Yesterday was a sea of red in risk markets with equities down in Europe and the US. The Eurostoxx 600 Index closed down 1.49% and the DAX a hefty 2.67% while US main boards are all down just under 1% after a late rally in the last hour of trading. The mood was dampened by a combination of no near term resolution to the trade wars and economy growth forecast downgrades coming out of the EC and the Bank of England. That all came with comments from White House Economic Adviser Kudlow that there is a ‘’sizeable distance’ between the US and China over trade.
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FX and Growth Downgrades
Against some further incremental support for the US Dollar, the AUD has continued to drift lower. The softer than expected labour market report out of NZ yesterday added a little more weight into the antipodean currencies. The NZD took the brunt of that news, but it also weighed on AUD sentiment, the AUD/USD trading sub 0.71 where it sits this morning as I go to press. This sell side weight came in the wake of the RBA’s growth downgrade on Tuesday and Governor Lowe making clear in his speech Wednesday that the RBA’s latent monetary policy bias has now become balanced, the RBA considering upside and downside scenarios for growth.
The Euro and Sterling have had whippy past 24 hours of trading, but despite the official growth forecast downgrades, associated EUR and GBP currency weakness was quickly reversed. Both the European Commission and the Bank of England took the knife to their outlooks, both revising down their growth outlook for this year by around 0.6%. The EC cut its German, France, and Italian forecasts, the latter by 1% to a barely visible 0.2%, a repeat of last year’s 0.1% performance after their fiscal woes. Lower Italian growth will only hamper their chances of getting to their budget target; getting there would require tighter policy. Growth for the EC was cut by 0.6% points from 1.9% to 1.3%.
Adding some real-time force to how this slower economy is playing out, German Industrial Production in December disappointed expectations at -0.4%/-3.9% against the consensus forecast of 0.8%, though no one can have been too surprised given the previous day’s slide in Factory Orders. The decline in production was broad-based, so cannot be attributed to the softer tone in the auto industry alone. Trade is no doubt a big factor.
Joining the downgrade club, the BoE also took the scalpel to its growth outlook, not surprising given the wide array of Brexit uncertainty, catering to plan for the worst perhaps and hope for the best. The UK economy is now forecast by the BoE to grow by 1.2% this year, down from the 1.7% the Bank expected last November. At his press conference, Governor Carney spoke of how Brexit was cascading through the UK economy, rattling companies and consumers. He also spoke of how after the ‘’fog of Brexit’’ has cleared, the BoE would be looking at a rate rise in the next couple of years, though even that was scaled back from more that were expected last year. This seemed to do the trick in producing some whippy price action in Sterling, reversing some earlier sell off.
With the market beset by a risk off tone, bonds were in demand, the German 10y down 4.7bps to 0.115% and as I go to press, the US 10y also by 4.46bps to 2.65%. The short end also joined the bond party, 2s down a somewhat larger 4.69bps on the day. This comes after comments yesterday from Fed Chair Powell at a town hall meeting that the US was in a ‘’good place’’ with low unemployment and inflation near target, a tone also repeated by Quarles. Fed President Kaplan spoke that time is required to clarify the outlook, speaking of one or two quarters needed.
Oil and iron ore were the big movers yesterday, in opposite directions, oil down in size, WTI by 2.48% to $52.68 and Brent by 1.61% to $61.68. Kudlow’s comments seemingly threw enough cold water on the demand outlook, adding a degree of selling force to what was an already evident drift lower in the session. Copper prices in New York have not likewise plunged, currently off 0.3% a similar move to the LME session. Gold was little changed and the softs were mostly weaker.
At the other end of the scale, after Vale’s production and licensing woes, iron ore prices in Asia yesterday moved higher again on their march toward $100/t, prices now north of $90/t. The Chinese trading market returns next week, so it will be interesting to see how that market reacts.
This morning on the Economic Front we have German Trade Balance and Current Account at 7.00 am. This is followed by French Industrial Output at 7.45 am. We have no U.S. data due today.
March S&P 500
It took a while but finally after the S&P traded the whole of my buy range for an average long position at 2698 with a 2686 low print before the market rallied 20 Handles into the close. This move higher enabled me to cover this long position at my revised 2703 T/P level and I am now flat. After a 400 Handle rally it is no surprise that the market is having difficulty in breaking its 200 Day Moving Average which is unchanged at 2741. The S&P has strong support from 2674/2687 and today I will be a buyer with a 2663 stop. I do not want to be short the S&P at this time especially ahead of a weekend.
No Change as I am still long the Euro at 1.1365 with the same 1.1385 T/P level and 1.1315 stop. If I am stopped out of this position I will be a more aggressive buyer from 1.1210/1.1260 with the same 1.1155 stop.
March Dollar Index
I am still flat the Dollar and today I will again leave my 96.60/97.00 sell level unchanged with a higher 97.30 stop.
My DAX plan did not work well with the market getting slammed for 2.67% on the awful German Data yesterday. This move lower saw the DAX trade the whole of my buy range for an average long position at 11130 before stopping me out of this position at 11055 and I am still flat. I am going to stay flat the DAX today as I want to see if the market can build value below the key 11100/11150 resistance area heading into the weekend.
Late in yesterday’s session the FTSE traded lower to my 7030 buy level before rallying to my revised 7055 T/P level and I am now flat. Today I will again look to buy the market on any dip lower to 6930/6970 with a 6895 stop.
Dow Rolling Contract
My Dow plan worked well as no matter where you bought the Dow in my buy range you should have had a nice gain given the near 200 point rally into the close. As I was long both the DAX and S&P I waited to buy the Dow which I did at a price of 25030 before covering this position at my revised 25110 T/P level and I am now flat. Yesterday the Dow rebounded off its 200 Day Moving Average with a late rally and today I will again look to buy this market on any dip lower to 24750/24900 with a 24660 tight stop.
The NASDAQ traded lower to my 6890 buy level. I am still long and I will now lower my T/P level on this position to 6930 with the same 6815 stop. If any of the above levels are hit I will be back with a new update for my Platinum Members.
The Bund is close to all-time highs as any expectation of growth in Germany again falls off a cliff. The Bund has strong resistance from 166.90/167.40 and today I will be a seller on any rally to this area with a 167.75 stop.
Gold Rolling Contract
I am still flat Gold and today I will now raise my buy level slightly to 1290/1298 with a higher 1282 stop.
Silver Rolling Contract
No Change as I am still long at 15.83 with the same 15.45 stop and 15.90 T/P level. If any of the above levels are hit I will be back with a new update for my Platinum Members.