Central Banks set the tone on global financial markets yesterday, with the latest comments from policy officials sparking a risk-on-mood that sent US stocks to their biggest gain in two months and roiled currencies from Sterling to the Canadian Dollar. ‘’it’s time to move on” are an apt description of the mood of central banks, which have been removing expectations of further policy easing and getting the market into thinking of central banks tightening policy. This theme continued yesterday afternoon with comments from the Bank of Canada’s Poloz and Bank of England’s Carney.
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For anyone following my Platinum Service it made 60 points yesterday and is now ahead by 844 points for June, having made 1071 points in May, 1376 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 1700 points.
In terms of market moves, most action happened in currencies: Canadian Dollar (+1.3%); British Pound (+0.9%); Euro (+0.4%) and the Aussie (+0.8%) – mostly on the back of central bank commentary and a move higher in commodity prices. There was some intra-day volatility in bond yields, while equities were mixed with Europe flat (EuroStoxx -0.1%) and the US higher (S&P500 +0.9%).
The Canadian dollar surged 1.3% on the back of continued hawkish comments from the Bank of Canada and higher oil prices. Governor Poloz reinforced the view of a possible rate hike in the near future: “[rate cuts] have done their job. We’re just approaching a new interest rate decision… certainly we need to be at least considering that whole situation now that capacity – excess capacity – is being used up steadily”. Markets have correspondingly shifted to pricing a 70% chance of a rate hike in July, up from just 35% a couple of days ago.
The Pound also got into the action closing up 0.9%. Comments from Bank of England Governor Carney were interpreted as being more hawkish than his previous comments on the economy, noting: “some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional”. Markets are now pricing a 55% chance of a rate hike by November 2017 compared to 44% a couple of days ago.
Interest Rates markets have experienced some volatility. While German Bund yields finished unchanged at 0.37%, they did trade in a wide range of 0.33-0.41 after yesterday’s 13bps increase. Yields did open higher in Europe, but they were taken lower on comments by unnamed ECB sources who said the market had misinterpreted Draghi yesterday (“[it] was intended to strike a balance between recognising the currency bloc’s economic strength and warning that monetary support is still needed”). This move was subsequently reversed on Carney’s comments and Draghi did not seek to clarify his earlier speech. Moves in US Treasuries were similar, up 1bps to 2.22%.
Why have Central Banks become hawkish all of a sudden? Draghi speech on Tuesday is worth re-reading on this, but it seems: (1) the link between monetary policy and the real economy is working; (2) the link between a growing real economy and inflation is more subdued than in the past, but the factors holding this back are temporary and thus brings the fear of inflation breaking out as the economy continues to improve; and (3) financial conditions are becoming easier as the real economy expands. Thus a constant policy stance is becoming more accommodative.
Will Australia join the central bank party? A Bloomberg article covering a three day old article by ex-RBA board member John Edwards suggested it may. Dr Edwards opined “if the RBA’s economic forecasts prove correct. It’s possible the tightening could start earlier, or if not the tightening itself, at least the signalling which should precede it. We may be seeing a little of that now…it would [see a]…natural policy rate as at least 3.5%.”
Moves in commodities were supportive for the Aussie: WTI up 1.2% to $47.37 a barrel its fifth consecutive daily increase. Iron Ore was also stronger, up 4.4% to $62.3 a tonne and well up on the recent lows of $53 a tonne.
This morning on the Economic Front we have Euro-Zone Business Climate Indicator and UK Mortgage Approvals at 9.30 am. This is followed at 1.00 pm by German CPI. Next at 1.30 pm we have the US Weekly Jobless Claims and the third estimate of Q1 GDP – markets still thinking of unrevised growth of 1.2% annualised. Finally in London at 6.00 pm the Fed’s Bullard who is a non-voter will speak on the US Economy and Monetary Policy.
September S&P 500
Even though I am bearish of the stock market going forward I am reluctant to be ever caught short the market as no matter what happens the ‘’buy the dip’’ continues every time we get a decent sell-off with yesterday’s move higher producing an Upside Key Day Reversal. Most members should think about switching to my Platinum Service as the updated emails are the key and as volatility picks up for the rest of the year this service is going to become more valuable. Unfortunately the S&P just missed my 2411 buy level before trading higher to my initial 2428 sell level. With the Central Bank Members Panel discussion beginning in Portugal I emailed my Platinum Members to exit any short position at 2426 with a new sell level at 2436. After my second level was hit I again emailed them to cut this position at 2435 and I am now flat. There is no doubt the reaction to Dragi’s speech scarred the ECB especially the move in the Bund which as I mentioned yesterday doubled in yield which I have never seen happen before and had to calm the markets. Today in light of yesterday’s strong positive action in which the McClellan Oscillator improved from Tuesday’s negative -30 reading to close last night with a positive reading of +44. This is bullish and today I will now look to buy the S&P on any dip lower to 2431/2437 with a 2426 stop. I do not want to be short the S&P ahead of tomorrow’s Month and Quarter end ahead of US July 4th Bank Holiday on Tuesday.
