We had quite significant market moves across most asset classes since I posted early yesterday morning, this time led by Euro strength after ECB minutes signal change in communication in coming months, while Brent Crude tops $70 for first time since Dec 2014. The downside US PPI surprise compounds EUR/USD strength/USD weakness ahead of CPI later today. Also today JPM and Wells Fargo are to report Q4 earnings. Meanwhile both the Dow and S&P surged for the seventh straight session to record yet more new all-time highs as we enter the capitulation phase of this huge nine year bull market.
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We saw significant price action in all things Euro following the Minutes of the latest ECB 14TH December Governing Council Meeting, which among things said: ‘’It was argued that communication needed to evolve gradually in step with improving economic data and a further easing of financial conditions was not regarded as warranted. From this perspective, it was important for the forward guidance to be updated in line with evolving data, with a view to avoiding more abrupt or disorderly adjustments at a later stage. It should be highlighted that the stronger than expected expansion of the Euro area economy had further reduced the likelihood of adverse economic outcomes and, hence, had bolstered the Governing Council’s confidence in the eventual attainment of its inflation aim’’.
The ECB then noted, ‘’Looking ahead the view was widely shared among members that the Governing Council’s communication would need to evolve gradually, without a change of sequencing, if the economy continued to expand and inflation converged further towards the Governing Council’s aim’’. ‘’The language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in the coming year. In particular as progress was made towards a sustained adjustment in the path of inflation, the relative importance of the forward guidance on policy rates would increase.’’
Interpretations: the ECB will signal, likely no later than March, that QE will end no later than September and the ECB will soon thereafter shift its forward guidance towards when it expects to start lifting the Deposit Rate off the current -0.4% floor.
EUR/USD jumped from 1.1940 to 1.2200 in short order on the Minutes, before further strength was derived from December US PPI data. This fell well short of expectations in both headline and core terms (-0.1%m/m for both against +0.2% expected). There were some quirks in the data, in particular weakness in the erratic ‘’margins’’ components, but such niceties were lost on markets heading into today’s CPI data. Though the read-through from PPI to CPI is usually negligible, most analysts were already noting (pre-PPI) that the risk on CPI was shaded to the downside of the 0.2% (core) consensus.
10-year US Treasuries dropped from 2.55% pre-PPI to 2.53%. Though the yield subsequently lifted to 2.57, they are heading into the New York close back on the lows. 10-year Bund yields in contrast finished the European session about 6bps higher at 0.581%.
Also to note overnight Brent crude traded above $70 for the first time since 4th December 2014 (high of $70.05) but gains have subsequently been retraced and are closing the NY session about flat at $69.15, so too WTI at $63.56. Base metals are mostly lower (Iron ore futures +0.4%, Aluminium -0.3%, Copper -0.2%, Nickel -2.4%, though Zinc is 1.5% higher).
USD weakness post ECB/PPI means that AUD/USD has pushed up to a high of 0.7895, running into resistance in the 0.7880-0.7890 area following yesterday’s stronger than expected Retail Sales data. If we hold the 0.7890 area first up this morning, further gains are in prospect.
Finally outgoing New York Fed President Bill Dudley spoke after the New York close, nothing that the case for an Interest Rate rise ‘’remains strong’ and that very easy financial conditions could push the Fed to be more aggressive but also that a more aggressive Fed could increase the risk of a ‘’hard landing’’.
This morning on the Economic Front we have the ECB Survey of Professional Forecasters at 10.00am. This is followed at 1.30 pm by US CPI and Retail Sales. Finally at 3.00 pm we have Business Inventories. Please note the US Cash Stock and Bond markets are closed on Monday for the MLK Holiday.
