We come in this morning to the news that just 24 hours on from President Xi’s conciliatory speech to the Boao Forum advocating market opening and yet there is a semblance of a risk-off market mood. European Equity markets have closed lower, with the Dow closing down 218 points, though not closing on its intra-day lows. Bonds have had a modest bid tone, though again yields are above intra-day lows. The VIX is down slightly to 20.23 (-0.23), oil, base metals and gold are higher (oil the more so), while major currencies have not changed trajectory. The EUR/USD sits at 1.2370 this morning. The Rouble is down over 3%.
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The reason for this backward risk step has been the reaction from President Trump to more unsettling news about Syria and speculation of European/US missile retaliation. In a tweet before the US market had opened, the President tweeted: ‘’Russia vows to shoot down any and all missiles fired at Syria. Get ready Russia because they will be coming, nice and new and smart’’! He also tweeted that the relationship with Russia is worse than it has ever been, and that includes the Cold War.
That missile tweet was sufficient to frighten the horses to some extent, dampening risk sentiment. In other news, the US March Core CPI was right in line with expectations, increasing 0.2%, while the FOMC Minutes of the March 20/21 meeting had little impact, to be expected given the new forecasts and press conference after that meeting. Headline CPI fell 0.1% in March but annual growth increased from 2.2% to 2.4% thanks to base effects from a decline last March when super cheap cell phone pricing was sufficiently large to drag CPI lower. Core CPI also fell a year ago, while this March it rose by the expected 0.2% taking annual core CPI up to 2.1% from 1.8%. The flow through of this into the Core PCE deflator should see it also lift in March (due 30 April) up from 1.6% to 1.9%. In coming months, a continuation of the 0.2% m/m rise averaged over the past six months should see that deflator attain a 2 handle. Apart from a brief period early last year, it has been seven years since the PCE deflator has had a 2 handle for any length of time.
It is not surprising then that the FOMC has been becoming more confident of actually reaching their 2% inflation mandate. (Annualising the growth over the past six months is almost confirmation that the Fed is meeting its inflation mandate.) As to the future of Fed funds, there was wire coverage given to the FOMC Minutes, especially to the Fed leaning toward faster rate hikes. ‘’A number of participants indicated that the stronger outlook for economic activity, along with their increased confidence that inflation would return to 2 percent over the medium term, implied that the appropriate path for the Federal Funds rate over the next few years would likely be slightly steeper than they had previously expected’’.
This cannot have been too surprising given not only last year’s tax cuts but the further bills passed to lift spending this year and indeed the tilt higher in Fed Funds forecasts released after the March meeting, including the Fed lifting its dots for 2018 and a higher average for this year, if not quite the median. There was also some scepticism in the Minutes as to how much expansionary fiscal policy would boost potential output as opposed to just being a ‘’sugar hit’’. Two other morsels to note: first, the trade risk (agricultural contacts understandably worried), while the Fed discussed changing the language on the stance of monetary policy from accommodative to neutral at some point.
ECB President Draghi was also speaking yesterday and shied away from directly engaging or batting back against the more strident view of shifting policy now in a more strident view espoused by Nowotny on Tuesday. Instead, you could be forgiven for thinking that he deflected it from a different angle, the trade/tariffs angle. He noted that while the direct effects of the tariff announcements or proposed were relatively modest, he will be watching to see what impact it has on confidence and the economy through that channel. He was quite upbeat on conditions in the Euro-Zone, bolstering an expectation that wages will eventually rise. This deflection played to the view that he is in no rush to make any near term definite statements about what will happen after September when the current QE programme ends.
This morning on the Economic Front we have Euro-Zone Industrial Production at 10.00 am and this is followed at 1.30 pm by the US Weekly Jobless Claims and the Canadian New Housing Price Index. Finally the ECB’s Weidmann speaks in Berlin at 5.00 pm, followed by the Fed’s Kaskari just before the US Markets close.
June S&P 500
Yesterday was a frustrating trading session with the S&P just missing my 2622 buy level with a 2625.50 low print before rallying 30 Handles. Subsequently I emailed my Platinum Members to buy the S&P at a higher 2640 price level which was filled before the market rallied to my 2649 T/P level and I am now flat. The S&P is absorbing the missile treats from Trump quite well given the circumstances as we move more and more away from the key 200 Day Moving Average at 2595. Today I will again look to buy the S&P on any dip lower to 2615/2630 with a 2605 stop. If I am taken long and subsequently stopped out of this position I will be a more aggressive buyer on any further dip lower to 2586/2596 with a 2579 stop. My only interest in selling the S&P is still on rally higher to 2678/2690 with the same 2697 tight stop.
The Euro continues to build value above Tuesday’s 1.2302 low print and I am still flat. Today I will again move my buy level slightly higher to 1.2270/1.2310 with a 1.2235 stop. I still do not want to be short the Euro at this time.
June Dollar Index
No change as I am still a small seller on any rally higher to 89.80/90.20 with a 90.55 stop.
I am still flat the DAX which continues to trade sideways/higher which it has done for most of the past six weeks. I do not want to chase this market higher and my only interest in buying the market is on a dip lower to 12110/12180 with a 12065 stop.
I am still flat the market which traded in a narrow range yesterday. Today I will lower my buy level slightly to 7075/7115 with a 7045 tight stop. My only interest in selling the market is still on a rally higher to 7250/7285 with a 7315 stop.
Dow Rolling Contract
Unfortunately the Dow missed my initial 24050 buy level with a 24090 low print before rallying nearly 300 points on what turned out to a volatile trading session. I am still flat and will continue to be a buyer on any dip lower to 23850/24050 with a 23680 wider stop. The longer that the Dow can hold the key 24000/24150 support level it will only be a matter of time before we move higher in my opinion. This view obviously goes against the Dow Theory sell signal from Monday but I do feel we will have one move above 25000 before real selling hits the market.
No change as I am still a buyer on any dip lower to 6450/6510 with the same 6390 stop. As I mentioned yesterday the NASDAQ needs to break and close over the strong resistance level at 6675/6775 as this will be a buy signal for 6975 and possibly 7125/7175.
The boring action continues in the BUND I am still flat which I have been for over two weeks now. I am afraid to chase this market higher and will therefore keep my buy level unchanged again from 158.25/158.60 with the same 157.95 stop.
Gold Rolling Contract
Yesterday Gold tested the 1366/1376 resistance area. This is strong resistance dating back over 20 months to July 2016. There have been 2/3 attempts to push through this resistance area since this high was made but each of them have been unsuccessful so far. Remember a break and close over 1380 is a strong buy signal especially if we close over here tomorrow evening. I am still flat Gold and today I will now raise my buy level to 1326/1334 with a 1319 stop.
Silver Rolling Contract
After Silver missed my 16.50 buy level with a 16.52 low print I emailed my Platinum Members to buy the market at 16.65. I am still long and will now lower my T/P level to 16.85 which is just below the key 16.90/17.10 resistance level – a break of which by tomorrow – will also be a strong buy signal.