Former Fed Chairman Alan Greenspan in a Bloomberg TV interview, speaking of a bubble in the bond market. “By any measure, real long term interest rates are much too low and therefore unsustainable. When they move higher they are likely to move reasonably fast. We are experiencing a bubble not in stock prices but in bond price”. He went on to talk of how the economy was about to enter a period of rising inflation, essentially then bursting the bubble. Rising inflation would be a challenge for bond investors and for yield-sensitive stocks, but a challenge the Fed would relish, a more familiar historical challenge than current circumstances. Despite Greenspan’s comments the ‘’Bond bubble” get bigger, US 10s down 4.3bps to 2.25% on the back of still subdued US inflation revealed by the latest PCE deflators, a pull-back in oil prices, and for once a steadier US Dollar. The Bloomberg spot BBDXY index has risen 0.22%.
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For anyone following my Platinum Service it made 23 points yesterday on the first trading day of August, having made 1096 points in July, 1023 points in June, 1071 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.
Meanwhile the Australian Dollar closed down, pulling back through 0.80 in the London session after choppy trading initially after the RBA statement. Relative under-performance of the AUD has come most likely in part from the headwinds created by the 59 words the RBA devoted to the growth and inflation consequences of a higher dollar, meaning later rate rises than would otherwise be the case. It was helped earlier yesterday in the run up to the RBA announcement of a stronger than expected Caixin China Manufacturing PMI for July adding more flavour to the commodity/China support theme. Iron ore was little changed overnight; met and steaming coal were higher, but oil weighed a little on commodity sentiment, as did base metals, mostly. Added into the mix, Former RBA Board member John Edwards has told Sky News that the Bank may no longer target inflation but focus on growth.
The US PCE deflators for June reflected the still low inflation mould. While the monthly change in both the headline and core PCE deflators were right in line with expectations (flat and 0.1%), an upward revision by a tenth saw a headline rate of 1.4% and core at 1.5% beating estimates by a tenth. The weaker US Dollar should help support inflation in coming months. Against the inline inflation content in that report, incomes and real consumer spending were slight misses.
Also released in the US, the ISM Manufacturing index for July came in above expectations, at 56.3 (L: 57.8; E: 54.4), with a kick up in prices paid but employment down two index points to a still solid 55.2. Adding to the mixed nature of the US data set, Construction Spending in June missed expectations, not market sensitive but part of the growth story. Auto sales missed expectations.
Eurostat released their initial cut of June quarter GDP and it was right in line with expectations. Growth was 0.6%/2.1%, actually matching the annual growth in the US. As is usually the case, there was only miniscule revision to the Euro-Zone July PMIs. Across the channel, the UK Manufacturing PMI for July was a little higher than expected at 55.1 (E: 54.5), up from 54.2, supporting Sterling and seeing EUR/GBP drift off a touch during yesterday’s quiet trading session.
The overnight NZ dairy auction saw the Global Dairy Auction price down by 1.6%, not a large fall, but nevertheless the softest since March. This seems to have been sufficient to keep the NZD on the back foot with the AUD and its pull-back and ahead of NZ labour market and wages data later this morning. The announcement yesterday of the NZ labour party changing its leadership, two months out from the election, and following recent poor poll results saw no NZD reaction.
This morning on the Economic Front we have UK Construction PMI at 9.30 am and this is followed at 10.00 am by Euro-Zone PPI. At 12.00 pm we have US MBA Mortgage Applications. Finally we have ISM New York at 2.45 pm and the Dallas Fed Manufacturing Index at 3.30 pm
Later there are two Fed speakers, hopefully offering their updated views on the economy, inflation and monetary policy. First up is Cleveland Fed President Loretta Mester (a non-voter on the FOMC this year). In late June (after the June hike) she said that she sees no reason to increase interest rates as recent inflation data raise doubts that prices are returning to the Fed’s 2 percent goal. Then follows San Francisco President John Williams (also a non-voter this year) who on his recent Australian sojourn was delivering a message that he was tending to look through recent low readings. He was singling out the likely one-off nature of the major fall in cell/telecoms prices and deals. There’s been more soft US inflation readings since.
