After and up and down session, US equities ended the day higher, marking a fifth consecutive day of gains. A light trading environment however hints at market cautiousness ahead of President Trump’s State of the Union speech. Meanwhile European equities closed smartly higher boosted by solid BP earnings. The US Dollar has retained its nascent upward trend, in spite of a broad decline in US Treasury yields. Sterling has been the big G10 underperformer following a much weaker than expected UK Services PMI and AUD has given back most of its post RBA gains. Focus now turns to RBA Lowe’s speech ahead President Trump’s State of the Union address.
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US equities were unable to keep up with the solid risk positive momentum delivered by the broadly based gains recorded by major European equity Indices. All major European indices closed above 1% with the UK FTSE100 leading the charge, up 2.04%. A softer pound amid disappointing UK data helped the FTSE, but the main driver was the 5% jump in BP shares after reporting better than expected earnings numbers aided by a rise in output. Amid a low trading environment (15%below the 30-day average according to Bloomberg) US equities have had an up, down and then up again session with sentiment not helped by a softer than expected Non-Manufacturing ISM. U.S. cautiousness is also justified by uncertainty over President Trump’s State of the Union address.
The US president will address his nation shortly after this Commentary is posted and expectations are for the President to make comments on North Korea, the US economy, China trade talks and border security. The latter of course is the main focus for markets given that Trump has hinted at the possibility of declaring a national emergency (which would allow him to circumvent Congress) in order to fund his much desired wall along the Mexican border. The political ramifications from such an announcement (setting a precedent of governing through presidential decree) could rattle markets as it would further deteriorate an already tense relationship with a Democrat led Congress.
Against this backdrop the US Dollar has managed to eke out some gains in Index terms against both Emerging Markets and Major currencies ( DXY +0.22%, BBDXY +0.12% and EMCI +0.08%).TRY (-0.46%) and ZAR (-0.34%) are the underperformers within EM while Sterling (-0.62%) is the notable underperformer within G10.
The Brexit deadline is approaching, the lack of new news is making the market nervous. Meanwhile the domestic backdrop is suggesting Brexit uncertainty is starting to weigh across all sections of the economy, the services sector was the focus yesterday with the UK January Services PMI printed much weaker than expected at 50.1 against 51 expected and 51.2 previous. New Business volumes declined for the first time in two and a half years in January. Markit notes “Brexit-related concerns had dampened client demand and resulted in delayed decision making on new projects’’. The pound now trades at 1.2954 and the break below its 200 Day MA suggest the recent upward momentum has run out of steam.
The decline in GBP dragged other European currencies lower with the EUR down 0.25% over the past 24hrs. The pair now trades at 1.1409, unable to sustain the small gains post better than expected EU final PMIs for January.
AUD is the only G10 currency that has managed to keep up with the USD, but a closer look at the intraday charts shows the pair on a steady decline throughout yesterday’s session largely reflecting an unwind of the position driven jump in the AUD post the RBA statement. Ahead of the announcement the market was looking for a dovish statement with the possibility of a rate cuts bias. Although the Statement could be deemed as dovish via the nod to increased downside risks globally and domestically, at this stage it sounds like the RBA is on a wait and see mode before making any decisions regarding policy guidance changes. In spite of downward revisions to GDP growth (3% instead of 3.5% for this year and next), the outlook still sees the economy growing above trend ( ~2.5%) while the unemployment rate forecast was left unchanged with unemployment expected to decline to 4.75% over the next couple of years. Moreover, inflation is still expected to head back towards target, although the Board thinks it will ‘’take a little bit longer than expected’’.
