The two most significant development yesterday were a 1.0% surge in the Euro (Euro now fetches 1.1110 – the highest since November 9 2016), and continued weakness in the US Dollar with the DXY down 0.7% yesterday and another 0.3% overnight and at its lowest point since just after the US the election. Overnight the continued political fall-out from US President Trump’s sacking of FBI Director Comey has led to a large fall in the US Equity Futures Market. The big secular theme over the past couple of months has been long Europe. European data continues to be broadly positive, reinforced yesterday with the German ZEW Index rising to 20.6 from 19.5 and the Trade Balance coming in better than expected with the surplus rising to €23.1bn from €18.8bn. Those prints also likely helped set the tone for the Euro’s rise, but it is important to note this is part of a trend that emerged following the first round of the French presidential election.
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For anyone following my Platinum Service it had its first down day since March 1, losing 50 points yesterday, but is still ahead by 533 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.
Abating political risk is also is driving speculation that the ECB will slightly alter its guidance at the June meeting by removing the words “or lower” from the pledge to have unchanged or lower rates for the foreseeable future. My view of the Euro trading around €1.10 in June is now clearly tilted to the upside. Optimism has also spread to other European currencies: Franc (+1.2%) and Norwegian Krone (+1.1%) all higher.
US dollar weakness extended overnight with the DXY now at 97.75, around the lowest levels since November 9 (the US election was held on Nov 8). The dollar was weaker against all G10 currencies. The soft CPI figures last week set the tone, while the notion that Trump’s tax plan and infrastructure packages could be delayed or watered down has grown – especially given recent political distractions such as Trump’s disclosure of classified information to Russia’s Foreign Minister. On top of that it was reported overnight that Trump asked Former FBI Director Comey to end the Mike Flynn inquiry. The result of this is the odds of Trump getting impeached has increased significantly.
Highlighting investors’ concerns around Trump’s policies, the inflation outlook has moderated with the 10-year inflation breakeven now falling to 1.84% – just near the levels following the US election. Breakeven inflation rates did peak at around 2%, so this suggests investors’ inflation expectations are moderating despite oil prices stabilising. Nevertheless, nominal bond yields remain resilient with US Treasury yields at 2.30% (down 3.9bps overnight), while markets are still pricing in a 70% chance the Fed will hike rates in June.
Given a more positive Europe, German Bund yields rose, up 1.5 bps to 0.44%. With Bund yields rising and US Treasury yields falling the Bund-UST spread has fallen to a fresh 2017 low. Supporting a June rate hike, Industrial Production figures were better than expected, up 1.0% in April and well above the consensus of a 0.4% rise. Although the market hardly moved on the data, it does suggest some of the “hard” data is starting to catch up to the more optimistic “soft” data – the manufacturing component in particular now looks broadly consistent with that implied by the ISM. Nevertheless, the overall run of data continues to be patchy with Housing Starts disappointing (1,172k v expectations of 1,260k).
The Aussie and the Kiwi were the underperformers yesterday. The Aussie rose 0.2% while the Kiwi was unchanged against a US dollar that fell 0.7% across the board. The Aussie hardly moved on the RBA Minutes yesterday with the RBA continuing to watch the labour and housing markets closely. It looks like the RBA will be on hold in 2017 and 2018.
Finally UK CPI came in a touch stronger at 2.7% y/y against expectations of a 2.6% outcome. Nevertheless there was little reaction given the Bank of England seems content to allow inflation to return to target in a somewhat longer timeframe.
This morning on the Economic Front we have UK Employment Change and Average Earnings at 9.30 am. This is followed at 10.00 am by Euro-Zone Construction Output and CPI. At 1.30 pm we have Canadian Manufacturing Sales. Finally at 4.00 pm we have the New York Fed’s Household Debt and Credit Report.
June S&P 500
My S&P plan worked well yesterday with the market trading lower to my 2395 buy level shortly after the Chicago open before rallying to a 2401 high print. I used this rally to exit this long position at my revised 2398 T/P level and I am now flat. There is no doubt the ongoing political situation in the US is getting worse by the day and you wonder how long these equity markets can stay at these elevated levels. We still have not seen any new policy implemented by the US Congress as the Tax Cuts and Infrastructure seems a long way from getting executed. Remember the Fair Value for the S&P is 1655 and one Standard Deviation above this is at 2170, so the S&P at 2400 is not sustainable in the long run. There is no doubt that it is getting dangerous to hold a position overnight as we have seen this morning with the S&P trading at 2382 on the Comey fallout. Given the extent of the down gap from last night’s Chicago close I have bought the S&P here in small size at 2382. I will only add to this position on a further move lower to 2373 with a tight 2369 stop. If I manage to T/P on this position or I am stopped out of this trade, either way I will be an aggressive buyer on any move lower to 2346/2352 with a 2341 stop. Remember we still have a large ‘’Open Gap’’ from before the Friday ahead of Round one of the French Election nearly 4 weeks ago. I will also be seller on any move higher to 2395/2401 with a 2406 stop which is just above the new all-time highs.
