While ECB President Mario Draghi and other ECB Governing Council members have been out en masse imploring investors to not worry and be happy about the Euro-Zone economic outlook, while repeating the ‘’patient, persistent, prudent’’ mantra with respect to monetary policy. However yesterday ECB Chief Economist Peter Praet nevertheless cautioned that there is considerable uncertainty regarding the degree of slack in the Euro-Zone economy (something he had already mentioned before Easter) and noting that inflation continued to be ‘’lacklustre’’. Draghi’s confidence was nevertheless enough to see EUR/USD put on half a cent, from around 1.2275 to near 1.2325. Meanwhile the winding road that is the US equity market has seen a small (1/3%) recovery from Friday’s 2.2% sell-off in the S&P500, but after being up almost 2% earlier in the session, which follows gains of 0.7%, 1.2% and 1.3% last Tuesday Wednesday and Thursday and a 2.2% fall last Monday. During this time the US dollar has continued to trade sideways (though the DXY is down 0.3% in the last 24 hours) while 10-year US Treasuries are sitting comfortably in the middle of what has been a 2.715-2.835% range.
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AUD is 0.2% up on where it started the week at 0.7700 as I write but has underperformed all other G10 currencies against the USD. AUD took a hit late in Asian session yesterday morning on news reports that China is evaluating the potential impact of gradual yuan depreciation as part of combating proposed tariffs. The report noted a Chinese government study that looked at using the currency as a tool in trade negotiations with the US, and also what would happen if China depreciated the yuan to offset the impact of any trade deal that curbs exports. The report also resonated in Europe which took AUD/USD down to a low of 0.7652, the bottom of the effective 0.765-0.78 range that has contained the pair since mid-March.
It is worth repeating that chances of a Chinese currency devaluation, along the lines of August 2015 or otherwise, are minimal. Regardless of whether the US and China do manage to iron out their differences on trade in coming months (most likely they will) a CNY devaluation or encouragement of a renewed depreciation trend will set back efforts to liberalise the capital account and encourage greatly increased foreign investor participation in China’s bond market, by years. Incidentally, President Trump has been out saying his administration will ‘’probably’’ come to an agreement with China on trade.
Emerging Markets have witnessed new record lows for the Turkish Lire, not on Syria but continued currency mismanagement where the government seems intent on adding stimulus (fiscal and/or monetary) to an already overheating economy. The Russian Rouble meanwhile has lost more than 4% on new sanctions imposed on Russian oligarchs including metals tycoon Oleg Deripaska. This looks to be the reason for yesterday’s near-5% surge on aluminium prices on fears of reduced Russian shipments.
Finally, the bipartisan US Office of Management and Budget (OMB) yesterday published its latest US budget deficit projections, the first since last December’s tax cuts and February/March spending increases were approved by Congress. Theses show the deficit ballooning to $804bn this fiscal year (ending Sep 30) from $665bn last year and to over $1tn in 2020. A decade from now the deficit is projected to reach $1.5tn (about 8% of current GDP) and public debt rise to $33tn by 2028 from $21tn now, almost 100% of GDP. The upshot is that there is a strong chance the US will suffer a further ratings downgrade before too long (the last was in August 2011). The numbers also serve as a reminder of the pressure that will be bearing down on the US dollar in the quarters and years ahead from the ever expanding ‘’twin deficits’’ and was the main reason why I emailed my Platinum Members late in the day to cancel any sell-orders in the EUR/USD.
This morning on the Economic Front we have no data of note from either the UK or the Euro-Zone, although ECB Members Nouy and Nowotny are speaking early this morning. At 11.00 am we have US NFIB Small Business Optimism and this is followed at 1.30 pm by PPI. Finally at 3.00 pm we have Wholesale Inventories as we wait for the FOMC Minutes tomorrow at 7.00 pm.
June S&P 500
Another wild ride for the S&P which traded to a high at 2653.75 before falling over 40 Handles in the last hour of trading. This move higher saw the S&P hit my average sell level at 2640 before thankfully stopping short of my 2656 stop level. The subsequent move lower saw the S&P me cover my short position at a too early 2635 revised T/P level and I am now flat. Yet again the S&P managed to hold its 200 Day Moving Average but to me it is only a matter of time before we break and close below this key technical level. The S&P has a declining tops pattern at 2674, 2657 and yesterday’s 2654 high and it will take a break and close above here to put the market on a more firmer footing. Today I will raise my buy level to 2588/2598 with a 2579 stop. As I go to post the S&P has just jumped over 20 Handles to the 2640 area again proving my point about how difficult it is to stay with any kind of short position on board. Today my only interest in selling the S&P is on a further rally higher to 2655/2670 with a 2679 stop.
With the US Trade Deficit near record levels it is only a matter of time before we see the US Dollar weaker. I am still flat and today I will now raise my buy level to 1.2230/1.2270 with a 1.2195 stop. I do not want to be short the Euro at this time.
June Dollar Index
The Dollar traded lower to my 89.55 buy level. As I changed my view on a stronger Dollar I emailed my Platinum Members to exit any long position at 89.63 and I am still flat. The Dollar has strong resistance from 90.10/90.50 and today I will be a small seller in this area with a 90.85 tight stop.
I am still flat the DAX which never came close to my buy level yesterday even with the late sell-off in the US markets. Today I will raise my buy level slightly to 12050/12125 with a 11990 tight stop. I still do not want to be short the DAX at this time.
I am still flat the FTSE and today I will now raise my buy level to 7035/7075 with a 6995 stop. Just like the DAX above I do not want to be short the market at this time.
Dow Rolling Contract
The Dow gapped higher on the re-open of the Futures Market on Sunday night. The market rose relentlessly throughout yesterday until about 7.00 pm when prices reversed from a high at 24375 and fall 400 points into the close. As I was already short the S&P at two different price levels I waited to sell the Dow which I did at 24300 before the market traded lower to my 24180 T/P level and I am now flat. The Dow needs to break and close over its now key 24375/24550 resistance level for the market to look better. As long as we stay below this area it is only a matter of time before the market challenges the early February low at 23300. Today I will again be a small seller on any further rally to 24375/24550 with a wider 24650 stop. My only interest in buying the Dow is on a large move lower to 23350/23540 with a 23210 stop.
No change as I am still a buyer on any dip lower to 6280/6350 with the same 6230 stop. As long as the NASDAQ can hold below the 6675/6775 resistance area then the bears are in control.
Is the Bund ever going to move again?. The Bund has now traded sideways for most of the past four weeks and I am still flat. I am not going to chase this market higher and today I will leave my buy level again unchanged at 158.00/158.40 with the same 157.60 stop.
Gold Rolling Contract
No change as I am still a buyer on any dip lower to 1310/1319 with a 1303 stop.
Silver Rolling Contract
After many days of holding my 16.45 long position, Silver finally traded higher to my 16.55 T/P level and I am now flat. Last week’s Commitment of Traders Report showed Managed Money Accounts in Silver Futures increased their net-short position to minus 39,604 contracts, which is another new record. As I have discussed, this extreme, which is a bullish signal for silver prices, is not confirmed by the Daily Sentiment Index which is still neutral. In my opinion it is only a matter of time before silver breaks out to the upside and today I will again look to buy the market on any dip lower to 16.05/16.35 with a 15.80 tight stop. If I am taken long I will again have a T/P level at 16.55.