I saw a UFO was the 2006 hit song by Australian Electro-pop outfit Sneaky Sound. Will geopolitics prove to be the UFO for markets in 2017? Not if you believe moves yesterday with only small changes in yields, equities and currencies, while the VIX remains at a low 13.8. The oil price was the standout performer with WTI oil up 1.6% to $53.10 a barrel while Brent reached $55.99 after having risen for six-consecutive days. Although geopolitical tensions have played a role, yesterday’s moves were driven more by an outage at Libya’s largest oil field and comments from Russia that it was looking to extend the OPEC-lend oil production cuts. Russia’s Deputy PM was quoted last week wanting the oil price in a $55-60 a barrel range.
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For anyone following my Platinum Service it made 8 points yesterday and is now ahead by 456 points for April, having made 1335 points in March, 1481 in February and 1734 in January. The previous seven months saw gains of 1351, 1971, 1582, 1142, 1782, 1682 and 2550 points respectively. Since I started this new Platinum Service in June 2015 it has averaged a monthly gain of over 1750 points.
Comments last night morning by US Fed Chair Yellen had little impact on markets. Dr Yellen emphasised that the current trajectory of Fed rate rises was appropriate – “it is appropriate to gradually raise the Federal Funds rate to a neutral stance” if the economy performs as expected. Although core inflation had not quiet reached 2%, Yellen said “we want to be ahead of the curve and not behind it”. In regards to the Unemployment Rate hitting a fresh cycle low of 4.5%, Yellen said it is a “a little below what I and my colleagues would use as a marker of full employment”.
US Treasury Yields fell 2bps to 2.36% in a quiet session. German Bund yields also fell by 2.1 bps to 0.21%. Moves in Australian CGS largely followed movements in US Treasury yields the previous day and were up 2.2bps to 2.57%.
With the French Presidential Election just weeks away, attention has started to turn to French politics (first round 23 April, second round 7 May). Although it is still likely centrist Macron will prove the eventual winner (betting markets ascribe a 57% probability), markets are paying close attention. Capturing attention was the rising fortunes of far left candidate Melenchon who is polling at around 18% in the first round. Although Melenchon wants to stay in the Euro and EU, he does want to reform it and it is unclear how we would perform in a run-off against Eurosceptic Le Pen. The French OAT-German Bund spread rose 4bps on the news and is now at its highest level since February. Nevertheless, French yields still remain at low levels overall at 0.93%.
In the FX space, commodity-linked currencies were the strongest performers – boosted by oil price. The CAD was up 0.5% and the Norwegian Krone was up a similar 0.4%. The US Dollar was down a slight 0.1% across the board. The Euro and Yen were unchanged, suggesting that geopolitics concerns while capturing media headlines, are largely isolated to the Oil Market and North Asia.
On geopolitics, South Korean markets were sharply down yesterday following news of a US aircraft carrier being sent to the Korean peninsula as a show of force. US Secretary of State Tillerson clarified that we wasn’t seeking regime change in North Korea. The KOSPI fell 0.9% and the Korean Won also depreciated by a similar amount. While geopolitics is capturing market, the VIX remains at low levels, rising to just 13.75.
This morning on the economic front we have UK CPI, PPI, House Price Index and Retail Sales at 9.30 am. This is followed at 10.00 am by Euro-Zone Industrial Production and both the German and Euro-Zone ZEW Survey for Current Situation/Expectations. At 11.00 am we have the US NFIB Small Business Optimism. Finally at 3.00 pm we have the JOLTS Job Openings.
Meanwhile the Fed’s Kaskari will speak at a Q&A session in Minneapolis at 6.45 pm.
