European and US equities ignored the negative lead from Asia and posted decent gains for the day. The FOMC minutes revealed most within the Fed are concerned over the potential impact from trade policy, but remain comfortable for now with the gradual pace of tightening. Reaction to the Minutes triggers a flattening in the 2y10y UST curve, the USD is little changed while in G10 NOK and NZD have outperformed. Meanwhile Technology shares have led the gains in the US with the NASDAQ closing 1.12% higher while in Europe car shares were the outperformers amid reports of an amicable meeting between the U.S. ambassador to Germany and German car representatives. So European and US equities are seemingly not bothered by the imminent announcement of US tariffs on Chinese goods.
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Yesterday a US trade representative confirmed that 25% tariffs on $34bn of Chinese goods are scheduled to take effect at 12:01am in Washington. So today’s US tariffs announcements and the expected equivalent retaliation from China looks to be in the price, but what happens next will be important for markets. We know a further $16bn tariffs will come shortly after, but any insinuation or confirmation of a second tariff list on $200bn worth of Chinese goods (Waiting for the Man? Or Trump Tweet?) will be the key for market sentiment and the US Dollar’s fortunes near term.
The FOMC minutes did not really elicit a major markets reaction, barring a mild flattening in the 2y10y US Treasury curve which has now moved below the 30bps mark for the first time since early August 2007. The curve now trades at 28bps with the move led by a 2.8bps rise in the 2y tenor while the 10y rate is essentially unchanged at 2.83%.The FOMC minutes revealed most within the Fed are concerned over the potential impact from trade policy, but remain comfortable for now with the gradual pace of tightening. The Minutes noted that a ‘’number’’ of officials said it might ‘’soon be appropriate’’ to modify language in the Fed’s post-meeting statement language that describes rates as ‘’accommodative’’. On this score a number” of participants think wage growth will “pick up further” and “some” fear “heightened inflationary pressures” if the economy runs too hot for a prolonged period’’. So there are a signs that some participants are turning more hawkish but they do not represent a majority yet.
Looking at currencies the USD is a smidgen softer in Index terms and in G10 the NOK is up 0.61%, despite the fact that oil prices are down 1%. NZD has been the other outperformer, up 0.38% over the past 24 hours with most of the gains coming from a steady rise during the overnight session. The Kiwi now trades at 0.6810.
Meanwhile the AUD has been a bystander, the pair has traded in a 42pips range over the past 24hrs and currently sits at 0.7405, almost exactly where it was this time yesterday.
Ahead of Prime Minister May’s cabinet meeting today, Sterling has seen a bit of volatility over the past 24 hours, initially gaining some support from hawkish remarks by BoE Governor Carney with the move quickly undone following a series of negative Brexit headlines. The Governor noted that ‘’incoming data have given me greater confidence that the softness of UK activity in the first quarter was largely due to the weather, not the economic climate’’ and ‘’an ongoing tightening of monetary policy over the next few years would be appropriate’’. Sterling climbed to an intra-day high of 1.3274 on Carney’s remarks and pricing for an August rate hike moved to 80% from 75% the previous day.
Unfortunately for the pound, Brexit headlines eroded these gains after Bloomberg reported that Chancellor Merkel’s government is unconvinced by UK PM May’s latest attempt at a compromise arrangement for Customs after Brexit, seeing it as unworkable. Furthermore, UK Brexit Secretary Davis and Trade Secretary Fox have been reported as fighting May’s Brexit plan ahead of the cabinet meeting that kicks off later today. Sterling now trades at 1.3230, after dipping to a low of 1.3204 immediately after the Brexit headlines hit the screen.
Lastly in terms economic news Germany Factory Orders broke a 4-month losing streak (+2.6% vs 1.1 exp.), coming in much higher than expected in May, supporting the view that weaker Euro-area growth earlier this year was a temporary speed bump. In the US, the June Non-Manufacturing ISM printed above consensus at 59.1 against expectations of 58.3 (58.6 previously), although the important employment component slipped and the ADP Employment growth was slightly weaker than expected.
