10 year US Treasury yields have broken through the 2.50% mark for the first time since mid-March aided by yesterday’s Bank of Japan’s decision to trim its longer dated JGB buying strategy while bond issuance and a jump in energy prices have also been factors at play. Oil prices trade to a new three year high and excluding the Japanese Yen, the US Dollar is stronger across the board. Meanwhile, US equities have made new highs, yet again! and all major European indices closed in positive territory. Longer dated core global yield started to move higher after yesterday’s news that the BoJ had reduced its purchases of JGBs maturing in 10-to-25 years and for those in more than 25 years. The 5% reduction was interpreted by some as a sign that the BoJ may be considering pulling back some of its stimulatory measures. USD/JPY dropped 60 points on the news and longer dated JGBs sold off. Bond issuance and spike in oil prices also played a role in the bond sell off with the move higher in US Treasury yields gathering momentum after the US open.
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Reaction to the BoJ decision to trim its longer dated JGB buying programme looks over done to me. Longer dated yields have struggled to rise recently and the BoJ obviously sees a steeper curve as desirable. The BoJ remains an inflation targeting central bank and with inflation still lingering at around 1% and well below the above 2% target, the Bank is unlikely to take its foot from the easing pedal any time soon. Yield Curve Control has become the main policy tool and thus the quantity of JGB buying is more a matter of the shape of the curve rather than the yearly target of Yen80trillon. All that said, the recent price action shows the market is very sensitive to any potential change in BoJ strategy.
As for the rise in UST yields, in addition to the increase in UST supply and high grade issuance, the rise in oil prices as well as solid economic data releases plays to the view that we may well be seeing a valid repricing in longer dated yields amid an improved growth outlook and higher energy prices. The move above 2.50% in 10y UST yields could be significant and herald a shift into a higher trading range and a steeper curve. Similarly, 10y bunds climbed 3.5bps yesterday to 0.46% and over the past 12 months moves above the 0.50% mark have been short lived. Watch this space.
Looking at currencies, JPY is the G10 outperformer, up 0.37% against the USD. The pair currently trades at 112.67, after reaching a low of 112.37. The recent move in USDJPY looks overdone and in my view the pair should be trading closer to 114 amid the risk positive environment and 10y UST yields above 2.50%. In index terms the USD is 0.15% higher and DXY trades at 92.49.
Strong German Industrial Production (Nov 5.6% yoy vs 3.9%exp.) and EU Unemployment Rate unchanged at 8.7% were not enough to prevent the Euro from drifting lower. After trading to an intraday high of 1.2052, the pair now trades at 1.1938.
The Chinese Won weakened yesterday after reports that the PBOC had made a technical change to how the CNY fix should be calculated by banks. According to these reports, banks who submit CNY FX fixings will no longer need to apply a counter-cyclical factor that was used to smooth daily volatility in the currency. Most analysts do not think the change necessarily signals that the PBoC wants a weaker CNY, although it might suggest China is more comfortable with letting market forces dictate price action.
In other news, Special counsel Mueller has conveyed interest in questioning President Trump and according to news reports, the president’s legal team is discussing a range of potential options for the format. Meanwhile, president Trump reckons he would beat Oprah Winfrey, amid calls for her to race for the White House.
Finally, according to the FT, South Korea and North Korea have agreed to hold military talks, but a joint statement released after Tuesday’s talks contained no mention of the North Korea’s atomic-weapons programme, and according to the Wall Street Journal South Korean officials said Pyongyang’s delegates had voiced anger when Seoul broached the North’s weapons programme.
This morning on the Economic Front we have UK Trade Industrial Production, Construction Output and the Trade Balance at 9.30 am. This is followed at 11.00 am by the latest Minutes from the December ECB Meeting and at 1.00 pm by the UK NIESR GDP Estimate. Finally we have the US Import Price Index and Wholesale Inventories at 3.00 pm.
March S&P 500
My S&P plan worked well with the market trading higher to my 2752 initial sell level before having a small sell-off to just below 2748. I used this sell-off to cover my short position at my revised 2750 T/P level and I am now flat. Subsequently the S&P made a new all-time high above 2759 before selling off into the close in what was an usual development given that it was a Tuesday which is normally a strong trading day. I mentioned yesterday in detail about how overextended this market is especially with the Daily Sentiment Index Reading at 95% bullish. This is not sustainable in my opinion and today I will again look to sell the market on any rally higher to 2756/2764 with a 2770 stop. My only interest in buying the market is still on a dip lower to 2719/2726 with a 2713 stop.
The Euro traded lower to my second buy level at 1.1940 after I posted yesterday morning. I am now long at an average rate of 1.1960 and today I will now lower my T/P level on this position to 1.1970 with the same 1.1915 tight stop. If either of the above scenarios play out I will be a more aggressive buyer on any dip lower to 1.1830/1.1880 with a 1.1790 stop. Despite the negative price action over the past few days I still do not want to be short the Euro at this time.
March Dollar Index
Unfortunately the Dollar just missed my 91.80 buy level before rallying and I am still flat. I am reluctant to chase this market higher and today I will only raise my buy level slightly to 91.60/91.95 with a 91.30 stop.
Yesterday the DAX again traded in a narrow range as the market continues to consolidate above the now key 13200/13300 support level and I am still flat. I still do not want to chase this market higher and today will only raise my buy level slightly to 13190/13255 with a higher 13145 stop.
No change as I am still a buyer on any dip lower to 7580/7620 with a 7550 higher stop. As mentioned yesterday the 7600 is key support and we should see a decent rally on any test of this level initially.
Dow Rolling Contract
Unfortunately the Dow just missed my 25450 sell level with a 25437 high print before having a late sell-off and I am still flat. Today I will now lower my sell level slightly to 25445/25505 with a 25565 stop. My only interest in buying the Dow is still on a dip lower to 24990/25100 with the same 24940 stop.
Frustratingly the NASDAQ also missed my 6710 sell level with a 6707 high print before also selling off due to the renewed weakness in the FANG stocks and I am still flat. I am not going to chase this market lower and today I will raise my sell level slightly to 6720/6765 with the same 6805 stop. With the Daily Sentiment Index Reading at an 11 ½ year high of 94% I still do not want to be long the market at this time.
Shortly after the Bund opened yesterday the market traded over 162 without reaching my 162.35 sell level before selling off on the back of the US Treasury Market getting hit and I am still flat. For now the Bund is holding its 200 Day Moving Average at 161.08, a break of which targets the next support level from 160.25/160.60 where I will be a buyer with a 159.95 stop. As I mentioned in my Economic Commentary above any test of the Bund at the 0.5% level has been short lived and with the market closing at a yield of 0.46% I do not want to chase this market lower from here. However a break and close below 159.80 will be bearish opening the possibility of an acceleration to the downside.
Gold Rolling Contract
Gold was weak yesterday and I am still flat. Today I will leave my buy level unchanged from 1294/1302 with the same 1286 stop.
Silver Rolling Contract
I am still flat Silver which missed my 17.20 T/P level on my latest long 17.10 position Today I will only add to this position on any move lower to 16.70 with the same 16.45 stop. If my second buy level is filled I will then lower my T/P level to 17.05.