Tight ranges were seen ahead of the FOMC Minutes release and there has been a fairly muted reaction post. The US Dollar remains on the back foot, US Treasury Yields are still in a tight range and US equities continue to eke out small gains. The Fed remains data dependent and while many participants are concerned over whether the softness in inflation is transitory or not, for now many participants see a rate hike later in 2017 as warranted if the economy evolves as expected. US CPI tomorrow looms large. Ahead of the Minutes, 10y UST yields were trading at 2.346% and now they trade half a bps lower at 2.339%, meanwhile the odds of another Fed hike in December have remained steady around 75%. In contrast the soft USD theme remains in place and is now entering its fifth day.
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For anyone following my Platinum Service it lost 6 points yesterday and is now ahead by 248 points for October, having made 447 points in September, 1560 in August, 1096 in July, 1023 in June, 1076 in May, 1375 in April, 1335 in March, 1481 in February and 1734 in January. Since I started this New Platinum Service in June 2015 it has averaged a monthly gain of over 1600 points.
The Euro has continued to lead the gains against the US Dollar, up another 0.47% over the past 24 hours and top of the G10 leader board. The market appears to have welcomed the decision by Spanish PM Mariano Rajoy to give Carles Puigdemont, the president of the Government of Catalonia, five days to clarify whether he has declared Independence from Spain or not. Spanish equities have outperformed with the IBEX 32 closing up +1.34%( BBG Europe 500 +0.07%) and Spanish Bonds have rallied while other EU Bonds have sold off. Interestingly, the EUR outperformance has occurred despite dovish talk from ECB members. The ECB’s Smets argued for a gradual and cautious tapering of asset purchases and Visco also called for a gradual normalisation. Bloomberg has run a story that ECB officials agree on keeping a pledge to not raise interest rates until “well past” the end of Bond buying. EUR now trades at 1.1875, its highest level in two weeks.
AUD and NZD have also outperformed the USD, but in smaller magnitudes relative to the Euro, +0.20% and +0.27% respectively. Political uncertainty is still weighing on the Kiwi, but, NZD outperformance overnight is actually a big deal, following an 8-day consecutive fall in the TWI as the country awaits the outcome of coalition government talks. NZD currently trades at 0.7110. Meanwhile the AUD has remained range bound with question marks over the state of the consumer weighing on RBA rate hike expectations while uncertainty over the commodity outlook has also been a factor limiting AUD outperformance under a soft USD environment. The pair now trades at 0.7810 and sits on the upper half of its 0.7733-0.7811 range held over the past 5 trading days.
In Fed-speak, known dove Evans was hosing down rate hike talk, telling reporters that it’s too soon to decide on a December rate hike. In an earlier speech he argued that the Fed’s decision to allow its balance sheet to begin slowly shrinking this month would deliver some degree of policy tightening. Given that backdrop, he said “there’s room for a very honest discussion later this year as to whether or not it’s the right time to raise rates.” Meanwhile, known hawk George said the Fed should continue to gradually raise interest rates and shouldn’t place too much emphasis on meeting its specific 2% inflation target.
Also last night, the Wall Street Journal reports that based on a survey of business and academic economists Kevin Warsh is seen as Trump’s most likely pick to lead the Fed. The survey suggested a 28% probability for Warsh getting the nod, a 22% probability for Yellen winning a second term and a 21% probability of Fed governor Jerome Powell being nominated while after this news was released, headlines show that Trump is going to meet Fed candidate John Taylor later this week.
This morning on the Economic Front we have the Bank of England Credit Conditions at 9.30 am and this is followed at 10.00 am by Euro-Zone Industrial Production. At 1.30 pm we have US PPI and the Weekly Jobless Claims. Finally we have the Bloomberg Consumer Comfort Index at 2.45 pm.
This afternoon in Washington Fed Governor Lael Brainard and ECB President Mario Draghi will speak on monetary policy at a panel which includes former Fed Chairman Ben Bernanke. Fed Governor Powell is also speaking at 6.00 pm, but given his topic is on prospects for Emerging Market Economies, he is unlikely to make any reference to US monetary policy.
