Sterling is the top G10 performer following news that the UK and EU have agreed on a provisional Brexit deal, but there are still lots of hurdles to overcome, UK Cabinet members now need to decide to back the deal or resign. Positive US-China sound bites have continued, but they have not been enough to lift US equities back into positive territory, the huge slump in oil prices weighing heavily on the energy sector. US Treasury Yields are lower with the 5y tenor leading the declines, AUD has retained most yesterday’s US-China news gains and Italy is said to stick with its deficit plan ahead of the EU deadline which helped the Euro to rally off Monday’s 18 month low.
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Currencies
The British pound is the best G10 performer over the past 24 hours following news that the UK and EU governments have agreed on a draft divorce deal. Following three consecutive days of decline, GBP has pared some of its recent losses gaining 0.83% over the past 24hrs and after trading to an overnight high of 1.3037, the pair now trades at 1.2984. UK Ministers have now been invited to read the agreement and the PM is meeting with all her top ministers individually ahead of a Cabinet meeting on Wednesday at 2 p.m. So although the news is positive, there is no certainty the Cabinet will approve the deal. Many ministers have reservations believing Prime Minister May could be giving too much away in a betrayal of the referendum in 2016. Plus the Irish border remains a thorn and it is not yet clear what the provisional deal is proposing in this regard. As PM May said recently we are now at the ‘’Endgame’’ and the first hurdle is to get the deal approved by Cabinet, this could take a couple of days of negotiations and the EU is also likely to be involved assuming the PM is forced to make some concessions with her Cabinet. Failure to pass the deal will raise the prospects of a disorderly Brexit, a general election and also a second referendum. By the end of the week with some certainty GBP won’t be trading near current levels, it could be significantly higher or massively lower.
Last night, the Italian government confirmed that it plans to keep its deficit and growth targets effectively challenging the European Commission with an offcial reply due by the end of Tuesday (European time). The Euro traded higher during yesterday’s session boosted by the Brexit news above, but in the pass hour the pair has traded sideways following the Italian headlines. After breaking below 1.13, the Euro looks vulnerable to the downside and from technical perspective a break below 1.1220 would open the door to an easy passage towards 1.10. Hard to say which way the pair is going to swing, but Brexit and Italian news are going to be pivotal this week. Lurking on the sidelines we could also get some news on US auto tariffs on EU cars, the US administration has been making some noise of an imminent announcement looking to increase the pressure on the EU to make a deal, so a perfect storm could be looming for the Euro.
As noted in previous dailies, USD Indices are effectively trading on the opposite side to UK and EU political news. If the Euro and the pound go up, then USD Indices are likely to be down. So based on the above news DXY is down 0.14% to 97.218 and BBDX is off 0.21% to 1211. The slight improvement in risk sentiment sees USD/JPY as the only USD pair recording some gains. After trading to and intra-day high of 114.13, USD/JPY now trades at 113.77, still reflecting a bit of cautioners in the air.
In a similar vein, the AUD trades just above 72c, retaining most of the gains from yesterday’s news that that China’s Vice Premier Liu was expected to visit Washington shortly, while he had also spoken to Treasury Secretary Mnuchin at the end of last week. Meanwhile President Trump’s Economic Advisor Kudlow confirmed that contact has resumed ‘’at all levels’’, there is no certainty that China will cede to U.S. demands in trade negotiations, but ‘’it is better to talk than to not talk,’’ Kudlow said in an interview on CNBC. Kudlow added that he won’t make a prediction on the outcome of discussions.
Equities
US equities rebounded at the open after the positive US-China news, but those gains were not sustained with the energy sector coming under pressure following a huge decline in oil prices (more below). The S&P 500 now trades at -0.27% and NASDAQ is -0.14%. Early in Europe, Stoxx Europe 600 Index rose for the first time in three days, with telecom firms leading the way after Vodafone Group Plc’s results.
Bonds
UST 5 years have led a decline in UST yields with the tenor falling 5.6 bps to 2.98%. The move lower in oil prices one big driver for the move, 10y UST now trade at 3.136%, 4.6bps lower relative to yesterday’s levels. 10y UK Gilts are up 6.9bps to 1.52% and 10y Bunds are 1bps higher at 0.4099%
Commodities
Oil prices slump more than 6% amid ongoing concern over an ease in demand and still suffering from Monday’s Trump tweet. The move lower also appears to have been exacerbated by a break of key technical levels. WTI now trades at $55.50 and Brent is at $64.99. Moves in other commodities have been relatively subdued with copper down -0.16%, iron ore -0.39% and gold -0.16%.
