Global equities have remained buoyant reflecting rising optimism of an ease in US China trade tensions and the avoidance of another US government shutdown with news reports suggesting President Trump will sign the border security deal while China confirmed President Xi will meet Senior US trade representatives tomorrow. Later in the session US equities gave back some of their early gains reacting to Senator Rubio’s pledge to submit a bill to tax corporate buybacks at the same rate as dividends. A firm and steady US core CPI print boosted the USD and UST yields while the Euro came under pressure amid disappointing data and Spanish political turmoil. The NZD has retained most of its post RBNZ gains while the AUD is little changed. In a quiet night for commodities, oil prices are smartly higher again.
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Expectations of a positive outcome from US-China trade talks this week as well as the prospect of avoiding another government shutdown continues to provide a tailwind to global equity markets. Yesterday Asia had a solid day with China’s CSI Index leading the gains closing 2% higher. Excluding Spanish equities (more on that below), all major European Indices closed in positive territory with the Stoxx 600 Index up for a third consecutive day. US equities also ended the day higher, although last night Senator Rubio’s tweet pledging to submit a bill to tax corporate buybacks at the same rate as dividends dented some of the positive vibes evident early in the session.
The senator’s tweet, follows his submission of a plan to reduce incentives for companies to use excess capital to buyback shares. The Senator appears to be aiming at addressing criticism of the Republican’s 2017 tax law that cut the corporate rate to 21% from 35%. Many companies have used the savings to buy back shares, boosting EPS by reducing the aggregate float, instead of using the savings in new investments. Rubio tweeted ‘’We are going to give permanent preference to investments that will drive the creation of jobs & increase in wages”.
US headline CPI printed unchanged against expectations for a 0.1% rise, but the Core CPI reading which is the one that really matters for Fed policy, printed at 0.2%mom, matching consensus. The trend in core US inflation remains steady, against some concerns of a potential decline, indeed at 2.2% yoy, the current reading is up from the 1.8% reading a year ago. Overall the data suggest that we cannot rule out a resumption of Fed rate hikes later in the year, US Treasury yields reacted positively to the data print with the 2y and 5y rate climbing 2.7bps to 2.534% and 2.524%,respectively, while the 10y tenor reached an intra-day high of 2.71%, before settling at 2.707%.
The CPI print also boosted the USD, however weakness in other major currencies also played into the US Dollar’s outperformance. European Industrial Production fell by a much bigger margin than expected in December (-4.2%yoy vs. -3.3%yoy exp.) and Spanish political turmoil did not help the common currency either. Catalan separatists rejected PM Sanchez’s budget bill after the government declined to discuss the region’s right to self-determination. News reports now suggest the government is likely to call a snap election on Friday with many commentators suggesting the elections could lead to a new coalition government with an anti-migration agenda. Spain’s political upheaval comes ahead of European Parliament elections in May, which in the eyes of many it is seen as a referendum on the EU itself. Amid a slowing economy, domestic politics is now looking like an additional hindering factor for the prospect of an EU economic recovery in 2019. The EUR currently trades at 1.1271, near its lowest level since mid-2017.
In the UK, headline CPI missed expectations slightly, although the core measure was on consensus. UK data remains a sideshow, with the market much more focused on whether a no-deal Brexit scenario can be averted. A Brexit parliament debate is scheduled to take place today, but with PM May announcing another vote will take place in two weeks time, it is unclear if any significant votes will take place later today. Sterling jumped earlier in yesterday’s session with a high of 1.2958 on reports that the UK government will table a motion that endorses a non-binding amendment passed two weeks ago, that the UK should not leave the EU without a deal. But some Brexit-backing Tories are unlikely to support this motion. Sterling now trades at 1.2852.
Commodities had a subdued session, although oil prices are the exception up for a second day (Brent +2%, WTI +1.6%) following Saudi Arabia’s pledge to deepen output cuts and held most of those gains even after the EIA reported bigger U.S. crude stockpiles than anticipated.
This morning on the Economic Front we have German GDP and Wholesale Price Index at 7.00 am. This is followed at 10.00 am by Euro-Zone GDP and Employment Change. At 1.30 pm we have the US Weekly Jobless Claims, Retail Sales and PPI. Finally at 3.00 pm we have Business Inventories.
March S&P 500
The S&P 500 traded higher to my 2756 second sell level for an average short position of 2749 before trading to a high of 2762. Subsequently the S&P had a small sell-off into the close and I covered my short position for a small loss at 2751 and I am now flat. The S&P again closed over its 200 Day Moving Average (2743) and this 2730/2742 key support area must hold for the S&P to continue moving higher to test its next main resistance level at 2810 which is the December 3 high. Today I will be a buyer on any dip to this area with a 2722 stop. I will also be a seller on any further rally to 2768/2780 with a 2788 stop.
The Euro traded lower to my 1.1285 buy level before having a small rally back above 1.1300. I emailed my Platinum Members to exit any long position at 1.1298 and I am now flat. The Euro needs to hold the key 1.1215 support area which is the low from November 12, or else we could see a major move lower to the 1.08 next support level over the coming weeks. Today I will again look to buy the Euro on any dip lower to 1.1180/1.1220 with a 1.1145 tight stop. The Daily Sentiment Index declined to just 10% bulls last Monday and this key indicator should ensure the Euro holds my support level above and see a more sustained rally.
March Dollar Index
I am still flat the Dollar and today I will now move my sell level higher to 97.30/97.70 with a 98.05 stop.
I am still flat the DAX which again traded heavy yesterday on the back of the weaker Industrial Production. Today I will leave my 10950/11010 buy level unchanged with the same 10875 stop.
No Change as I am still a buyer on any dip lower to 7005/7045 with the same 6970 stop.
Dow Rolling Contract
The Dow closed higher by 100 points with the market now trading 500 points above its 200 Day Moving Average. I am still flat and today I will again move my buy level higher to 25150/25300 with a higher 25040 stop.
I am still flat the NASDAQ and today I will lower my buy level slightly to 6895/6945 with a 6850 tight stop.
The Bund looks tired and today I will lower my sell level slightly to 166.60/167.00 with a 167.35 stop.
Gold Rolling Contract
No Change as I am still buyer on any dip lower to 1289/1297 with the same 1281 stop.
Silver Rolling Contract
Silver looks tired and I now have this long 15.83 position on board for an over extended period. Today I will lower my exit level to 15.75 with the same 15.45 stop. If any of the above levels are hit I will be back with a new update for my Platinum Members.