As we wait for the FOMC and Janet Yellen this evening the Governor of the Australian Central Bank Glenn Stevens has gone early, the AFR publishing its now traditional end-of-year interview with him yesterday morning. Nothing earth-shattering here with no direct attempt to give markets a steer on where he thinks the currency should be. Stevens nevertheless makes clear that he believes that if the currency does need to adjust further to the falls in Commodity prices, then it will. He also suggests that in the event of any material reduction in risk appetite, the AUD will not be regarded as a safe haven. Certainly history is on his side here, and my own expectation is that the steep fall in the prices of commodities that contribute most to Australia’s terms of trade, will be exerting fresh downward pressure on the AUD sooner rather than later.
For anybody following my new Platinum Service it lost 10 points yesterday but is still ahead by 1215 points for December. The previous six months saw gains of 1510, 1600, 2833, 2195, 1810 and 3045 points respectively. If anyone is interested in my Platinum Service please email on bryan@tradernoble.com for details.
Mr Stevens was still upbeat about the economy, noting that ‘at worse’ the Unemployment rate has levelled off, and seems less worried about the failure to date of non-mining capex to take off. He suggests decent growth could be achieved without this. The AUD started falling soon after headlines related to the interview starting crossing the wires (from above to below 0.72) though this looks to have been more a function of a generally rising US dollar than Stevens’ remarks.
The main features of yesterday’s markets have been a modest recovery in Oil prices and which has carried many other commodities with it, accompanied (or led by) a firmer US Dollar that sees the narrow DXY index up by just over 0.5% and led by a failure of the EUR/USD rate to hold on the 1.10 handle having hit a low of 1.0905 before firming again overnight. Turmoil in high yield credit markets also looks to have taken something of a back seat yesterday, with corporate bond spreads actually coming back in a touch.
Data wise, the highlight has been US November CPI, which printed a ‘low’ 0.2% (0.17%) to pull the annual rate up to 2.0% from 1.9%. Gains continue to be led by rising healthcare insurance premiums and to a lesser extent last month, higher rents. Energy price falls continue to depress headline inflation though this picked up to 0.5% from 0.4%. Though the data was in line with expectations, US bond yields extended their gains after the data, though a coincident rise in oil prices looks to have been the more significant contributor. In other data the Empire (NY State) Manufacturing Survey rose to a still weak -4.59 from -10.74 and the NAHB housing index slipped to 61 from 62, still strong but off recent highs. UK CPI came in flat for 0.1% y/y (0.1% above expectations) while the German ZEW survey saw the ‘Current Situation’ reading lift to 55.0 from 54.4 and expectations to 16.1 from 10.4 – both better than expected.
As expected the stock markets rebounded strongly with most Indices closing higher by 1.4%/2.0%.
This morning on the economic front we have German and Euro-Zone PMI Services PMI at 8.30 am and 9.00 am respectively. At 9.30 am we have UK Unemployment and Average Earnings. This is followed at 10.00 am by Euro-Zone Trade and CPI. At 1.30 pm we have US Housing Starts and Building Permits. Next we have Industrial Production, Capacity Utilisation and Manufacturing Production at 2.15 pm. Finally we have the main event of the day namely the FOMC Rate Decision at 7.00 pm and Fed Chair Yellen press conference at 7.30 pm.
If ever there was going to be a day of twiddling thumbs ahead of key event risk, surely today is the day. Despite the recent emergence of stress in high yield credit markets and a downturn in global equity markets, I fully expect the FOMC to agree to the first (25 point) rise in rates since June 2006 (when they were raised to 5.25% from 5.0%. The rest, as they say, is history). It is nigh on impossible to second guess market reaction to the announcement of a rate rise. In FX, we know speculative positioning has been running very long US dollars up until two weeks ago. But the clear out of short EUR positions following the ECB means the ‘long’ is probably nowhere near what it was. I acknowledge the risk that the US Dollar may well fall not rise initially, but if so I suspect this will be used as an opportunity to re-enter long USD positions. This assumes that the Fed’s new ‘dot point’ forecasts, and/or the narrative surrounding any rate hike, is not even more ’dovish’ than already expected. On the dot-points, my guess is that the median staff projections for the Fed Funds rate at the end of 2016 will be lowered from 1.375%to 1.125%, which assuming a 0.25- 0.5% rate for the start of 2016, implies three further Rate hikes in 2016. Either way get ready for some spectacular volatility.