This morning on the Economic Front we already had the release of German Industrial Production which came in much higher than the 0.3% expected with a +2.6% print. Next we have US Trade Balance and the Non-Farm Payrolls at 1.30 pm. The market is looking for 195k NFP print (223k prev.), but the risk is for a softer print at 170k amid a number of indicators suggesting the trend in job growth is slowing. The Unemployment rate is expected to stay unchanged at 3.8% and for the average hourly earnings I am looking for 0.2% m/m and 2.7% y/y which is slightly below consensus of 0.3% m/m. At 3.00 pm we have the University of Michigan Consumer Sentiment. Finally at 4.00 pm the Fed releases its Monetary Report to Congress.
September S&P 500
The S&P had a strong finish after a mid-afternoon sell-off with the market managing to close over its 50 Day Moving Average which now comes in well below the market at 2720. I am still flat as thankfully we had no sell levels in any of the Indices yesterday. The S&P should now have strong support from 2723/2731 and today I will be a buyer in this area with a wider 2716 stop. I am looking for the S&P to eventually break the initial resistance at 2745 ahead of stronger resistance from 2761/2770 where I will be a seller with a tight 2777 stop.
I am still flat the Euro and as today is the key NFP release at 1.30 pm I will leave my buy level unchanged from 1.1600/1.1640 with the same 1.1565 stop. If we do get a weaker than expected NFP print then the Dollar should weaken initially and I will now raise my sell level to 1.1810/1.1850 with a 1.1885 stop.
September Dollar Index
No change as I am still a buyer on any dip lower to 93.10/93.50 with the same 92.75 stop. I still do not want to be short the Dollar at this time.
The DAX spiked higher just before I posted yesterday morning and the rally has continued with the market now trading above 12500, for a 250 point rally in the past 24 hours. It again proves how difficult it is to be short any equity Index for any length of time especially with Interest Rates so low. Today I will now raise my DAX buy level to 12290/12370 with a 12235 stop. I still do not want to be short the market at this time.
All eyes and ears will be following UK PM May who convened an all-day meeting of her Cabinet at her Chequers country house with the hope/aim to reach a consensus on the customs plan and U.K’s future relationship with the EU after Brexit. I am still flat the FTSE and even though the market is trading higher this morning I am reluctant to chase this market higher pending today’s key meeting. However I will raise my buy level slightly to 7470/7510 with a 7435 stop.
Dow Rolling Contract
The Dow traded in a wide range over the past 24 hours before eventually rallying into the close to again close over its 200 Day Moving Average. This move was tagged in advance by the improvement in the McClellan Oscillator which had traded higher to close at-10 on Tuesday before rallying again yesterday to close last night with a +54 print. I am still flat the Dow and today I will now raise my buy level to 24080/24230 with a 23995 stop.
Just when everyone thought the NASDAQ was going to break lower the market turned and rallied 1.25% yesterday on strong volume. I am still flat the market and today I will now raise my buy level to 7030/7080 with a 6985 stop.
Even though the Bund traded higher to my initial sell level before having a small sell-off I did not sell the market myself and I am still flat. If you are still short I would take my gain here and go flat ahead of the US Payroll data. My only interest in selling the Bund today is on a further rally higher to 163.15/163.55 with a 163.85 stop. Given the insanely low yield I still do not want to be short the market at this time.
Gold Rolling Contract
No change as I am still a buyer on any dip lower to 1238/1246 with the same 1232 tight stop.
Silver Rolling Contract
Silver traded lower to my 15.95 buy level after I posted yesterday. As I wanted to bank some points for yesterday’s session I covered this position at 16.05. Subsequently I emailed my Platinum Members to re-buy Silver again at 15.95 and this was filled overnight. I am still long and I will leave my T/P level unchanged at 16.15. If any of these levels are filled I will be back with a new update for my Platinum Members.