Another big trading session for news and in markets, the fall-out from Apples’ revised Q1 revenue guidance, and a much weaker than expected US December Manufacturing ISM report, the key market drivers. Apple’s share price losses, running at 6-7% during the APAC session yesterday after issuing sharply lower Q1 revenue guidance ($84bn from $91.3bn previously and blamed largely on ‘’economic deceleration in greater China’’) extended to as much as -10% and the stock has not recovered since. Spill over to other tech-related companies and suppliers, has seen the NASDAQ down 2.7%. The Dow closed down 2.6% and S&P500 -2.4% with the IT sector (-4.8%) by far the biggest loser but all sectors in the red. bar real estate (on lower bond yields and hence lower mortgage rates) and utilities (the ultimate defensive sector).
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The US Manufacturing ISM printed well below the 57.5 consensus and November’s 59.3, at 54.1, weakness driven by the New Orders sub-index, slumping to 51.1 from 62.1. As my friends at Pantheon Economics astutely note, the fall in the main index closely mirrors the sharp weakness recently seen in the equivalent China PMI import sub-index. This is more proof, if needed, that President Trump’s trade actions against China are now hurting the US as much as they are China; rather than being, as Trump would have us belief, a zero sum game where the US takes the spoils at all others expense. More reason to think a Sino-US trade deal is in the offing in coming weeks.
The impact of the ISM report alongside the latest slide in US stocks has been to see US Treasury yields continue their slide, the 2yr note down 10bps to 2.37% and the 10yr down 8bps to 2.54%. Thus the 2-year yield now sits below the Effective Fed Funds rate (2.4%) with 2019 Fed tightening now fully priced out of the US curve and market is now ascribing a slightly more than 50% chance of Fed easing in 2020.
Prior to the ISM report, Dallas Fed President Robert Kapan in a Bloomberg TV interview has been the first FOMC member to ‘’blink’’ with respect to his Fed policy view. The highlights of Kaplan’s remarks are as follows
‘’There are three big issues that I see reflected in the markets that are consistent with what I’m seeing in the economy: Global growth decelerating…interest-sensitive industries are showing weakness…and financial conditions have tightened and credit spreads have widened. Those three issues are affecting the markets but they’re also affecting my thinking on monetary policy. It’s going to take some time to see the depth and breadth of those three issues.”
“My own view is we shouldn’t take any further action on interest rates until these issues are resolved for better or for worse…so I would be an advocate of taking no action during the first couple of quarters of this year…we should be patient and give some time for this economy and watch how this situation unfolds.”
“This is unprecedented. There’s no textbook for exiting Quantitative Easing…we should be very vigilant and be very open-minded to making adjustments in this balance sheet runoff if we need to.” “I don’t want to speculate…’’There are a number of things we could do in terms of caps or the pacing — but I am not there yet, and I don’t even want to speculate on it, other than to say that we are watching it very, very carefully.’’
‘’Some of these market forces, including financial conditions, can spill over and tighten the economy and cause growth to slow and it is critical that we are very attuned to it. ‘’This is a very critical time, Patience is a critical tool we should be using during this period. We can get this right. Inflation is not running away from us’’.
My own view is that the Fed may have one more rate hike but that we are close to the end of the Rate Hiking Cycle
Unlike on Wednesday where risk aversion dominated lower yields to drive the US dollar higher, Thursday has seen a role reversal, lower US yields the main driver to see the DXY index down 0.55%. JPY strength is again the key influence, USD/JPY failing to extend the recovery seen during our time-zone yesterday following the morning ‘’flash crash’’. JPY is 1.34% stronger against the USD at 107.60. All other G10 currencies are also stronger against the USD with EUR, NZD and CAD all up by 0.5% or more.
Economic Data Summary:
US manufacturing ISM 54.1 down from 59.3 and 57.5 expected
ISM New Orders 51.1 down from 62.1
ISM Prices Paid 54.9 down from 60.7
US ADP employment 271k from a downward revised 157k in November and 180k expected
UK Markit construction PMI 52.8 down from 53.5 and 52.9 expected.