June S&P 500
Unfortunately the S&P missed my 2343 buy level with a 2347.75 low print before rallying to a new high on the day at 2363. Subsequently the market sold off again into the close on what turned out to be a volatile trading session with plenty of up and down moves within this large range. After experiencing its lowest Quarterly average in more than a decade (Q4 of 2006), the CBOE Volatility Index (VIX) closed last night at its highest level for the year at a still historic low of 13.8. The measure of S&P option volatility is on the increase. Low periods of volatility usually precede high periods of volatility and high volatility most often occurs during stock market declines. I am still flat the S&P and today on account of the pick up in volatility I will now lower my sell level to 2361/2367 with a 2372 stop. I will also lower my buy level slightly to 2334/2340 with a 2329 stop. Again if I am stopped out of this position or I manage to T/P on any initial long position, I will again be an aggressive buyer on any subsequent dip lower to the March lows from 2314/2320 with a 2309 stop.
The Euro having made a new low at 1.0569 after I posted yesterday morning rallied to an intra day high at 1.0607 as the market was unable to get back above the key 1.0620 pivot point and three month uptrend. With this failed upside rebound I emailed my Platinum Members to exit their recent long 1.0595 position at 1.0600 and I am still flat. The Euro is oversold with the market trading in one sideways trend for over 12 months. The Euro has support at 1.0560 and strong support at 1.0495 which is the March low. Today, given how oversold the Euro is trading I will again look to buy the market on any dip lower to 1.0525/1.0555 with a 1.0490 stop. Despite the negative price action I still do not want to be short the market at this time.
June Dollar Index
The Dollar tried to break it resistance at 101.40 but failed and is now back at last Friday’s 100.95 price. I am still flat the Dollar having stood aside yesterday and I will now look to sell the market on any rally higher to 101.30/101.60 with a 101.90 tight stop.
The DAX sold of this morning as the market continues to trade heavy following last Monday’s Downside Key Day Reversal. The market missed my 12150 buy level with a 12169 low print before rallying as I finish my commentary. The DAX has strong Fibonacci support at 12050/12105 and today I am going to lower my buy range to this area with a 12005 stop. I would expect a strong bounce on any dip to my buy area as this has been the theme of the DAX over the past six weeks. Given how weak the Euro is trading I am surprised that the DAX is not trading higher. Despite last week’s KDR, I still do not want to be short the DAX at this time.
No change as I am still a buyer on any dip lower to 7210/7240 with the same 7175 stop which is just below the 7180 Head &Shoulders Neckline support. Remember a break and close below 7180 has a target price at 7040.
Dow Rolling Contract
The Cash Dow has gone into hibernation with the market closing during the normal American hours for trading within a 80 point range from 20,648/20,748. This range has persisted since March 28. Today I will leave my buy range unchanged from 20520/20580 with the same 20470 stop. Yesterday the Dow traded just below the key 20750 resistance level before selling off. Today I will look to sell the Dow on any rally higher to 20790/20860 with a 20910 stop which is just above last Wednesday’s intra day high print.
Shortly after I posted yesterday morning the Bund traded higher to my 163.05 sell level before selling off 20 points. As I wanted to pay for my loss in Silver I emailed my Platinum Members to exit this position at 162.90. Subsequently I went short the Bund again at 163.25 and I covered this position before the close for a small gain at 163.17 and I am now flat. The Bund is extremely overbought on the Daily Chart but we still do not have a sell signal. It is just incredible that allegedly 8 years into an economic recovery that the Yield on the Bund is below 20 basis points. The Bund has strong resistance from 163.45/163.75 and today I will be a small seller in this area with a 164.05 stop.
Gold Rolling Contract
Gold tried to sell-off yesterday hitting a low at 1246 before again rallying overnight. Given the extent of last Friday’s reversal to the downside I am not going to chase this market higher and today I will leave my buy level unchanged from 1238/1244 with the same 1233 stop.
Silver Rolling Contract
Friday’s huge Downside Key Day Reversal is a worry as any reversal that we have had in Silver over the past six months has stuck. Given the points made in the Bund above I used these to exit my latest long 18.10 Silver position at 17.90 and I am now flat. I am going to stay flat unless we sell off aggressively from here where I will look to buy the market from 17.10/17.40 with a 16.80 stop. Otherwise I will stay on the sidelines and observe.