As summer times kicks into full mode in Europe, ECB President Draghi play list is slowly but surely moving away from QE as he sounded more upbeat in a long time. On paper, not a lot was expected from yesterday’s trading session, but in the end we had pretty decent moves in currencies, bond yields and equity markets, largely driven by hawkish comments from President Draghi (less enamoured with stimulatory measures) while softness in equities also reflect concerns over cyber-attacks and Googles European commission fine. In his introductory speech to the ECB forum on Central Banking in Sintra, Portugal, ECB President Draghi took another step down the path of gradual exit from emergency policy measures. He provided an upbeat assessment on the Euro-Zone economic recovery and argued that the slow inflationary response to above-trend economic growth was largely due to temporary positive supply shock and that monetary policy is working to build reflationary pressures.
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For anyone following my New Platinum Service it made 2 points yesterday on what turned out to be one of the most volatile trading sessions so far in 2017 and is now ahead by 784 points for June, having made 1071 points in May, 1376 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 1750 points.
The key takeaway from Draghi’s speech is that the economy continues to recover, a constant policy stance will become more accommodative, and the Central Bank can accompany the recovery by adjusting the parameters of its policy instruments not in order to tighten the policy stance, but to keep it broadly unchanged. The market took that as signalling a further step towards policy normalisation, allowing a discussion of the tapering of asset purchases over coming months.
Reaction to Draghi’s speech triggered a rally in the Euro, from 1.1183 to 1.1370 currently while 10y Bunds initially jumped from 0.24% to 0.28% and then continued to climb closing the day, 13bps higher at 0.37%. The market has clearly taken Draghi’s message on board, QE tapering is coming and now the question is how soon and how quickly. My base case remains for an ECB announcement in September, but today’s speech clearly raises the prospect an announcement could come as early as next meeting on 20 July. The ECB will need to tread carefully from here in order to avoid a 2013 US like taper tantrum episode which say 10y UST yields sold off by 140bps in the space of a few months.
European currencies followed the move higher in the Euro with DKK up 1.47% against the USD while CHF is +1.34% and SEK is 1.34%. European currencies outperformances reflect the bigger move in EU Bond Yields relative to US Treasury yields. As noted above, 10y Bunds have jumped 13bps,10y French FRTR are +14bps and 10y UK Gilts are +8bps. In contrast 10y US Treasury yields have climbed +7.5 bps to be currently at 2.2051%.
European currencies outperformances have dragged USD indices down between 0.60-0.70%.Menahwile the AUD and NZD are little changed against the USD and unsurprisingly the move higher in US yields helped USD/JPY trade back above 112 (+0.24%)
In other news, the Bank of England released its Financial Stability Review and will raise banks counter-cyclical capital buffer initially to 0.5% by June 2018 and then again to 1% in November 2018 in order to reduce risks posed by 10% annual gains in consumer credit and to prepare for the uncertain outcome of Brexit talks.
In the US, consumer confidence rose to 118.9 from 117.6 and well above 116.0 f/c., partly reflecting the elevated level of stocks and strong labour market/low energy prices. The IMF reduced its forecast for US growth by 0.2pp to 2.1% for 2017 and by 0.4pp to 2.5% for next year after removing the previously assumed fiscal stimulus. That remains well short of Trump’s optimistic budget proposal which assumes a 3% target.
Meanwhile Fed Chair Janet Yellen speaking in London did not offer much new. She noted that the gradual rate-hike pace is well anticipated in markets and that asset valuations are somewhat rich by traditional metrics. She did make one interesting comment when she said we would not see another new financial crisis in her life-time. This comment could well come back to haunt her over the coming years.
This morning on the Economic Front we already had the release of German May Import Price Index which came in weaker than the -0.6% expected with a 1% fall. At 1.30 pm we have US Trade Balance and Wholesale Inventories. This is followed at 3.00 pm by Pending Home Sales. Finally after the close at 9.30 pm the Fed will release Part Two of its Annual Bank Stress Tests.
