The mild risk off tone continued yesterday with both equities lower (S&P500 -0.4%, Euro Stoxx -0.3%), and Bond Yields lower (USTs -3.9bps, Bunds -21bps), while the VIX crept higher but is still at a low 12.91. Economic data certainly does not support the risk off tone with US CPI and Retail Sales coming in in line with expectations, while German GDP yesterday was stronger than expected. US Core CPI was 0.2% m/m with the y/y rate a tenth ahead of expectations at 1.8%. The in line CPI print helps the case of Fed officials who have argued the recent slowing in inflation was due to one-off factors and did not represent a broader slowing. The on consensus print may also help assuage the Doves; note Evans was out yesterday stating he fears the public is losing faith in the commitment to get inflation back to the 2% target.
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For anyone following my Platinum Service it made 187 points yesterday and is now ahead by 665 points for November, having made 657 points in October, 447 in September, 1560 in August, 1096 in July, 1023 in June, 1076 in May, 1375 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 1600 points.
The market now expects a 100% chance of a December rate hike, though it still under prices the Fed in 2018 where it expects only 1.6 rate hikes compared to the Fed’s dot points of three. US Retail Sales were also in line with expectations with the Core Control Group up 0.3% m/m and suggestive of a strong start to Q4 GDP.
To me, the drivers of the risk-off tone over recent days are questions around equity valuations, determining what a flattening yield curve means – historically a herald for recessions, and continued political uncertainty in the US which may act to derail tax reform. As for equity valuations, P/E ratios are at elevated levels, though a recent paper by the San Fran Fed suggests valuations are supported by low rates. For the yield curve, this is likely being impacted by monetary policies in other countries.
As for political uncertainty, this continues to be feature. Politico reports President Trump is looking to jettison his Secretary of State Tillerson in favour of Mike Pompeo – Pompeo was reported as telling associates that he expects the President to tap him for the position. Such political changes has the potential to derail tax reform, where the House aims to get it done by year’s end.
In FX, the most significant move was the AUD which collapsed yesterday, entirely driven by a soft wages print. The AUD initially fell 0.6% to 0.7580 where it has remained and currently trades at 0.7584. The next potential mover for the Aussie is today’s Employment data where there is downside risk to the consensus.
As for yesterday’s wages figures, the 0.5% q/q result was well below the 0.7% q/q consensus and showed little sign of a boost from the recent increase in the minimum wage. The lack of a pick-up even with the minimum wage makes it more likely the RBA will need to see an initial increase in wages growth before it can be confident that wages growth and inflation lifts as the labour market tightens. The market now prices the RBA as only having a 50% chance of hiking rates by November 2018 and is not fully priced until March 2019. CGS yields also fell on the news, with the policy sensitive 3-year yield down 6bps to 1.93%.
Other FX moves were more contained. The US Dollar was broadly unchanged (DXY +0.0%). Weakness in oil prices over the past couple of days has weighed on commodity linked currencies with the Canadian Dollar down 0.3% and the Norwegian Krone down 0.7%. Amid the mild risk-off tone, the Yen was higher, closing up 0.5%.
Sterling was broadly changed despite a speech by Brexit Minister Davis where he added to speculation that a transition deal is possible in coming weeks which he thinks is possible at or shortly after the 14-15 December European Council summit and by early January at the latest.
This morning on the Economic Front we have UK Retail Sales at 9.30 am and this is followed at 10.00 am by Euro-Zone CPI. At 1.30 pm we have the latest US Weekly Jobless Claims, Philly Fed Business Outlook and the Export/Import Price Index. Finally we have US Industrial Production and the NAHB Housing Market Index at 2.15 pm and 3.00 pm respectively.
Speaking wise it is a busy day with the Bank of England’s Carney, ECB Member Vileroy and the Fed’s Kaplan all speaking at 2.00 pm, 2.30 pm and 6.10 pm respectively. Finally the ECB’s Constancio speaks in Canada at 8.00 pm.
