Softer US data releases had a short – lived downward impact on US equities, US Treasury yields and the USD, with all three asset classes closing higher on Friday. It was a good day for risk assets with all major equity indices closing higher. The USD was broadly stronger with CAD the big G10 underperformer following a softer than expected Q4 GDP print. Sterling lost ground on Friday, but has opened the new week stronger amid expectations of a softening stand by Conservative Brexitiers. The stronger USD backdrop sees AUD and NZD end the week close to their near term lows. Over the weekend President Trump said he has asked China to immediately remove all tariffs on US agriculture and he also had a go at ‘’a gentleman at the Fed’’ that likes raising interest rates while noting that the US Dollar is too strong. Helping Equity Markets to open stronger this morning was a story from the Wall Street Journal suggesting US and China are close to agreeing a trade deal with a formal agreement likely be reached at a Xi-Trump summit around March 27. This news should be a positive for risk sentiment at the start of the new week.
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US data releases on Friday were unequivocally soft. The all-important ISM Manufacturing fell to a 2-year low, coming in 54.2 from 56.6 and against expectations of a smaller decline to 55.8. Details on the survey were not that impressive either, production fell to 54.8 from 60.5, new orders came at 55.5 from 58.2 and employment at 52.3 from 55.5. Meanwhile the final reading of the University of Michigan Consumer Sentiment Index for February was also softer than expected, alongside soft monthly income and spending data for December.
In spite of evidence of a US economic slowdown, the soft US data releases only had a short lived impact on US equities, UST yields and the USD, all three closed higher on Friday. Unlike concerns over the China’s and Europe’s slowdown, both in terms of magnitude and extent of time, the market appears to have less concerns over the nature and magnitude of the US slowdown. The weather and government shutdown are temporary shocks and thus investors can look through a spell of soft data releases and now the prospect of a US-China trade deal should help reinforce that view with China also benefiting from the latter.
So after an intraday fall, all three US major equity indices managed to end the day in positive territory. Looking at the weekly performance the Nasdaq closed higher for a 10th week in a row, but the Dow was unable to match the move closing 0.2% down for the week after 9 weeks of higher weekly returns. The UK FTSE was the other negative performer for the week, reflecting its sensitivity to a higher pound while in Asia, China’s equity market was the stand out with the Shanghai composite Index up 6.77% for the week.
On Friday, UST yields move higher in an almost parallel fashion ( about 4bps in average) with the 10y rate closing the week at 2.7531%, after reaching an intra-day high of 2.7640%. US data releases did not really have a material effect on UST yields trajectory with the intraday chart showing a steady rise in yields over the course of the day. Speaking at the National Association for Business Economics conference, Atlanta Fed Bostic (non-voter) said that he is very comfortable with the Fed being patient, Bostic still favours one rate hike this year and although he expects inflation to pick up and he would not panic if it went a little above 2% target.
Unlike UST yields, the US Dollar did show a brief negative reaction to the softer US data releases ( mainly the ISM report). Nevertheless the USD still closed higher in index terms, outperforming both developed and most EM currencies. The DXY index closed Friday 0.38% higher, to end the week essentially unchanged at 96.53. Looking at G10 in more detail, the CAD was the big underperformer on Friday weighted down by a barely positive GDP growth in Q4 and a 2% fall in WTI oil prices. A July Bank of Canada rate hike is now priced at 13% after being close to 25% half way through last week, the BOC meets later this week ahead of labour market data on Friday. The Bank is expected to stand pat, but given the softer data of late it will be interesting to see if it retains its tightening bias for later in the year.
Euro-area core CPI data came in lower than expected at 1.0%, confirming core inflation remains stuck around the figure with no evidence of renewed upward pressures. The EU final PMI’s also confirmed a sub 50 number for February Germany at 47.6 (same as the flash reading last week) – a 74-month low. The data comes ahead of the ECB meeting later this week alongside a fresh set of forecasts. There is a chance that the Bank pushes out its expected timing of rate hikes, and we might also hear official confirmation of discussion about further easing measures, such as another round of long-term loans offered to banks on favourable terms to try to stimulate credit growth. After moving above 1.14 after the US ISM data, the currency drifted down into the close, ending the week around 1.1365.