September S&P 500
Yesterday afternoon the S&P traded to an initial low print of 2429 just missing the start of my buy range at 2428 before rallying back above 2437. Subsequently the NASDAQ got hit hard and in the process broke its earlier June low and this led to a dramatic sell-off in the S&P which stopped me out at 2417 on my average 2425 long position and I am now flat. This is the sort of price action that I have been looking for as a few more sell extremes like we saw yesterday could soon do a lot of damage to this severely overvalued market. The S&P has good support at 2410 and very strong support at the March 1, highs at 2401 and I would expect any initial test of these areas to attract some buying. Today I will be a buyer from 2404/2411 with a 2399 stop. A break and close below 2401 will be very bearish in the near-term. Given the amount of times that the S&P has bounce off the 2429 level I would expect the market to have difficulty in breaking this level initially and for this reason I will be a small seller from 2427/2433 with a 2438 tight stop.
The Euro well and truly came to life yesterday after trading sideways for most of the past two months. The break and close over 1.13 is bullish which long-term could well see the Euro test 1.20 in the coming months. Yesterday after the Euro traded higher to my 1.1260 initial sell level I emailed my Platinum Members to only add to this position on a further move higher to 1.13. After my second level got filled I again emailed them to cover this now average short 1.1280 position for a small loss at 1.1284 and I am now flat. Even though the Euro is overbought the path of least resistance is to the upside and today I will now look to buy the Euro on any dip lower to 1.1305/1.1335 with a 1.1270 stop. The next resistance level is at 1.1410 ahead of 1.1435.
September Dollar Index
The beauty of my Platinum Service is my updated emails which certainly helped for most of yesterday. After the Dollar traded lower to my 96.60 initial buy level I emailed my Platinum Members to exit this position at 96.66 and I am now flat. Subsequently the Dollar got slammed with the Dollar trading below 95.90 on what turned out to be extremely volatile trading session. The Dollar has good support at 95.50 and today I will again look to buy the Dollar on any dip lower to 95.15/95.50 with a 94.80 stop. Given the huge sell-off yesterday I will now use any rally to 96.35/96.70 to go short with a 97.05 stop.
My DAX plan worked well yesterday as shortly after I posted the DAX traded lower to my 12645 buy level before rallying over 80 points and this rally higher enabled me to cover my long position at my 12680 T/P level and I am now flat. Finally we are seeing some follow through to the downside after last Tuesday’s sizeable Downside Key Day Reversal. The DAX is oversold but does not have any decent support until 12470 and today I will be a buyer on any further dip lower to 12440/12495 with a 12395 stop. Despite the negative price action I still do not want to be short the DAX at this time.
The FTSE thankfully missed my initial buy level before the 9.00 pm close last night and I emailed my Platinum Members to cancel any buy order overnight and as a result I am still flat. The FTSE has support at 7315 which is the low from earlier this month ahead of 7280 which is a 7 month trend line. Today I will only be a buyer on any further dip to 7255/7285 with a 7220 stop. Again given the large discount to the Cash FTSE I still do not want to be short the September Contract at this time.
Dow Rolling Contract
My Dow plan also worked well yesterday with the market trading lower to my 21330 buy level before rallying to my 21375 T/P level and I am now flat. The Dow is acting stronger than both the S&P and NASDAQ at this time and for the bears to regain control we need to see the Dow break its key March 1 previous all-time high at 21169. My only interest in buying the Dow today is on any sell-off to 21150/21210 with a 21100 stop. I will also lower my sell level to 21420/21480 with a 21530 stop.
Frustratingly the Bund just missed my sell level yesterday before selling off over 250 points from yesterday’s 165.32 high to this morning’s 162.80 low print so far. This is an incredible move with one of the largest red candles that I have witnessed on many years. Thankfully we had no buy level in the Bund as anyone who bought the market just got run over. I cannot see today going by without a comment from some ECB official to try and calm the Bund market as yesterday’s sell-off was so dramatic with a near doubling in Yields in one trading session. The Bund has good support from 161.80/162.30 and I will be a buyer in this area with a 161.45 stop.
Gold Rolling Contract
Despite the dramatic moves across most asset classes the big surprise was the failure of Gold to re-coup its losses from Monday in yesterday’s trading session. I am still flat Gold and today I will leave my buy level unchanged from 1226/1234 with a 1220 tight stop. Remember a break and close below 1225 is very bearish.
Silver Rolling Contract
In contrast to Gold, Silver has now recovered all of Monday’s losses with the market trading at 16.78 this morning. I am still flat and today I will now raise my buy level to 16.15/16.50 with a 15.75 stop.