No new news from the US-Sino trade war has helped investors focus back on fundamentals and with the US earnings season starting later this week, the US has led the gains in equities over the past 24 hours. Commodities also had a good day, helping the AUD retained most of yesterday’s gains. Sterling remains volatile amid cabinet resignations and the USD staged a comeback in the US session aided by a move higher in US Treasury yields.
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Yesterday was a good trading session for equities on both side of the Atlantic, but US equities were the outperformers with the Dow leading the way, up 1.31%. Lack of new news in US-Sino trade tensions have helped the S&P500 record a third day of positive returns with financials and industrial shares leading the way. IT and Energy shares led the gains in Europe with the later probably benefiting from a solid session for commodities.
Copper and aluminium have led the gains, up 1.97% and 1.65% respectively while Brent (+1.45%) and metallurgical coal (+0.80%) were not too far behind. So amid this positive backdrop, which also saw the VIX index dip down to a 12 handle for the first time in two and a half weeks, the AUD has retained most of yesterday’s gains and as a result it is the best G10 performer over the past 24hrs. The Aussie currently trades at 0.7467, up 0.50% relative to levels this time yesterday and with President Trump seemingly too busy with a Supreme court nomination and NATO negotiations, the lack of new news in the trade front has been good news for the AUD. So near term the AUD has room to trade higher, but I remain sceptical the currency can sustained a move above 75c. I think it is only a matter of time before Trump makes an announcement on additional China trade tariffs ( more likely next week, if not the week after) and thus I would not be surprised to see the AUD eventually coming under renewed downward pressure. Earlier this morning President Trump has nominated Brett Kavanaugh for Supreme Court. This is seen to secure the conservative majority on the court for years to come.
Sterling has seen a fair bit of volatility trading in a 1.3190-1.3363 range ( now at 1.3240) after Boris Johnson followed David Davies and his assistant (Steve Baker) in resigning from PM May’s Cabinet. The resignations have sparked speculation over a possible leadership challenge, (48 MPs are needed to initiate a challenge), but in the event, I think it is unlikely there are enough votes for the PM to be ousted. Overall, while PM May’s move to a softer Brexit is a positive, there are still a lot of uncertainties. At this stage the proposal is short on detail, it provides a solution for goods trade with Europe, but there is no clear strategy on the services sector which represent around 80% of the economy. Europe is unlikely to offer an opinion until it sees the white paper, so it remains to be seen if this proposal is workable and next week the Custom and Trade Bill may also present a big obstacle for PM May’s proposal. Political uncertainty remains a big cloud over Sterling, making it a dangerous currency to trade and this is unlikely to change any time soon.
The risk positive backdrop has also seen US Treasury yields edge higher with the move led by the back end of the curve. 10y UST yields are up 3.4bps to 2.8% but remain well within last week’s tight ranges. Focus is now likely to turn to the 3y, 10y and 30y supply this week, as well as CPI tomorrow.
Amid a higher UST yields, the USD staged a small recovery during the US session with the DXY index back above the 94 mark. Unsurprisingly, amid the rise in UST yields, the USD was notably stronger against the yen, USD/JPY now trades at 111, up 0.45% over the past 24hrs. The trend line from the 2015 highs continues to suggest some resistance should be expected around the 111.20 level.
On other news, ECB president Draghi addressed the European Parliament yesterday and said that ‘’we are confident that basically thanks to our monetary policy the inflation rate will converge to our objectives’’. Draghi also urged lawmakers to push back against creeping protectionism, which he singled out as the main risk for the area’s economic expansion.
This morning on the Economic Front we have UK Trade Balance and Industrial Production at 9.30 am. Next we have German and Euro-Zone ZEW Survey for Current Situation/Expectations at 10.00 am. Finally we have the NFIB Small Business Optimism at 11.00 am.
September S&P 500
As I have mentioned countless times over the past few years it is so difficult to have a short position in the S&P for any length of time as it only takes a couple of trading sessions for the market to regain any previous losses. This has certainly been the case with the S&P which has now rallied over 65 Handles off Friday’s pre NFP low to hit a high of 2797 overnight. Yesterday’s aggressive move higher has left a large ‘’Open Gap’’ from last Friday’s Chicago close at 2760 to yesterday’s 2775 day session low. One note of caution is the small rise in the McClellan Oscillator which only rose 16 points to close at +126 which is not impressive especially on a day when the Dow rises 320 points. Today I will now raise my buy level to 2763/2773 with a 2756 stop. The S&P has good resistance from 2810/2818 and today I will be a seller in this area with a 2825 stop.
I am still flat the Euro and today I will now lower my sell level slightly to 1.1780/1.1820 with a 1.1855 tight stop. I will also lower my buy level to 1.1640/1.1680 with a 1.1610 stop.
September Dollar Index
I am still flat the Dollar which just missed my buy level yesterday before rallying as expected. Today I will now raise my buy level to 93.20/93.60 with a 92.80 stop. I still do not want to be short the Dollar at this time.
Unfortunately the DAX just missed my 12450 buy level with a 12475 low print before rallying over 100 points and I am still flat. Thankfully we had no sell levels in our main Indices yesterday as yet again short positions have got slammed. Today I will raise my buy level to 12410/12480 with a 12360 stop. I still do not want to be short the DAX at this time.
The FTSE also just missed my buy level before having a large rally helped by the renewed sell-off in Sterling as the political situation worsens. Today I will now raise my buy level to 7550/7590 with a 7515 tight stop. My only interest in selling the FTSE is on a move higher to 7690/7730 with a 7765 stop.
Dow Rolling Contract
Given the fact that both the NASDAQ and S&P never tested their 200 Day Moving Averages before both closed above their 50 Day Moving Averages last Thursday it was inevitable that the Dow would play catchup. Yesterday’s 320 point move now sees the Dow comfortably above its 50 Day MA which comes in at 24635 this morning and this area should now act as support on any subsequent test lower. Today I will now raise my buy level to 24510/24660 with a 24420 stop. The Dow has initial resistance from 25080/25200 and today I will be a small seller in this area with a 25270 stop.
I am still flat the NASDAQ which underperformed both the Dow and S&P yesterday. Today I will tighten my sell range to 7370/7410 with a 7445 stop.
I am still flat the Bund and today I will now lower my sell level slightly to 162.85/163.15 with a 163.40 stop.
Gold Rolling Contract
Gold continues to try and stabilize above last week’s 1237 low with a rally yesterday to 1267 before again attracting sellers. I am still flat Gold and as I am long Silver I will now lower my Gold buy level slightly to 1240/1248 with a 1234 stop.
Silver Rolling Contract
Yesterday afternoon Silver again traded lower to my 16.10 buy level. I am still long and I will only add to this position on any further move lower to 15.70 with the same 15.45 stop. Meanwhile I will now lower my T/P level on this position to 16.25. If any of these levels are hit I will be back with a new update for my Platinum Members.