A lift in China’s Caixin Manufacturing PMI (Feb: 49.9 vs. 48.5 exp.) provided a transitory uplift to both the AUD and NZD, but in the end the stronger USD backdrop weighed on both antipodean currencies with both pairs closing close to their bottom of their recent ranges. AUD closed at 0.7080 and NZD was near the 0.6800 mark.
As noted above the WSJ is suggesting the US and China are close to agreeing a trade deal and notwithstanding some hurdles, talks have progressed to the extent that a formal agreement could be signed at a Xi-Trump summit around March 27.
After a softer close on Friday, Sterling is also moving higher this morning following weekend news that Conservative Brexitiers have outlined conditions for supporting PM May’s plan for leaving the European Union. According to the Sunday Times, the document cites three tests: a demand for a legally binding clause that ‘’unambiguously overrides’’ the text of the withdrawal agreement, stronger language that the so-called Irish border backstop will be temporary and a ‘’clear and unconditional route out of the backstop if trade talks fail.’’. It remains to be seen if this will be enough for PM May to get her plan through, Europe still needs to agree to these concessions and the PM still needs support from a few Labour MP in order to get all the necessary votes.
This morning on the Economic Front we have UK Markit Construction PMI and Euro-Zone Sentix Investor Confidence at 9.30 am. Next we have Euro-Zone PPI at 10.00 am. Finally we have ISM New York Business Conditions and Construction Spending at 2.45 pm and 3.00 pm respectively.
March S&P 500
Unfortunately the S&P just missed my 2784 buy level with a 2788 low print before having a nice 30 Handle rally. Thankfully we had no sell levels in the S&P over the weekend with the market closing higher for the 10 consecutive week. Internally the market is weak with the McClellan Oscillator closing just barely in positive territory while the Fear & Greed Index is now showing extreme Greed with a print of 75. There is no doubt this market is severely overbought. The S&P has resistance from 2826/2840 and today I will be a seller in this area with a 2848 tight stop. I will also raise my buy level to 2780/2794 with a 2772 stop.
The boring action continues in the Euro. After weeks of no comment on the Dollar we finally had Trump tweeting over the weekend that he wants to see a weaker Dollar. I am still flat the Euro and I will leave my 1.1270/1.1310 buy range unchanged with the same 1.1225 stop.
March Dollar Index
I am still flat the Dollar. Today I will again raise my sell level slightly to 96.80/97.20 with a 97.55 stop.
The DAX closed higher on Friday and I am still flat. Today I will raise my buy level to 11470/11530 with a 11425 stop. I still do not want to be short the market at this time.
The FTSE also just missed my 7050 buy level before rallying and I am still flat. Given the strength of Sterling I am reluctant to chase this market higher and today I will leave my 7020/7060 buy level unchanged with a 6965 same stop.
Dow Rolling Contract
Frustrating the Dow missed my 26180 sell level with a 26170 high print before selling off 60 points this morning and I am still flat. I expected more of a sell-off from the 26000/26200 resistance area but so far any sell-off has been contained despite how severely overbought the market is trading. Today my only interest in selling the Dow is on a further rally higher to 26250/26400 with a 26475 tight stop. I will also move my buy level higher to 25800/25950 with a 25710 stop.
The NASDAQ traded higher to my 7200 sell level. As I wanted to bank some points for Friday’s session I have now cut this position here at 7193 and I am now flat. Today I will move my buy level higher to 7060/7120 with a 7010 stop.
I am still flat the Bund with the same 166.20/166.60 sell level. If I am taken short I will have a T/P level at 165.95. Meanwhile my stop on any executed short position will be 166.95.
Gold Rolling Contract
Yet again the Daily Sentiment Index has proved itself to be one of the most reliable trade signals in the market. Two weeks ago when Gold was trading at 1345 the DSI was over 90% bulls. I should have gone short instead of trying to engineer a position that did not happen. On Friday the DSI closed at a still high of 66% despite Gold trading lower to my 1296 buy level. I am not comfortable in holding this position and today I will lower my T/P level on this position to 1297. Meanwhile I will raise my stop on this position to 1283.
Silver Rolling Contract
Silver got hit hard on Friday with the market trading lower to my second buy level of 15.30 for a now average long position at 15.50. I will leave my 15.10 stop on this position while lowering my T/P level to 15.55. If any of the above levels are hit I will be back with a new update for my Platinum Members.