After trading sideways for most of the last two months the Euro has certainly come back to life over the past 48 hours. I mentioned yesterday that in light of Tuesday’s huge 200 points move higher that the ECB would not sit back and not make a comment which they did at lunch time to say that Dragi’s speech had been miss-interpreted by the market. This saw the Euro fall from 1.1380 to 1.1292 in one red candle, thus putting me long at an average rate of 1.1320. As I wanted to be flat ahead of the Central Bank Panel I covered this position for a small gain at 1.1335 and I am now flat. This morning the Euro is trading at my next target at 1.1410 and is now severely overbought. At 83% Euro bulls, the Daily Sentiment Index has equalled its previous high reading from September 17, 2015 which was a near term price high and this reading was taken before the Euro moved higher overnight. The Euro has strong resistance from 1.1465/1.1505 and I will be a seller in this area with a 1.1540 tight stop. I will again look to buy the market on any dip lower to 1.1310/1.1350 with a 1.1270 stop.
September Dollar Index
Unfortunately the Dollar just missed my 96.35 sell level yesterday with a 96.33 high print before selling off overnight to my 95.45 buy level. The Dollar is now severely oversold with a low DSI reading and is due a near term bounce to correct this condition. I am still long and I will now only add to this position on any move lower to 95.00 with a tight 94.80 stop.
Now you know why I have been reluctant to be a seller at any stage in the DAX over the past few months despite last week’s Downside Key Day Reversal. When you have a Central Bank such as the SNB (Swiss Central Bank) with an alleged $80 billion invested in the US equity market and Euro 20 billion in European stocks it is incredibly difficult to be short the market despite the high PE Ratios and what is commonly regarded as a 1655 Fair Value for the S&P. My own view is the series of rate hikes started by the Fed which will now filter through to the other Central Banks is guaranteed to cause a recession over the coming 12 months. I am still flat the DAX which just missed my buy level before trading nearly 180 points higher this morning from yesterday’s low print. Today I will now raise my buy level to 12550/12610 with a 12510 stop. Given the strength of the Euro I am reluctant to chase this market much higher from here.
I am still flat the FTSE which is struggling on the back of the much stronger pound. So far the key 7315 support level is holding and today I will now raise my buy level to 7300/7330 with a 7270 stop.
Dow Rolling Contract
My Dow plan worked well but you had to be quick as after the Dow traded higher to my initial 21425 sell level the Dow spent 20 minutes below this level with a sell-off that stopped at 21393 before rallying strongly into the close. After the Dow hit my sell range I emailed my Platinum Members to exit this position at my revised 21410 T/P level and I am now flat. Despite yesterday’s positive price action we still have six Hindenburg Omen’s on the clock and this signal is still valid until mid-October meaning there is a 28% chance of a crash (mad and all that this seems) over the coming 3 ½ months. Today I will again look to sell the Dow on any rally higher to 21620/21680 with a 21735 tight stop. Despite the positive seasonality my only interest in buying the Dow is on a large dip lower to 21275/21345 with a 21225 stop.
The Bund had another wild trading session as the ramifications from a change in policy stance by the ECB increases. This morning the Bund is resuming its sell-off after spiking higher after the comment from the ECB Official that the market had interpreted Dragis’s comment on Tuesday incorrectly. Today I will leave my buy range unchanged from 161.80/162.30 with the same 161.45 stop.
Gold Rolling Contract
Gold is struggling to re-gain it’s $20 sell –off last Monday and I am still flat. I do not trust this market as in my opinion it was a large player who sold the market on Monday. I am still flat and I am reluctant to raise my buy level despite the higher prices. Therefore today I will leave my buy level unchanged from 1226/1234 with the same 1220 tight stop.
Silver Rolling Contract
Silver is trading better than Gold at this time as it closes in on the 17.05 strong resistance level. Today I will move my buy level higher to 16.25/16.60 with a 15.90 stop.