Risk assets remain in a cautious mood not helped by an escalation in tension between India and Pakistan while overnight US Trade Representative, Robert Lighthizer, tempered expectations of an imminent US-China trade deal following earlier suggestion by President Trump that a deal with his friend Xi was in the making. The USD is a tad higher with gains against AUD, NZD and JPY partially offset by a stronger pound and oil linked currencies (CAD and NOK). Oil prices jumped following an unexpected decline in US inventories, UST yields also head higher. Not helping markets this morning was the news that the talks between the U.S. and North Korea on the denuclerisation of the Korean Peninsula at their summit in Vietnam have ended early. In a press conference at the end of the Summit President Trump said that Kim was ‘’quite a guy and quite a character, but that sometimes you have to walk’’. He also said that they all agreed ‘’it was not a good time to sign anything’’.
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US equities traded in an out of positive territory initially opening with a soft tone following a negative lead from Asia and Europe. The flare up in tensions between India and Pakistan triggered a bid for safe haven assets just after I posted yesterday morning. Speaking before Congress, US Trade Representative Lighthizer delivered a more cautious message in terms US-China trade negotiations progress. In contrast to comments from President Tump, a few days ago where the President suggested an agreement could be signed late in March, Lighthizer sounded less optimistic noting that that ‘’The issues on the table between the U.S. and China are too serious to be resolved with promises of additional purchases,’’ and that it is still too early to tell if China will concede to US demands. Lighthizer also said that ‘’This administration is pressing for significant structural changes that would allow for a more level playing field’’ adding that ‘’Much still needs to be done, both before an agreement is reached, and more importantly, after it is reached.’’
In contrast to the soft/sideways moves in equities, global Interest Rates have moved higher over the past 24 hours. Looking at the intraday charts the jump in both 10y Bunds and 10y UST yields appear to have been driven by technical factors aided by the move higher in oil prices while US corporate issuance and heavy selling of German Bunds futures also seemingly played a role. 10y UST yields now trade at 2.6933%, up 6bps over the past 24hrs while 10y bunds closed 3bps at 0.148%.
The USD is a tad higher in Index terms with DXY up 0.17% to 96.16% while BBDX is +0.18% to 1187.85. Gains in the USD vs majors have come from weakness in AUD, NZD and JPY. Yesterday the antipodean currencies traded softer amid weaker than expected domestic data releases, NZD took as small hit on worse than expected January trade figurers (-$914mn vs. -300m E), then AUD (to low of 0.7135 from high of 0.7199) on weaker than expected Construction Work Done.
Late yesterday, USD/JPY traded lower following news that Pakistani fighter jets shot down two Indian aircrafts and a soft opening by European equities did not help either. That said, given the high degree of sensitivity to 10y UST yields, courtesy of the Bank of Japan’s yield curve control policy, USD/JPY is back above 110.80 this morning reacting to the solid jump in 10y UST yields to 2.69%.
The standout performer in FX markets is again the Pound, following on from Theresa May’s decision to allow the UK parliament the option of extending Article 50. Sterling is 0.4% higher to 1.3306, its highest level since July. Last night the UK Parliament voted against a motion put forward by the Opposition Labour party that urged the government to adopt a Customs Union deal and then move to a second referendum. This motion was expected to be defeated and pressure will now be on Corbyn to go full steam for a second referendum in coming days. That in turn will help pressure the Tory Brexiteers to take May’s deal on the 12/13th March or risk losing Brexit to a long extension or second referendum. Meanwhile, on the other side of the Channel, French President Emmanuel Macron said the EU would only grant the U.K. an extension to the Brexit negotiations if there is a “clear” reason for doing so, meanwhile in a more conciliatory tone German Chancellor Angela Merkel said ‘’The exit deal applies. If the UK needs a little bit more time we will not say no but we want an orderly Brexit,’’. My position has long been the UK will not leave without a deal and while I still expect Sterling to make further gains, I also think a volatile GBP environment is likely as the political tension get worked out.
