The US Stock Market reversed earlier gains after Fed Chair Powell said the Fed were determined to reduce their balance sheet. Subsequently the market rallied off these initial lows when he told the Economic Club in Washington that, “You should anticipate that we’re going to be patient, and watching, and waiting, and seeing”, reiterating his soothing comments made at the end of last week that have helped support risk sentiment. As for ‘’wishing’’, Powell noted that the current Fed median ‘’dot’’ projections are conditioned on a very strong 2019 outlook.

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Chicago Fed president Charles Evans – of late much less dovish than the moniker traditionally ascribed to him – said that the Fed can ‘’easily’’ look at the data for six months (before considering another rate hike). Feb uber-dove James Bullard meanwhile has repeated his view that he is concerned the Fed is on the ‘’precipice of a policy mistake’’ and that in his view the December rate hike was ‘’a bit of an overreach’’ in which respect we know from Wednesday’s FOMC minutes that some around the table opposed a rate rise. He will have been one and, for sure, Neel Kashkari another.

The net result of this week’s Fed speak together with increased optimism towards a Sino-US trade deal and other developments has been to see the US money market price out earlier thoughts of Fed easing before 2019 is out (implied odds of about 30% this time last week for the December meeting, to now an implied Fed Funds rate of 2.42% at year-end versus the current Effective rate of 2.40%). This is showing up in a slightly better performance for the US dollar in the last 24 hours and slightly higher bond yields across the US curve, while the S&P has put on just over 2.5% so far this week.

Currencies 

The Aussie dollar is the best performing G10 currency in the past 24 hours and only one to be up against an otherwise firmer US dollar (overnight high of 0.7220, 0.7210 now). Instrumental to the gains has been the appreciation of the Chinese Yuan yesterday morning and which has also dragged most of EM Asia FX up in its slipstream. USD/CNY fell from around 6.82 to 6.78 yesterday, a gain of over 0.5%.

The DXY Index closed  0.3% higher on the day, unusually large weakness in the Swiss franc (-1%) and a 0.4% drop in EUR/USD making the biggest contributions. GBP is about 0.3% lower as we head toward next week’s currently planned vote on UK PM May’s Brexit Withdrawal Agreement, with some impact from negative UK news in the form of Jaguar Land Rover announcing 4,500 jobs cuts and media headlines that ‘’UK retailers endure worst Christmas since 2008’’.

Weighing on the Euro somewhat was an outsized drop in French Industrial Production (-2.1% against just -0.2% expected) and which comes on the heels of Wednesday’s similar sized fall in German production (-1.9%). One precondition for a sizable fall in the US dollar this year, viz a better showing by the Euro-Zone economy, is patently not yet falling into place, albeit both sets of numbers may have been depressed by the impact of the ‘’yellow vest’’ protests in France and retooling in the German auto industry. On the latter though, there is a yet no sign from German orders data this is now reversing.

Equities

The S&P and Dow closed 0.45% higher while while the NASDAQ was unchanged. It was a very mixed picture across sectors, industrials, utilities and real estate all up about 1% but consumer discretionaries down by 0.7% and the worse performing sector.

Bonds

US Treasury yields have continued to edge higher, 10s currently +2bps to 2.73% and 2s by 1bp to 2.56%.

Commodities 

Oil has continued its advance, albeit only slightly, both benchmark blends up about 25 cents. Base metals are mostly weaker though, e.g. copper -0.5%, with aluminium the outlier, up by about 0.5%. Gold has been mirroring the dollar this week, hence it closed $6 lower before reversing overnight. Iron ore is little changed.

Economic Data Summary: 

China December CPI 1.9% (2.1%E, 2.2%P); PPI 0.9% (1.6%E, 2.7%P)

US weekly initial jobless claims 216k (226k E, 233k P)

This morning on the Economic Front we have UK Industrial/Manufacturing Production, Index of Services, Trade Balance and GDP. at 9.30 am. This is followed at 1.30 pm by US CPI. Finally at 7.00 pm we have the Monthly Budget Statement.

March S&P 500

Just before the Chicago close the S&P finally traded higher to my 2597 sell level before falling 9 Handles overnight. I did not take the trade myself as I had made some points on both the Dow and NASDAQ and did not want to risk these gains with an overnight position. Earlier the S&P had just missed my 2555 buy level before rallying 40 Handles into Fed Chair Powell’s speech in what turned out to be a volatile two-way trading session. The McClellan Oscillator again closed in severely overbought territory with a closing print of + 344. This indicator is flashing warning signs for the S&P so we have to be careful with any long position as we wait for US CPI at 1.30 pm. Today I will again look to sell the S&P on any rally higher to 2612/2628 with a 2641 wider stop which is just above the 50 Day Moving Average which comes in at 2636 this morning. I will now raise my buy level to 2555/2567 with a 2545 stop.

EUR/USD

I am still flat the Euro and today I will now lower my sell level slightly to 1.1570/1.1610 with a 1.1645 stop. I will also raise my buy level to 1.1390/1.1430 with a 1.1355 stop.

March Dollar Index

No Change as I am still a buyer on any dip lower to 93.90/94.30 with a 93.55 stop.

March DAX

The DAX just missed my 10995 sell level with a 10880 high before selling off on Powell’s comments that the Fed were determined to reduce its balance sheet. Today I will move my sell level slightly higher to 11030/11090 with a higher 11140 stop. Meanwhile I will also raise my buy level to 10690/10760 with a 10635 tight stop.

March FTSE

There is no stopping the FTSE which continues to outperform the other European Indices helped by the fact that Sterling is so far unable to rally as we wait for next week’s key vote on Brexit. Today I will again look to raise my buy level to 6765/6805 with a 6730 stop.

Dow Rolling Contract

My Dow plan worked well with the market rallying to my 23970 sell level before falling nearly 200 points. I used this sell-off to cover my short position at my revised 23928 T/P level and I am now flat. Today I will again look to sell the Dow on any further rally to 24090/24230 with a 24310 tight stop. If I am taken short and subsequently stopped out of this position I will be a more aggressive seller from 24400/24600 with a 24710 stop. Meanwhile I will leave my 23350/23500 buy level unchanged with the same 25230 stop.

March NASDAQ

My NASDAQ plan also worked well with the market trading higher to 6620 sell level before selling off to my 6290 revised T/P level and I am now flat. Today I will again  look to sell the market on any further rally to 6655/6695 with a 7035 tight stop. I still do not want to be long the NASDAQ at this time.

March BUND

I am still flat the BUND as the market reverses this week’s break below 164 to currently trade at 164.40. Today I will now raise my sell level to 164.90/165.40 with a 165.75 tight stop.

Gold Rolling Contract

I am still flat Gold which just fell shy of my 1276 buy level before reversing to rally overnight as the market looks to try and break the key 1300 resistance level. I am not going to chase the market higher and today I will leave my 1267/1276 buy range unchanged with the same 1259 stop.

Silver Rolling Contract

Unfortunately Silver just missed my 15.50 buy level and I am still flat. Today I will now raise my buy level to 15.20/15.60 with the same 14.80 stop. If I am taken long I will have a T/P level at 15.90.