Markets closed last Friday in a cautious mood reflecting a change in sentiment following Thursday’s confirmation by President Trump that he will not meet President Xi before the March 1st tariff deadline. News the U.S. Administration is considering three options for EU car tariffs did not help the equity market in Europe while U.S. equities ended the week essentially flat with the last hour of power saving the day. The US Dollar continues to win the least ugly contest, up for a seventh consecutive day, CAD was the big winner in G10 FX after a very solid jobs print and the AUD recovered a bit of lost ground post the SoMP decline. Weekend news confirmed China-US trade talks will take place Feb 14-15 while U.S. border talks to avoid another Government Shutdown hit an impasse. ON Saturday President Trump tweeted ‘’ Wall Coming One Way or the Other’’ implying the declaration of a ‘’national emergency’’ to secure wall funding remains an option.
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After I posted early Friday morning, Asian equities closed the week weaker across the board, reflecting an increased level of apprehension on whether or not the U.S. and China can find an agreement to deescalate their trade tensions ahead of the March 1st deadline. European equities traded sideways at the open but then news that U.S. Administration was considering three types of tariffs on European cars sour the mood. According to Germany’s Wirtschaftswoche magazine, the three options are (1) 10% rate; (2) 25% rate; (3) or specific customs duties limited to technological advanced cars and components such as electric vehicles. All major EU equity indices closed Friday in negative territory with the STX Europe 600, down -0.56%.
U.S. equities were heading for a negative close on Friday with the S&P500 down ~0.90% at one point before staging a recovery later in the session with the move up accelerating in the last (power) hour of trading. The Dow closed in negative territory (-0.25%), but it still managed to record its seventh consecutive weekly gain. The S&P 500 rose 0.07%, to 2707.88, while the Nasdaq Composite added 9.85 points climbing 0.14% to 7298.20. The S&P 500 and NASDAQ also closed higher for the week. There was no obvious trigger for the turn-around in US equities, although some commentators cited comments by San Francisco Fed President Mary Daly, who raised the possibility of using QE as a more regular policy tool, as helping to boost the market. Daly said ‘’you could imagine executing policy with your interest rate as your primary tool, and the balance sheet as a secondary tool, but one that you would use more readily’’, although she added that no decision had been made.
U.S. led trade uncertainty along with increasing concerns over the extent of the current global growth slowdown has seen an increase in demand for core global bond. On Friday 10y Bunds led the move lower in yields, a part of the ongoing concerns over the state of the European economy. Italy’s fiscal position is also a growing worry, evident by the 36bps rise in 10y BTPS yields on the week (now at 2.95%). The threat of U.S. tariffs on EU cars, did not help sentiment either with 10y Bunds trading down to an intraday low of 0.078% before closing at 0.087%. Meanwhile the US Treasury curve bull steepened with the 2y rate declining 4.4bps to 2.482% while 10y US Treasuries closed at 2.636% (3.8bps lower on the day).
Against a backdrop of uncertainty and despite a Fed that is comfortably on hold, the USD continues to win the least ugly contest, up for a seventh consecutive day. The USD also closed the week broadly stronger with both DXY and BBDXY up almost 1%. That said, it was not all one way for the USD on Friday, the CAD was the G10 outperformer boosted by a much better than expected January labour market report. The Canadian Unemployment rate ticked up, due to an increase in the participation rate, but wage growth was also higher than expected.
The AUD closed Friday at 0.7088, down 0.18% on the day. The Aussie staged a mini recovery during Friday’s New York session following an intraday low of 0.7061 immediately after the release of the SoMP. The market was seemingly surprised by the forecast downgrades which had already been flagged in Tuesday’s Statement and the Governor’s speech on Wednesday. The RBA new forecast revealed a hefty GDP growth downgrade of 2.5% over the year to June 2019 vs 3.5% previously. So the RBA expects a growth slowdown into the first half of 2019 followed by a pickup thereafter taking the 2019 growth to 3%.
One factor that may have contributed to the small AUD recovery can be attributed to the soaring iron ore price. Against a backdrop of soft commodity prices (Brent -1.7% and WTI -2.54%, copper -0.28%), iron ore prices have continued to climb reaching $94 during the Asian trading session which is the highest level in 4 years. China is back from holiday today and it will be interesting to see whether China’s iron ore prices reflect a similar jump.
Over the weekend we had confirmation China-U.S. trade talks will take place Feb 14-15 and we have also had mixed reports in terms of the border negotiations between US Republicans and Democrats. Late on Friday negotiators signaled they were close to reaching a compromise spending package suggesting a number between $1.3bn to $2bn was in the offing. This is clearly well below the $5.7bn demanded by President Trump. Not surprisingly and in a sign of defiance, on Saturday President Trump tweeted the ‘’ Wall Coming One Way or the Other’’, implying the declaration of a ‘’national emergency’’ to secure wall funding remains an option. Speaking to the media yesterday, Mick Mulvaney, the acting White House Chief of Staff, said ‘’You cannot take a shutdown off the table, and you cannot take $5.7 (billion) off the table’’.
This morning on the Economic Front we have UK GDP, Industrial/Manufacturing Production, Index Of Services, Trade Balance and Total Business Investment at 9.30 am. Finally at 1.30 pm we have U.S. Unit Labour Costs.
March S&P 500
For the second consecutive trading session we had a power rally in the last hour of trading across all US Indices. Earlier the move lower saw the S&P trade lower to my 2685 buy level before rallying to my revised 2691 T/P level and I am now flat. However for the S&P to continue its recent impressive seven week rally the market needs to break and close over its 200 Day Moving Average which comes in at 2742 this morning. Today I will again look to buy the S&P on any dip lower to 2680/2694 with a 2672 tight stop. My only interest in selling the S&P is still on a rally higher to 2732/2745 with a 2753 stop.
No Change as I am still long the Euro at 1.1365 with the same 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 which traded in a narrow range on Friday. I will now raise my sell level again to 96.85/97.25 with a 97.60 higher stop.
The DAX got hit again on Friday with the market again closing below the key 11100/11160 resistance area. Today I will be a seller on any rally to this area with a tight 11215 stop.
The FTSE just missed my 6970 buy level before following the US Indices higher into the New York close and I am still flat. Today I will leave my 6935/6975 buy range unchanged with a 6895 stop.
Dow Rolling Contract
My Dow plan worked well with the market trading lower to my 24900 buy level before rallying over 200 points into the close. This move higher enabled me to cover this position at my 24960 T/P level and I am now flat. It was important that we got this late rally as the Dow managed to close over its 200 Day Moving Average which comes in at 25002 this morning. Today I will again look to buy the Dow on any dip lower to 24800/24950 with a 24710 tight stop. I still do not want to be short the Dow at this time.
The NASDAQ having been under pressure for most of the day with the market just missing my 6815 stop, before a late rally took the market to my revised 6923 T/P level (as emailed to my Platinum Members) and I am now flat. Today I will again look to buy the market on any dip lower to 6840/6880 with a 6805 stop.
With Bund Yields trading to an incredible 7 Basis Points on Friday it is hard to see any recovery in the Euro-Zone economies. The Bund is not only signaling a recession but could even be a depression. These are not words that I use lightly. I am still flat the Bund and today I will again raise my sell level to 167.05/167.45 with a 167.80 stop.
Gold Rolling Contract
I am still flat Gold and today I will now raise my buy level to 1295/1303 with a 1288 stop.
Silver Rolling Contract
No Change as I am still long at 15.83 with the same 15.90 T/P level and 15.45 stop. If any of the above levels are hit I will be back with a new update for my Platinum Members.