Economics
UK wages data came in hot with Earnings ex-bonus at 3.2% 3m y/y against expectations of 3.1%. The annual growth rate is now the highest since October 2008 and it is worth noting here that wages are starting to accelerate in the lower-skilled industries- perhaps indicating labour shortages in wholesaling, retailing, hotels & restaurants with wages +4.4% y/y. Other components were largely as expected, employment of 23k (25k expected) and unemployment ticked one-tenth higher to 4.1% from 4.0%. With Brexit uncertainty hard to see the Bank of England reacting to the data, but in the event of a deal it could cause the BoE to become more aggressive given strong wages growth.
This morning on the Economic Front we already had the release of German GDP which came in weaker than the -0.1% expected with a -0.2% print. At 9.30 am we have UK CPI, PPI and the Retail Price index. This is followed at 10.00 am by Euro-Zone Industrial Production, GDP and Employment. Next we have the US MBA Mortgage Applications at 12.00 pm and CPI at 1.30 pm. Finally, Fed Chair Powell is speaking after the markets close in Dallas this evening.
December S&P 500
It took a while but finally the S&P traded lower to my 2718 buy level before rallying to my 2728 T/P level and I am now flat. There is no doubt the speed and two-way price action is incredible and difficult to keep an eye on every move. The S&P has very strong support from 2690/2710 on the wide and this support area must hold or else we could well see a test of the October lows over the coming days. Powell’s speech later this evening could be key to the next major move. Today my only interest in buying the market is on a dip lower to 2691/2705 with a 2684 tight stop. Remember I am only trading in small size given the volatility. The S&P has strong resistance at is 200 Day Moving Average which comes in at 2761 this morning and we need to break and close above this area for a more sustainable recovery.
EUR/USD
I am still flat the Euro which never came close to my buy range yesterday. I am reluctant to chase this market higher and today I will leave my buy range unchanged from 1.1160/1.1210 with the same 1.1135 stop. If I a taken long and subsequently stopped out of this position I will be a more aggressive buyer from 1.1060/1.1105 with a 1.1025 stop. Given the huge support in the 1.11/1.13 area I still do not want to be short the market at this time.
December Dollar Index
I am still flat the Dollar and today I will now lower my sell level slightly to 97.60/98.05 with a 98.40 stop.
December DAX
The DAX just missed my sell level yesterday before selling off into the close and I am still flat. Today I will leave my buy level unchanged from 11030/11110 with the same 10970 stop. I know this buy level is well below current prices but I do not see any point in chasing this market higher especially as the 11400/11600 resistance area has been so difficult to break and close above. Meanwhile I will still be a small seller on any further rally to 11580/11650 with a tight 11725 stop.
December FTSE
Shortly after I posted the FTSE traded higher to my 7075 T/P level on my 7045 long position. Subsequently I emailed my Platinum Members to re-buy the market on any dip lower to 7010 with a revised 7028 T/P level with both levels getting hit and I am now flat. With the UK Cabinet Meeting starting at 2.00 pm this afternoon could be tricky to trade. The FTSE has strong support from 6885/6925 and today I will be a buyer on any dip to this area with a 6845 tight stop. I still do not want to be short the market at this time.
Dow Rolling Contract
My Dow plan worked well with the market trading lower to my 25320 buy level before rallying to my 25395 T/P level and I am still flat. The Dow has strong support from 24880/25130 and I am looking for a buy extreme to develop from this area otherwise if we break below the 24900 support area this market could well see a further acceleration to the downside. Today I will be a small buyer on any dip to this area with a tight 24795 stop.
December NASDAQ
Finally the NASDAQ traded lower to my 6830 buy level before rallying to my 6860 T/P level and I am now flat. Due to the aggressive sell-off in the NASDAQ since the end of August, the technical picture is weaker than either the Dow or S&P. The NASDAQ has strong resistance from 6960/7030 and today I will be a small seller on any rally to this area with a 7080 stop. Today my only interest in buying the market is on a further dip lower to 6650/6700 with a 6610 stop.
December BUND
I am still flat the Bund which is trying to break higher this morning given the weaker equity markets. Today I will continue to look to sell rallied with my sell range today from 160.85/161.35 with a 161.70 stop.
Gold Rolling Contract
Gold traded in an extremely narrow range again yesterday. I am still long at 1209 with the same breakeven stop and 1187 stop. I will still look to add to this position at 1193 and if this happens I will then lower my T/P level to 1201.
Silver Rolling Contract
No Change as I am still long at 14.20 with the same 13.55 stop. I will now lower my T/P level on this position to 14.30 and if any of the above levels are hit I will be back with a new update for my Platinum Members.
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