December S&P 500
My Platinum Service has really proved itself this week as volatility finally picks up after what seems like months of hibernation. Yesterday after the S&P hit my initial 2565 buy level I emailed my Platinum Members to exit this position at my revised 2568 T/P level ahead of the CPI data at 1.30pm. Subsequently I emailed them again to re-buy the S&P on any dip to 2560 with a 2566 T/P level which thankfully both were filled after another sharp drop and spike higher soon after the US Markets opened. I am now flat. The S&P has strong support from 2552/2558 and today I will be a buyer on any dip lower to this area with a 2546 stop. I still do not want to be short the market at this time until we can break and close below key support at 2550. If I am taken long I will have a T/P level at 2563.
I am still flat the Euro and today I will now raise my buy level to 1.1705/1.1755 with a wider 1.1665 stop. Naturally I still do not want to be short the Euro at this time. If I am taken long I will have a T/P level at 1.1785.
December Dollar Index
I am still flat and will not chase the Dollar lower from here. Therefore, today I will leave my sell level unchanged from 94.25/94.60 with a 94.90 stop. If I am taken short I will have a T/P level at 93.95.
The DAX had a wild trading session yesterday with the market trading the whole of my buy range yesterday morning which had me long at an average rate of 12900. The low was 12840 before the market rallied strongly into the close. Again as I was have a good week and wanted to protect these gains I covered my long position ahead of the US CPI at 12905 and I am still flat. Today I will again look to buy the DAX on any dip lower to 12830/12890 with a 12780 stop. Given how oversold the market is trading I do not want to be short the DAX at this time. If I am taken long I will have a T/P level at 12925.
My FTSE plan also worked well with the market eventually trading lower to my 7345 buy level before rebounding. As I wanted to be flat overnight I covered this position at my revised 7360 T/P level and I am now flat. Even though the FTSE is on a sell signal I am reluctant to go short especially given the weakness of Sterling. Today I will again look to buy the market on any dip lower to 7300/7340 with a 7270 stop. If I am taken long I will have a T/P level at 7365.
Dow Rolling Contract
My Dow plan also worked well yesterday with the market trading lower to my 23275 initial buy level before bouncing. Again as I wanted to be flat ahead of the US CPI data I covered this position at my revised 23302 T/P level and I am now flat. There is no doubt the 23200/23250 area is strong support and that a break and close below here opens up the possibility of an acceleration lower to 23060 initially, followed by a further move lower to 22800, 22650 and possibly as low as 22350/22500. The next couple of days could be critical for all the US Indices given the proximity to these strong support levels. Today I will again look to buy the Dow on any dip lower to 23180/23240 with a 23140 tight stop. Given how close we are to long term support I do not want to be short the Dow at this time. If I am taken long I will have a T/P level at 23285.
My NASDAQ plan also worked well with the market initially hitting my 6260 buy level before rebounding to my revised 6275 T/P level. Subsequently I emailed my Platinum Members to rebuy the NASDAQ on any dip lower to 6245 with a 6270 T/P level if executed Thankfully both levels worked and I am now flat. There is no doubt that the weakness in Apple is hurting the NASDAQ and we really need to hold this 6200/6240 level or else this market could accelerate to the downside. Today I will again be a buyer on any dip lower to 6215/6245 with a 6190 stop. If I am taken long I will have a T/P level at 6270.
My Bund plan worked well with the market trading higher to my 162.95 sell level with a 163.07 high print before selling off. Again as I wanted to be flat ahead of the US data I covered this position at my revised 162.85 T/P level and I am now flat. Today I will again look to sell the market on any rally higher to 163.10/163.40 with a 163.75 stop. If I am taken short I will have a T/P level at 162.85.
Gold Rolling Contract
Gold rallied to a 1290 high print before getting hit hard into the close. I still do not trust this market and today I will leave my buy level unchanged at 1255/1263 with a 1248 stop. If I am taken long I will have a T/P level at 1269.
Silver Rolling Contract
No change as I am still a buyer on any dip lower to 16.60/16.85 with a 16.35 tight stop. If I am taken long I will have a T/P level at 17.00.