Having delivered his semi-annual testimony to the Senate yesterday, there was, unsurprisingly, little new information from Fed Chair Powell’s testimony to Congress. Powell said the Fed was close to agreeing a plan on its balance sheet (which is shrinking, as the Fed lets is QE holdings mature). The consensus is for the Fed to halt its balance sheet reduction later this year.
After coming under some pressure following a tweet by President Trump asking OPEC to ‘’relax’’, oil prices rebounded following an unexpected drop in US crude-oil inventories (8.6m barrels decline to 445.9m vs expectations for a small increase) and comments from the energy minister of Saudi Arabia, reiterating OPEC’s commitment to cutting output to rebalance the market. Meanwhile both Gold and Silver ended the day lower after a mild sell-off.
This morning on the Economic Front we have French GDP at 8.30 am and this si followed at 1.00 pm by German CPI. At 1.30 pm we have US Weekly Jobless Claims and GDP. Finally we have the Chicago Purchasing Mangers Index at 2.45 pm and the Kansas Fed Manufacturing Activity Index at 4.00 pm.
Meanwhile the Fed’s Clarida and Bostic are speaking at 1.00 pm and 1.50 pm respectively.
March S&P 500
My S&P plan worked well with the market selling off to my 2775 buy level before rallying 20 Handles. As I want to make some points yesterday after Tuesday’s quite session I covered this long S&P position at my revised 2779 T/P level and I am now flat. This morning the S&P Futures Market is under pressure after the Trump/Kim talks ended early. Even though the S&P is overbought and due a correction I am not expecting a major sell-off at this time. Today I will again look to buy the market on any further dip lower to 2760/2772 with a 2753 stop. If I am taken long and subsequently stopped out of this position I will be a more aggressive buyer from 2735/2750 with a 2727 stop. My only interest in selling the market is still on a rally higher to 2806/2818 with a 2825 stop.
No Change as I am still a buyer on any dip lower to 1.1270/1.1310 with the same 1.1225 stop. With US GDP due a 1.30 pm there is plenty of potential for Dollar volatility especially if we get a weaker than expected print. I will still look to sell the Euro on any move higher to 1.1520/1.1570 with a 1.1605 stop.
March Dollar Index
The Dollar just missed my 96.10 sell level before having a small sell-off and I am still flat. Today I will raise my sell level slightly to 96.35/96.75 with a 97.05 stop.
After trading in a narrow range over the past two weeks we are seeing some selling pressure in the DAX this morning. I am still flat and today I will lower my buy level slightly to 11280/11340 with a 11225 stop. I will also lower my sell level to 11550/11650 with a 11720 stop.
I am still flat the FTSE which never threatened my sell range yesterday which is no surprise given the strength of Sterling. The FTSE has strong support from 6970/7010 and I will be a buyer on any dip to this area with a 6935 stop.
Dow Rolling Contract
I am still flat the Dow and today I will continue to be an aggressive buyer on any dip lower to 25630/25750 with a 25580 stop. Just like the S&P above I am not expecting a major sell-off in the Dow at this time. If I am taken long and stopped out of my Dow buy level I will be a more aggressive buyer on any further dip lower to 25270/25470 with a 25150 stop. My only interest in selling the Dow is still from 26150/26300 with a 26390 stop.
The NASDAQ traded in a narrow range yesterday and I am still flat. Today I will continue to be a buyer on any dip lower to 6960/7010 with a 6915 stop. I will also leave my 7165/7205 sell level unchanged with a 7245 stop.
Yesterday we saw some decent selling in the Bund which is no surprise given its insanely low yield of just 14 basis points. I am still flat and today I will now lower my sell level to 166.25/166.65 with a 167.05 stop which is just above recent highs. I still do not want to be long the Bund at this time.
Gold Rolling Contract
I am still flat Gold which just missed my buy level before having a late rally. As I am back long Silver I will now lower my buy level to 1298/1308 with a 1291 stop.
Silver Rolling Contract
Silver traded lower to my 15.70 buy level. I am still long and I will now raise my stop to 15.25 on this position. I will also lower my T/P level to 15.85 and if any of the above levels are hit I will be back with a new update for my Platinum Members.