US Treasury yields drifted lower across the board with 10y US yields currently trading at 2.7019% (-1.8bps). The move lower in yields was evident ahead of the disappointing Non-Manufacturing ISM. The survey for January was weaker than expected at 56.7 against expectations of 57.1 (58.0 previously). Driving the decline was a fall in New Orders (-5.0 to 57.7; which looks mostly due to a sharp fall in New Export Orders), while the government shutdown also likely weighed. Despite the softer print, the ISM overall remains at very solid levels with the Employment Index still pointing to +250k payrolls a month
Playing into the lower yield environment, Fed’s Kaplan repeated his recent commentary of arguing the Fed should be on hold in the first half of 2019 until the outlook becomes clearer. His cautious view is due to the global slowing, stating “It is my view that slowing economic growth outside the U.S. has the potential to ultimately spill over into economic growth in the U.S. I am particularly mindful of the fact that approximately 45 percent of S&P 500 company revenues come from outside the United States and that a variety of U.S. industries rely heavily on exports to China, Europe and other regions of the world. ”
Commodities have had a mixed to softer past 24 hours with oil prices down between 0.7% and 1.5%. According to Bloomberg, Russia curbed output by 47k barrels a day in January from its October baseline level, in line with the country’s pledge to OPEC. Meanwhile, U.S. government data due Wednesday is forecast to show American crude inventories rose a third week.
This morning on the Economic Front we have German Factory Orders at 7.00 pm. This is followed at 12.00 pm by U.S. MBA Mortgage Applications. Next at 1.30 pm we have Trade Balance, Nonfarm Productivity and Unit Labour Costs. Finally at 3.30 pm we have the EIA Crude Inventories.
March S&P 500
My S&P plan worked well with the S&P trading higher to my initial 2733 sell level before selling off to my revised 2729.50 T/P level. Subsequently I emailed my Platinum Members to re-sell the S&P at a price of 2737 which was filled before the market fell 14 Handles and this move lower enabled me to cover this second short position at my 2731 T/P level and I am now flat. Given the fact that the S&P has now rallied over 400 Handles in just six weeks off the December 26 low at 2332, the market is severely overbought and facing huge resistance at the 2735/2750 area. Today I will now look to sell the S&P on any further rally to 2742/2755 with a 2762 tight stop. Meanwhile I will now raise my buy level slightly to 2692/2705 with a 2684 stop.
I am still flat the Euro which continues to trade in a tight boring range. Today I will again lower my buy level to 1.1330/1.1370 with a 1.1285 stop which is just below last month’s 1.1289 low print. I still do not want to be short the Euro at this time.
March Dollar Index
I am still flat the Dollar and today I will again raise my sell level to 96.25/96.65 with a 96.95 higher stop.
Thankfully we had no sell levels in either the DAX or FTSE with both markets having strong up-day’s yesterday and I am still flat. The DAX has strong resistance from 11550/11650 and today I will be a seller on any rally to this area with a 11720 stop.
The much weaker Pound saw a 2% rally in the FTSE yesterday and I am still flat. Today I will again raise my buy level to 7005/7045 with a 6965 stop.
Dow Rolling Contract
For the Fifth Consecutive trading session the Dow has now closed over its 200 Day Moving Average. However despite the near 4000 point rally in the Dow over the past six weeks the 200 Day MA is unchanged at 24991. The Dow has strong resistance from 25550/25700 and today I will be a small seller on any rally to this area with a 25820 stop. My only interest in buying the Dow is on a dip lower to 25000/25130 with a 24895 stop.
Given the huge run higher in the NASDAQ so far this year I am reluctant to chase this market higher and today I will leave my 6825/6875 buy level unchanged with the same 6775 stop.
My Bund plan worked well with the market trading lower to my 164.95 buy level before again rallying to my 165.20 T/P level and I am now flat. Today I will again look to buy the Bund on any dip lower to 164.60/165.00 with a 164.25 stop. Despite the insanely low yield for the Bund I still do not want to be short the market at this time.
Gold Rolling Contract
No Change as I am still a buyer on any dip lower to 1295/1304 with the same 1287 stop.
Silver Rolling Contract
Silver traded in a narrow range yesterday and I am still long at 15.83 with the same 16.00 T/P level. I will now raise my stop on this position to 15.45 and if any of the above levels are hit I will be back with a new update for my Platinum Members.