December S&P 500
Yesterday was the quietest non-Holiday trading session that I can remember for many years with little or no movement across all asset classes as the market appears to go on hold ahead of US CPI which will be released tomorrow at 1.30 pm. The S&P just missed my 2554 sell level before having a small sell-off and I am still flat. I was in London yesterday to do interviews with Core TV and IG Index. While I as in IG, it was pointed out that 85% of IG clients are short the S&P which probably goes a long way to explaining why it is so difficult to get anything going on the downside as the majority of traders are short and getting squeezed. The VIX which had closed with a 10 Handle on Tuesday was lower last night to close at 9.85 while the McClellan Oscillator improved slightly to close at +23. Today I will move my sell level slightly higher to 2555/2562 with a 2567 stop. Meanwhile I will still be a strong buyer on any dip lower to 2530/2536 with a 2525 stop. If I am taken long and subsequently stopped out of this position I will be a very aggressive buyer from 2506/2514 with the same 2500 stop.
My fears of being short the Euro certainly proved to be correct with the Euro trading 60 points higher this morning at 1.1875. Thankfully after I posted yesterday morning the Euro traded to a 1.1801 low which enabled me to cover my average short 1.1790 position for a small loss at 1.1805 and I am still flat. My own view is the Fed are not going to do the number of rate hikes expected by the market and that the US Dollar will renew its sell-off over the coming months with a move to 1.30 a real possibility. Today I will move my buy level higher to 1.1795/1.1830 with a 1.1760 stop. As long as the Euro can stay above 1.1790 then we should see a move higher but a break and close below this important support will be bearish and will see me look to go short again.
December Dollar Index
Earlier this morning the Dollar finally traded lower to my 92.65 buy level. In light of yesterday’s buy extreme for the Euro I no longer want to be long the Dollar and I emailed my Platinum Members earlier to exit this position at 92.74 and I am now flat. Today I will be a small seller on any rally higher to 93.05/93.35 with a 93.65 stop.
The DAX continues to trade in an extremely narrow range which is unprecedented as I cannot remember a time when we have traded in such a narrow range which has occurred for the past 10 trading sessions. I am not going to chase this market and today I will continue to look to buy the market on any dip lower to 12830/12880 with a 12785 stop.
No change as I am still a small buyer on any dip lower to 7425/7460 with the same 7395 stop which is just below the FTSE’s 4 month trendline and good support at 7450.
Dow Rolling Contract
The latest Investors Intelligence Advisors Survey has jumped to levels that are rare. The latest bull/bear ratio shows there are currently 4 times as many stock market bulls as there are bears, a rare reading. Since 1987, there are only three prior instances of greater than 4:1 bullish advisors to bearish ones. Each previous was followed by a substantial sell-off. Again until we get a sell extreme it is difficult to be short for more than a few hours before buyers return. Today I will leave my sell level unchanged at 22890/22965 with the same 23020 stop. I will still look to buy the Dow on any dip lower to 22580/22650 with a 22530 stop.
The Bund just missed my buy level before rallying small into the close and I am still flat. The fact that the Bund had broken 161.40 this morning is bullish especially if we close over this level this evening. Today I will now raise my buy level slightly to 160.80/161.10 with a 160.50 stop.
Gold Rolling Contract
No change as I am still a small seller on any rally higher to 1309/1315 with the same 1322 stop. It was interesting to see that the IG clients are 82% long Gold which is another reason to be wary of any strong rally. For this reason despite Gold trading higher this morning I will leave my buy level unchanged from 1269/1277 with a 1262 stop.
Silver Rolling Contract
Yesterday’s rise to 17.28, retraced 50% of the decline from September 8. I am still flat and I do not want to chase this market higher and today will only raise my buy level slightly to 16.70/17.00 with a 16.40 stop.