September S&P 500
The S&P got off to a quiet start for August with the market trading in an extremely narrow range for most of yesterday’s trading session, despite the Dow making another new all-time high on low volume. I am still flat the market as the S&P just missed my 2480 sell level before selling off. The price action continues to be bullish despite the S&P’s severely overbought condition and the negative divergence vis- a- v the Dow. Today I will now raise my buy level to 2462/2468 with a 2457 stop. If I am taken long and subsequently stopped out of this position I will be a more aggressive buyer in front of 2451 with a 2445 stop. Until we get a sell extreme in the S&P, the bulls are still in charge as the market eyes the long-term resistance from 2500/2510. I do not want to be short the S&P at this time.
Shortly after the US Markets opened the Euro traded to a low of 1.1785 and this move lower saw the Euro hit my 1.1800 T/P level on my latest 1.1815 short position. I am still flat the market which again closed at its 500 Week Moving Average in what is a severe overbought market. As I mentioned over the past couple of days the 1.1860/1.1910 area is very strong resistance and today I will again look to go short in this area with a 1.1950 stop. The Euro has support at 1.1725 but given the DSI reading I do not want to be long the market at this time.
September Dollar Index
As I wanted to get August off to a positive start I emailed my Platinum Members late in the session to exit my latest long 92.80 position for a small gain at 92.95 and I am now flat. With the Daily Sentiment Index reading at just 7% bulls I will continue with my strategy of buying dips which has worked well for the last few weeks. Today my buy level will be form 92.25/92.65 with a 91.85 wider stop.
Thankfully we had no sell level in the DAX yesterday which rallied over 200 points from an oversold condition. Yet again the Daily Bollinger Band and Williams Index proved what a valuable trading signal they are. The DAX has strong resistance at yesterday’s 12300 high print but I still would not short this market especially given how much the DAX has underperformed the US Indices over the past few weeks. Today I will now move my buy level higher to 12130/12190 with a 12080 stop.
The FTSE followed the European equity markets higher yesterday as the Fund managers put monies to work on the first trading day of August as speculated in yesterday’s commentary. Thankfully we were not short. Just like Gold below I do not fully trust the FTSE Market at these levels especially as the market has strong resistance at 7415 which is an 8 week trend line. For these reasons I will be a seller from 7405/7435 with a 7470 stop. I will now raise my buy level slightly to 7285/7315 with a 7255 stop.
Dow Rolling Contract
Again as I wanted to get August off to a positive start I emailed my Platinum Members to exit their second short 21980 sell level in the Dow for a small gain at 21945. I am still short in very small size from yesterday at 21885. Incredibly despite the Dow making new highs almost every day the McClellan Oscillator has closed in negative territory. In my 32 years of trading I have never seen a more overbought market with so many negative cross currents in it. However as mentioned in the S&P above it is so hard to be short when the Fed and other Central Banks keep buying the market and until we get a sell extreme that lasts for more than a few days then it is very difficult to be short other than in small size which I am currently doing with my existing short Dow position. I will only add to this trade on any move higher to 22040 with a 22080 stop. I will also use any sell-off over the coming days to 21870 to exit this short position and look for a subsequent rally to get a better short position on board.
My Bund plan did not work well despite form Fed Chairman Greenspan doing his best to talk Bond yields higher in what is a massive bubble. Yesterday after the Bund traded higher to my average sell level at 162.43 I was stopped out of this position near the highs of the Day at 162.85 and I am now flat. It is incredible that 8 years into a so called economic recovery that that bond markets are painting a different picture with most of the German curve yielding negative rates. This is insane and should not be happening. Today I will again look to sell the Bund on any rally higher to 163.25/163.55 with a 163.80 stop.
Gold Rolling Contract
No change as I am still a buyer on any dip lower to 1244/1252 with the same 1236 stop.
Silver Rolling Contract
Today I will raise my buy level slightly to 16.10/16.45 with a 15.90 stop. I am reluctant to chase this market higher given the 11% rally since the 15.17 low on July 10 last.