Nine and a half years on from the last Fed rate hike and seven years on from when interest rates were first set at the effective zero lower bound (0-0.25%) the Fed has seen fit to sound the death knell for ZIRP, lifting the target rate for the Fed Funds rate to a range of 0.25-0.5%.
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In contrast to those looking for the most ‘dovish hike’ in Fed history, there is nothing in the surrounding atmospherics accompanying the rates announcement to immediately validate this view. For one, the decision to raise today was unanimous (this after two Fed governors, Daniel Tarullo and Lael Brainard) had been expressing scepticism towards the need for – and risks arising from – higher rates. Second, the median ‘dot point’ forecast for the expected fed funds rate at the end of 2016 remains at 1.375%, implying four quarter point moves up next year and unchanged from the September FOMC meeting. Third, the median estimate for the ‘longer run’ Fed Funds rate remains at 3.5%. The dovish tinge comes from the fact the median dot point forecast for end 2017 is lowed by 0.25% to 2.375% and for end 2018 by just 0.125% to 3.25% .
By and large the Fed has delivered on market expectations, hence a fairly muted reaction, with the FOMC’s view on the labour market upgraded (underutilization of labour resources has diminished “appreciably”) and the Fed now saying it is “reasonably confident that inflation will rise, over the medium term, to its 2 percent objective”.
That the US dollar had traded slightly lower, not higher in the hour following the Fed announcement, says much about market positioning running into the FOMC meeting (i.e. still very long Dollars, notwithstanding the shake-out of short EUR positions post the 3 December ECB meeting). However having hit a high of 1.1020 the Euro got hit hard and traded as low as 1.0832 overnight.
Lack of any fresh upward pressure on US Bond Yields (which have, at 10 years, moved below pre-announcement levels) also reduces one justification for an immediate strengthening of the US Dollar. US equity markets have taken the Fed in their stride, ending the day with a 1.3% gain having initially sold off on the news, while commodity prices – with the exception of Oil (down another $1.25-1.50 today) like the fact that the US Dollar initially traded lower and not higher out of the Fed. However that may change today given the strength of the Dollar and so far no rebound in Oil prices.
This morning on the economic front we have the German IFO Business Climate/Current Assessment. At the same time the ECB publishes its latest Economic Bulletin. At 9.30 am we have UK Retail Sales. This is followed at 10.00 am by Euro-Zone Labour Costs. At 1.30 pm we have the US Weekly Jobless Claims, Current Account Outlook and the Philly Fed Business Outlook. Finally at 3.00 pm we have the US Leading Index.
March S&P 500
I have now rolled to the March Contract as the December Contract expires tomorrow. The March Contract is trading at a 9 Handle discount to the Cash Market/December Contract. Tomorrow’s Expiration is the third largest in history and this was one of the main reasons why I did not want to short the S&P this week as I mentioned in the second video on my website that the Fed have been very clever in having their FOMC Meeting in the same week as the Quarterly Expiration which has been a theme over the past two years.
Yesterday’s December S&P plan worked well as shortly after the FOMC Announcement the S&P traded lower to my 2040 buy level before having a quick 24 Handle rally which enabled me to cover this position at 2055. Subsequently after selling off and then rallying again following the Yellen press conference I went short at 2072 and I covered this position near the close at 2069 because the December Contract expires tomorrow and I am now flat. Please keep a mental note that when we have set-up as mentioned in Monday’s S&P commentary namely an oversold Daily Bollinger Band, Williams Index and a McClellan Oscillator with a negative reading of over 250 that you just buy the market with a wide stop. This signal has so far generated 80 Handles this week and if we replicate the last two years Santa rally we have another 40 Handles to go. The last time we had this set-up was on August 24th which eventually generated a near 200 Handle return. Today I will be a buyer of the March Contract on any dip lower to 2043/2049 with a 2038 stop. I will also look to go short in small size on any rally higher to 2072/2078 with a 2083 stop.
EUR/USD
Unfortunately the Euro just missed my 1.0830 buy level by 2 points overnight and I am still flat. Today I will lower my buy level slightly to 1.0770/1.0810 with a 1.0745 stop. I still do not want to be short the Euro at this time.
March Dollar Index
Thankfully the Dollar traded below 98.00 ahead of the FOMC announcement which gave everyone a chance to get out of their 98.20 short position. I did not wait that long and covered my position for a breakeven and I am now flat. Today I will again look to go short on any rally higher to 99.20/99.50 with a 99.80 stop. Remember a break and close over the double top at 100.39 from April and 100.65 from December 3rd will be very bullish and opens up the possibility of a move higher to 1.08/1.10 over the coming months.
March DAX
I have now rolled to the March Contract which trades at a 3 point premium to the December Contract/Cash Market. Very late in yesterday’s trading session the December DAX traded higher to my 10640 sell level. Unfortunately I covered this position too early at 10610 especially wIth the DAX trading 80 points lower on the open this morning. The fact that the Euro has surprisingly turned lower means the DAX is now better bid than before. This morning the DAX is also back trading above the key 10650 pivot point and for this reason I will be a small buyer on any dip lower to 10630/10660 with a 10580 stop. For these reasons I do not want to be short the DAX at this time.
March FTSE
I have now rolled to the March Contract which is trading at a 48 point discount to the December Contract/Cash Market. I am still flat the FTSE which looks like it started its own santa rally shortly after I posted yesterday morning. Today I will be a buyer of the March Contract on any dip lower to 6045/6075 with a 6015 stop. Given the positive price action in the FTSE and which has rebounded strongly from its recently oversold condition I do not want to be short the market at this time.
Dow Rolling Contract
Unfortunately the Dow just missed my 17430 buy level by less than 30 points yesterday which is frustrating when you see the market trading nearly 300 points higher this morning. Just like the S&P above the McClellan Oscillator again proved what a valuable trading tool it is as the Dow is now 600 points higher from last Monday’s low print. Today I will look to go short on any further move higher to 17810/17870 with a 17920 stop but only in small size. Given the fact that the US Dollar is firming again I do not want to be long the Dow at this time.
March BUND
The BUND had wild post FOMC reaction with the market trading as low as 156.80. before recovering strongly this morning with the market currently trading at 158.30. I am still flat the BUD and today I will raise my sell level to 158.65/158.95 with a 159.20 stop.
Gold Rolling Contract
No change as I am still a small buyer on any dip lower to 1045/1052 with a 1039 stop.
Silver Rolling Contract
Finally my long 13.85 Silver position worked well yesterday as Silver had a nice spike ahead of the FOMC announcement which enabled me to cove rthis position at my 14.25 T/P level. Subsequently Silver traded lower post the FOMC which enabled me to go long again at 14.00. I am still long and I will have a 13.55 stop on this position.
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