December S&P 500
This is the eight consecutive Quarterly Expiration that the S&P has rallied into, helped in no uncertain terms by the Fed holding its FOMC Meeting in the same week. This is why I have been so adamant in not shorting the market in the few days ahead of this event despite the negative price action. When you have the three criteria outlined in Monday’s extended S&P commentary set up as they were after Monday’s close then it is probably one of the safest trades of the year to buy the market especially with the McClellan Oscillator closing with a negative 294 print. Needless to say the MO has improved greatly to close with a -162 print last night. Having taken a huge gain in the S&P yesterday I am still flat as the market closed almost all its ‘Open Gap’ from 2034/2057 left at the end of last week. Yesterday’s huge move has left another large ‘Gap’ from Monday’s close at 2012 to yesterday’s Chicago’s day session low at 2030. To complicate matters more we are now in the strongest two week period of the year where historically 80% of the time the S&P rallies. Remember the last two years saw gains of 120 Handles in this period. Today I am going to stay flat until the FOMC announcement. If the S&P sells off post FOMC I will be a buyer from 2032/2040 ahead of the Yellen press conference with a 2026 stop. My only interest in selling the market is on a spike higher to 2065/2073 in small size with a 2078 stop.
EUR/USD
My Euro plan did not work out yesterday as the Euro which traded heavy all day eventually hit my 1.0955 buy level before stopping me out of this position near the low of the day at 1.0915 and I am now flat. This evening promises to be another wild ride for the Euro and is difficult to call especially after what happened with the ECB recently which saw a 500 point Euro rally. Today my only interest in buying the Euro is on a dip lower to 1.0770/1.0830 with a 1.0735 stop. I still do not want to be short the Euro at this time especially with the price action positive since the ECB Meeting two weeks ago.
March Dollar Index
The Dollar traded higher to my 98.20 sell level. I am still short and I will use any sell-off to 97.90/98.00 to go flat ahead of this evening. I am going to stay flat and just trade the Euro post the FOMC as I do not see an edge in this market ahead of the main event later.
December DAX
The DAX had a nice 300 point rally after opening lower yesterday morning and I am still flat Today I will raise my buy level to 10240/10300 with a 10185 stop. I still do not want to be short the DAX at this time unless we trade higher to 10630/10700 where I will be a small seller with a 10740 stop.
December FTSE
Unfortunately the FTSE just missed my 5940 buy level three times after I posted yesterday and I am still flat which is frustrating when you see the FTSE trading over 100 points higher this morning. Today I will raise my buy level slightly higher to 5935/5965 with a 5895 stop. Given how oversold the FTSE is trading I do not want to be short the market at this time.
Dow Rolling Contract
The Dow has now rallied nearly 500 points since last Monday’s low print as yet again the MO, Daily Bollinger Band and Williams Index prove what a powerful signal when aligned properly. I am still flat the Dow and today I will raise my buy level to 17340/17410 with a 17280 stop. Given how oversold the Dow is trading coupled with the fact that we are now entering the strongest two weeks of the year with a weaker Dollar I do not want to be short the market at this time.
March BUND
I am still flat the BUND which sold off aggressively yesterday on the strong equity markets. Today I will lower my sell level to 158.40/158.80 with a 159.05 stop.
Gold Rolling Contract
Gold finally traded higher after I posted yesterday morning which enabled me to cover my 1060 long position for a small gain at 1063 and I am now flat. Today I will look to buy Gold on nay dip lower to 1043/1052 with a 1037 stop.
Silver Rolling Contract
No change as I am still long Silver at 13.85 with the same 13.45 stop.
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