Russian Roulette is a pretty dark song, and latest developments in ‘Russia-gate’ centred on what former national security advisor Michael Flynn was prepared to tell about Trump administration dealings with Russia, after earlier admitting he had lied to the FBI, cast a dark pall over markets on Friday. This was before news later in the day from Senate majority leader Mitch McConnell that the Republicans had the numbers to pass a tax bill (which they duly did, by 51-49 votes, in the early hours of Saturday morning). Deficit hawk Bob Corker was the only hold-out. The successful passing of the tax bill has led to a huge rally in the US Futures Indices with the S&P and Dow trading 20 Handles and 230 points higher respectively to new all-time highs.
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For anyone following my Platinum Service it made 363 points on Friday which was the first trading session in December, having made 823 points in November and 657 points in October. Since I started this New Platinum Service in June 2015 it has averaged a monthly gain of over 1600 points.
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Much of the reaction to the Flynn-related headlines came initially from the initial headlines that he admitted lying to the FBI and was prepared to testify against Trump, and then an ABC news headline saying Trump had directed Flynn to contact Russian officials while Trump was still an election candidate. This second story was retracted by ABC over the weekend and the investigative journalist who broke the news suspended. ABC’s ‘clarification’ was that Trump’s alleged directive came only after he was elected president, which on some legal interpretations was perfectly legal, though opinions differ here. In any event, bear in mind that a key reason for the Russian related ‘Trump discount’ in the US dollar earlier this year was the view it was breeding policy inertia. With tax reform proceeding apace, this is not now the case.
This latter news has been reflected in a quite sizeable reversal of US dollar loses at the London market reopen this morning with USD/JPY up over 0.5% and AUD, NZD and EUR all down about 0.35% as I post.
On Friday, the Flynn reports resulted in an across-the board USD sell-off from around 4pm London time (-0.6% in DXY terms), a 10bps plunge in 10-year Treasuries from 2.42% to 2.32% and a 1% drop in US stocks, before roughly half of the moves in FX and rates, and almost all of the earlier stock market losses, were retraced in afternoon NY trade on the McConnell tax bill news.
USD weakness Friday was led by a 1.6% drop in USD/CAD, aided by an uber-strong Canada Employment Report that saw a 79.5k jump in employment drive the unemployment rate down by 0.3% to 5.9%, even with an unchanged participation rate.
EUR and Sterling were the only currencies not to benefit from USD weakness Friday. EUR closed the day little changed – yields spreads moved against EUR/USD last week – while Sterling gave back earlier gain from a better than expected Manufacturing PMI report (58.2 up from 56.6) after Donald Tusk was quoted saying the EU would reject opening talks with the UK on a Brexit transition arrangement if an offer on the Irish border issue was not acceptable to Ireland. On the week the DXY and BBDXY indices were both 0.1% higher and GBP the best performing G10 currency on Brexit transition deal hopes despite Friday’s weakness.
The longer end of the US Treasury curve benefited more than the front end from the Flynn news to leave the 2- 10s curve 3.8bps flatter on the day but less than 1bp on the week: 10s recovered from 2.32% to 2.36% in afternoon NY trade and yields are set to move higher when the New York Market opens in a few hours’ time.
US stocks ended down 0.2% for the S&P500, -0.17% for the Dow and -0.38% for the NASDAQ. IT led the declines, extending the mid-week theme of sector rotation though it was a mixed performance from the sectors seen to benefit most from successful passage of corporate tax reduction (telecoms did well, but not utilities) while energy stocks benefited from the $1.0 rise in WTI crude but the broader materials sector was lower despite across the board strength in commodity prices. The VIX closed at 11.43 from 11.28.
In commodities oil, Gold, precious and base metals and coal prices were all higher, including a $2 rise in oil ore to $70.11, the first time back above $70 since 18th September. On the week though, iron ore is up over 3% and metallurgical coal more than 7%.
The strong Canadian Employment report side, other data of note was the US Manufacturing ISM which slightly disappointed at 58.2 versus 58.3 expected and 58.7 last time (though new orders were up, to 64.0 from 63.4).
This morning on the Economic Front we have UK Construction PMI at 9.30 am. At the same time we have the Euro-Zone Sentix Investor Confidence, followed by PPI at 10.00 am. Finally at 3.00 pm we have US Factory Orders.