This morning on the Economic Front we have German Unemployment and Markit Services PMI at 8.55 am. This is followed by Euro-Zone and UK Markit Services PMI at 9.00 am and 9.30 am respectively. Also at 9.30 am we have UK Mortgage Approvals, Consumer Credit and Money Supply. Next we have Euro-Zone CPI at 10.00 am. At 1.30 pm we have US Non-Farm Payrolls. Most analysts are discounting the strong ADP employment report given the historical tendency for ADP to overstate Non-Farm Payrolls in December. Thus I am picking 170k, close to the 180k consensus. I see Unemployment ticking down to 3.6% from 3.7% (consensus unchanged) and average hourly earnings growth of 0.2% (0.3% consensus) which if correct would see annual growth tick down to 2.9% from 3.1% in November.
At 2.45 pm we have US Markit Services/Composite PMI. Finally at 3.15 pm we have the Fed Chairman Powell and Fed Member Bostic speaking.
March S&P 500
Volatility certainly picked up again with incredible two-way price action preceding a strong sell-off into the close, only for the market to reverse a large part of that move with a 25 Handle rally overnight for the E Mini Contract. My S&P plan worked well with the market trading lower to my 2468 buy level before rallying to my 2480 T/P level. Subsequently the S&P traded to an initial intra-day low of 2447 before reversing to a rebound high of 2492. I emailed my Platinum Members to buy the S&P again at 2460 and after this price was filled I unfortunately covered this position too early at my revised 2465 T/P level and I am now flat. As I mentioned yesterday as long as the S&P can build value above 2445 then we should eventually see a move higher to the major 2600/2625 resistance area. The NFP today will determine whether this view is correct. Below here the S&P has strong support at last week’s 2398 low print and a break and close below here will be very bearish. As I mentioned above the Fed are close to been finished with their Rate increases and given the recent data it is imperative that President Trump gets a Trade deal with China or else we are going to have a severe slowdown. If both of these scenarios play out then we should see a major rally in the market. Today I will again look to buy the S&P on any dip lower to 2440/2455 with a 2429 tight stop. I still do not want to be short the S&P at this time.
The Euro reversed Wednesday’s sell-off with the market trading higher to my 1.1400 sell level. As I no longer wanted to be short ahead of today’s NFP I emailed my Platinum Members to exit and short position at 1.1395 and I am now flat. Today I will raise my buy level to 1.1290/1.1335 with a 1.1255 stop.
March Dollar Index
After the ISM was released the Dollar traded lower to my 96.05 T/P level n my 96.30 short position and I am now flat. Today I will again look to sell the Dollar on any rally higher to 96.20/96.60 with a 96.95 stop.
My DAX plan worked well with the market trading lower to my 10410 buy level before rallying to my 10465 T/P level and I am now flat. Today I will again look to buy the DAX on any dip lower to 10360/10430 with a 10310 stop.
The FTSE was the only Index not to hit my buy level yesterday and I am now flat. The combination of the weaker pound plus the fact that the FTSE is yielding 4.5% which is the highest rate in 30 years is helping the FTSE to outperform the other Indices. I am still flat and today I will now raise my buy level to 6570/6620 with a 6515 stop.
Dow Rolling Contract
What a day with the movements in both directions incredible. The good part about yesterday is that no matter where you bought the Dow in my buy range you would have had the opportunity to make some decent points. For the record I bought the market at 22800 before selling this position at my revised 22850 T/P level and I am now flat. So far the Dow is holding my 22700 support level. Today I will be a small buyer on any dip lower to 22550/22720 with a 22430 tight stop. If the Dow can build value above 22900 for a few hours after the NFP is released then we should see a rally to Wednesday’s 23350/23450 resistance area ahead of an eventual move higher to at least the 24100 major resistance and breakdown area from late December.
My NASDAQ Plan also worked well with the market trading lower to my 6170 buy level before rallying to my 6215 T/P level and I am now flat. Today I will again look to buy the market on any dip lower to 6100/6160 with a 6040 stop.
Thankfully the Bund sold off to my 164.55 T/P level on my 164.82 average short position after I posted yesterday morning and I am still flat. The BUND is severely overbought and today I will again look to sell the market on any rally higher to 165.10/165.60 with a 165.95 stop.
Gold Rolling Contract
No Change as I am still a buyer on any dip lower to 1266/1276 with a 1257 stop.
Silver Rolling Contract
I am still flat Silver and today I will again move my buy level higher to 15.25/15.60 with a 14.85 stop.