March S&P 500
I was correct in expecting a strong rally yesterday but unfortunately the market just missed my 2744 buy level before rallying over 20 Handles as yet again one short position after another was stopped out. I do not have the latest Daily Sentiment Index reading which will be printed after the US markets close tomorrow but the Fear & Greed Index is now at ‘’Extreme Greed’’ closing at 77 while the VIX continues to trade with a 9 Handle. This market is getting frothy and could roll over to the downside at any moment but we need a catalyst for this to happen as we approach my next target level at 2800 which is above its 3rd Standard Deviation at 2792. Yesterday after I was already short the Dow the S&P traded higher to my 2765 sell level and I emailed my Platinum Members to cut any short position at 2763.50 and I am still flat. With US Markets closed on Monday it is going to be difficult to hold a short position over the weekend. My only interest in doing this is on a further rally to 2799/2815 with a 2825 stop. I am sorry about the wide parameters but given the size of the rally I am only trading in smaller stake size with wider stops until we finally see a fall of 3% in this market which we have not had for nearly 15 months. I will also raise my buy level to 2748/2756 with a 2743 stop.
Unfortunately I had my T/P level on my latest long 1.1968 Euro position too low at 1.1975 which was quickly hit on the release of the ECB Minutes and I am now flat. Hopefully you were able to get a higher exit price on any long position. Today I will again look to buy the Euro on any dip lower to 1.1950/1.1985 with a 1.1915 stop which is just below this weeks 1.1916 low print. The Euro has strong resistance from 1.1230/1.2180 and I will also be a seller in this area with a 1.2220 stop.
March Dollar Index
The Dollar traded lower to my 91.70 buy level. I am still long and have lowered my T/P level on this position to 91.80. I will only add to this position on any subsequent move lower to 91.30 with the same 90.95 stop. If my second buy level is filled before I am able to exit at my T/P level I will be back with a new update for my Platinum Members.
The ECB Minutes really hit the DAX yesterday as the significance of an end to QE took hold of both the German Equity and Bond Markets. After the DAX traded lower to my initial buy level at 13195 I emailed my Platinum Members to exit any long position at 13205 or better and I am now flat. There is no doubt the strength of the Euro is having a knock on effect on the DAX as no Economy likes a strong currency at this time. The DAX has strong support from 13100/13170 and today I will be a buyer on any test of this area with a 13050 tight stop. I still do not want to be short the market at this time.
The FTSE closed at yet another new all-time high in a severely overbought market. I am still flat and today I will now raise my buy level to 7630/7670 with a 7595 stop. As I am already short the Dow there is no point in having a sell level for the FTSE at this time as we wait for a sell extreme to develop.
Dow Rolling Contract
The Dow exploded to the upside yesterday with the market hitting my 25500 sell level. I am only short in small size and emailed my Platinum Members to raise any second sell level to 25620 with a 25670 stop. Meanwhile I will now raise my buy level to 25200/25300 with a 25130 stop.
The NASDAQ closed weaker than both the S&P and Dow although at a new all-time high. The market missed my sell range and today I will now raise my sell level to 6755/6790 with a 6830 tight stop. As mentioned over the past week the 6760 is strong resistance and a break and close over here for a few days opens up the possibility of a move higher to 7400.
The Bund traded lower to my initial 160.85 buy level before rallying back above 161.00. I was in the process of writing an updated email to my Platinum Members to exit any long position here before the market sold off 20 points in a few seconds. I added to this position at 160.50 for an average buy level at 160.67. I have a T/P level at 160.75 which hopefully might be filled on the European open given the fact that US Bond market rallied late. My stop remains at 160.20. If I am stopped out of this position I will be a more aggressive buyer on any dip lower to 159.40/159.80 with a 159.10 stop.
Gold Rolling Contract
No change as I am still a buyer on any dip lower to 1294/1302 with the same 1286 stop.
Silver Rolling Contract
Just before I posted this morning Silver finally traded higher to my 17.10 T/P level on my latest long 17.00 position and I am now flat. I will again look to buy the market on any dip lower to 16.65/16.95 with a 16.35 stop and a 17.15 T/P level if executed.