December S&P 500
There is no doubt that the volatility witnessed over the past few days is the highest in terms of points movement that we have seen all year. After Thursday’s unlucky stop in the S&P we certainly made up for those losses on Friday with the S&P incredibly falling over 45 Handles from its lunch time high to my average buy level at 2610 before spiking on one large blue candle to a 2631 rebound high and this move enabled me to cover this position at my 2627 T/P level. On the passing of the tax bill early Saturday morning the S&P opened above my sell range at 2662 where I went short and I emailed my Platinum Members last night to cover this position at 2656 and I am now flat. The S&P is getting closer to my ultimate sell target level at 2675/2700. Today I will again be a seller in this area with a 2720 stop. Given the volatility plus the fact that we are so close to the S&P 3rd Standard Deviation that I have to use a wider sell range where I plan to start in small size and try and build a decent short position in this region. Meanwhile I will again be a buyer on any dip lower to 2618/2626 with a 2610 stop.
My Euro plan worked well with the Euro trading lower to my 1.1870 initial buy level with a 1.1850 low print before rallying back above 1.1900 on the ‘’Flynn News’’. I used this rally to cover my long position at my revised 1.1885 T/P level and I am now flat. With the Euro opening much lower this morning I will again look to buy the market on any further dip to 1.1780/1.1825 with a 1.1745 stop
December Dollar Index
Unfortunately the Dollar just missed my 92.50 buy level with a 92.55 low print before rallying strongly this morning and I am still flat. There is no doubt that the Dollar has strong support at 92.50 as a break and close below here could well see a further acceleration lower for the Dollar. Today I will now raise my buy level to 92.40/92.75 with a 92.05 stop.
My DAX plan also worked well on Friday with the market trading lower to my 12840 buy level shortly after I posted before rallying to my 12880 T/P level and I am now flat. The price action across all the Equity Indices shows how difficult it is to be short any market as shown by the DAX which is trading 350 points off Friday’s low at 13070 this morning. The DAX has strong resistance from 13140/13200 and today I will be a seller in this area with a 13245 tight stop. My only interest in buying the DAX is on a dip lower to 12840/12900 with a 12790 stop.
The FTSE also just missed my buy level on Friday before rallying and I am still flat. Today I will now raise my buy level to 7270/7305 with a 7240 stop. I still do not want to be short the market at this time.
Dow Rolling Contract
Incredibly the Dow sold off over 400 points in a flash on Friday to bottom at 23925 before spending the rest of the session rallying into the close. This rally has continued overnight on the back of the tax bill being passed by the Senate with the Dow trading on higher on the re-open last night to my 24445 sell level. Subsequently we had a small sell-off to a 24375 low print and I sued this move lower to cover this position at my revised 24398 T/P level and I am now flat. You just cannot be short the US stock market for any length of time and especially over a weekend. The Dow is now trading over 850 points higher than the post missile launch low by North Korea late Wednesday evening. The Dow has strong resistance from 24540/24600 and today I will be a small seller in this area with a 24650 stop. Given the huge move higher I will now look to buy the market on any dip lower to 24230/24300 with a 24170 stop.
While the Dow closed 2.5% higher last week the NASDAQ actually closed the week lower as the FANG stocks came under some serious selling. I am still flat and today I will raise my sell level slightly to 6425/6465 with a 6500 stop.
My Bund plan worked well but again you had to be quick. After the market traded higher to my 163.40 sell level we had a quick drop to 163.05 before rallying into the close. I used this sell-off to cover my short position at my revised 163.19 T/P level and I am now flat. This morning the Bund is opening lower on the back of the higher Treasury Yields and I will look to buy the market on any further dip lower to 162.50/162.85 with a 162.25 tight stop. My only interest in selling the Bund is on a further rally higher to 163.85/164.15 with a 164.40 stop.
Gold Rolling Contract
No change as I am still a buyer on any dip lower to 1256/1263 with the same 1249 stop.
Silver Rolling Contract
I am still long from last week at 16.41 with the same 15.95 stop. Today I will look to add to this position on any further move lower to 16.10. For now my T/P level remains unchanged at 16.70.