Thankfully we have not been short the Euro for the last few months as the Dollar continued to make new six month lows. My own view is the US is close to entering a recession despite the economy being at full Employment. Money has piled into the European Equity markets since March and for the first time in many years the European Stock markets are outperforming their US counterparts. Incredibly the Euro is now trading over 500 points higher since the first round of the French Election and is now severely overbought. The Euro has huge resistance at 1.12 as a break and close over this level for a few weeks will open up the possibility of a move higher to 1.21 and then 1.30 over the coming months. This is now a critical juncture for the rest of the year as I see a huge pick up in volatility. Today I will leave my sell level unchanged at 1.1160/1.1200 with a 1.1235 tight stop. Given how overbought the Euro is trading my only interest in buying the Euro is on a dip lower to 1.0995/1.1035 with a 1.0970 stop.
June Dollar Index
My latest long 98.95 Dollar position was stopped out just as I posted yesterday at 98.50 and I am still flat. The 98.50 proved to be a good stop with the market trading at 97.70 this morning. The Dollar is severely oversold and today I will now be a small buyer from 97.35/97.75 with a 96.95 stop. Given the significance of this key 98.50 level which should now act as strong resistance I will be a seller on any rally higher to 98.40/98.75 with a 99.00 stop.
I am surprised that the DAX is not trading lower this morning especially with the Euro trading over 1.11. I am still flat the DAX which just missed my sell level yesterday. The DAX has strong support from 12600/12660 and today I will be a small buyer in this area with a 12560 stop. My only interest in selling the DAX is still on a rally higher to 12850/12900 with a 12940 stop.
Thankfully we exited any short position in the FTSE yesterday as 30 minutes after I posted the FTSE started an 80 point rally and I am still flat. There is no doubt the ongoing weakness in Sterling is certainly helping especially with EUR/GBP now trading at .8590. Even this morning with the sell-off in the US equity markets the FTSE is more than holding its own in this environment. Today I will now raise my buy level to 7400/7435 with a 7370 tight stop. Despite how overbought the FTSE is trading I still do not want to be short the market at this time.
Dow Rolling Contract
This severe negative divergence between the Dow and the S&P is getting worrying as the longer that the Dow cannot break the March 1 highs at 21,169 the odds increase of a major sell-off in the US stock market. There is no doubt as mentioned in my S&P commentary above that it is getting dicey to have any overnight positions in light of the worsening political situation in Washington. Overnight after the Dow hit my 20890 buy level I was stopped out of this trade at 20835. Subsequently I emailed my Platinum Members to re-buy the Dow at 20840 with a tight 20810 stop which is just below the overnight low print. I now have a 20880 T/P level on this trade as I try to get my loss back. If I am stopped out of this position or I manage to T/P at 20880 I will again look to buy the Dow on any dip lower to 20670/20730 with a 20620 stop. Despite the overnight sell-off in the Dow I still do not want to be short the market especially given the weakness of the US Dollar.
Unfortunately the Bund just missed my second buy level at 160.10 with a 160.17 low print before rally strongly this morning on the weaker equity markets. It is incredible to see the Bund trading with a yield of just 40 basis points 8 years into an economic recovery. There is no doubt that the Bunds are telling you we are in for a nasty shock around the corner. Yesterday’s move higher in the Bund saw me exit my 160.37 long position at my revised 160.45 T/P level and I am now flat. Today I will again look to buy the Bund on any dip lower to 160.05/160.35 with a 159.80 stop. I still do not want to be short the Bund at this time.
Gold Rolling Contract
Gold has rallied strongly this morning on the back of the worsening political situation in Washington. I am still flat Gold which is now testing the key 1245/1255 resistance level. I am afraid to go short Gold and today I will now raise my buy level slightly to 1220/1228 with a 1213 stop.
Silver Rolling Contract
Shortly after I posted yesterday Gold traded lower to my 16.70 buy level before rallying to my revised 16.82 T/P level just before the New York close. As I feel naked when I do not have a long Silver position on board I bought Silver again this morning at 16.86 with a tight 16.60 stop.