low print. I am still long and I will now lower my T/P level on this position to 1.1765 as I want to be flat ahead of the FOMC at 7.00 pm. If I manage to T/P on this position I will again look to buy the Euro on any subsequent dip lower to 1.1650/1.1685 with a 1.1620 stop.
December Dollar Index
No change as I am still a seller of the Dollar on any rally higher to 94.20/94.50 with the same 94.75 stop. I no longer want to be long the Dollar at this time.
December DAX
The DAX continues to struggle to break the key 13200 resistance level. I am still flat the market and nervous and I will not chase this market higher. For this reason I will leave my buy level unchanged from 12980/13040 with the same 12930 stop.
December FTSE
After months of sideways action the FTSE is finally breaking out to the upside with the market again closing over the key 7420 pivot point and this level should act as strong support on any subsequent test. Today I will now raise my buy level to 7425/7455 with a 7395 stop.
Dow Rolling Contract
My Dow plan worked well with the market trading higher to my 24495 sell level before selling off to a 24460 low print. We traded near this low for a good 30 minutes before rallying and I used this sell-off to cover my short position at my revised 24465 T/P level and I am now flat. I will stay flat until we get the FOMC announcement at 7.00 pm and if the Dow rallies further I will again be a seller from 24630/24700 with a 24750 stop. Given how overbought the Dow is trading I still do not want to be long the market at this time.
December NASDAQ
I am still flat the NASDAQ which again missed my buy level before rallying. On the back of the Alabama Senate vote the US Stock Futures markets sold off with the NASDAQ again just missing my 6355 buy level. Today I will now lower my buy level to 6295/6335 with a 6260 stop. Remember a break and close below 6300 is bearish.
March BUND
I am still flat the BUND and will continue to be a seller on rallies. Today I will now lower my sell level slightly to 163.75/164.05 with a 164.35 stop. I still do not want to be long the Bund at this time.
Gold Rolling Contract
No change as I am still a buyer on any dip lower to 1226/1234 with the same 1219 stop. The low for Gold yesterday was 1236.50 just missing my buy level but the rally so far off this low has been weak.
Silver Rolling Contract
No change as I am still long at 15.75 with the same 15.95 T/P level. Again as mentioned yesterday I will only add to this position on any move lower to 15.30 with the same 14.95 stop.
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