While bulls were looking forward to a dovish Fed statement, they seem to forget that it is based on a weak economic outlook, writes Bill Baruch, President of BlueLineFutures.com.
E-mini S&P (ESM)
Yesterday’s close: Settled at 2827, down 9.50
Fundamentals: U.S benchmarks initially rallied after the Federal Reserve confirmed even the most dovish projections. They signaled no rate hikes this year and one in 2020, adding that they will end unwinding their balance sheet in September (known as Quantitative Tightening or QT). This is a more accommodative Fed than imagined for the foreseeable future. Why don’t stocks love the news? First, the S&P has rallied 23% off the December low with the bulk of it coming for this exact reason. Furthermore, by turning this dovish, one must ask, what does the Fed find so frightening? So, while the market has had a one-way ticket north for nearly three months, it now has nothing more to price-in. With everything now known, only worsening economic data will make the Fed more dovish and this in and of itself should not be a good thing for the market.
U.S.-China trade is also in the spotlight after President Trump said yesterday, he will keep tariffs on China until he is sure they are complying with a deal. Enforceability of a deal has been a key question in Washington and when it comes down to it, any deal must be enforceable; if not, it’s not a deal at all. The two sides continue to exude positivity ahead of next week’s round of meetings; U.S Treasury Secretary Mnuchin and U.S Trade Representative Robert Lighthizer travel to Beijing.
On the data front, Philly Fed Manufacturing beat expectations and this breaks a streak of Manufacturing misses. One thing to think about is that with the Fed now known and priced-in; good news could be good news for a bit and bad news bad news.
Technicals: U.S benchmarks across the board are down a little less than 0.5% this morning. However, the NQ is still at a much more elevated level after taking out Tuesday’s high by about 0.5% late yesterday.
Crude Oil (CLK)
Yesterday’s close: Settled at $60.23, up 94¢
Fundamentals: Yesterday, crude oil finished sharply higher from its early morning low after the EIA delivered a very bullish inventory report totaling a composite drawdown of 18.3 million barrels and the Federal Reserve exceeded the most dovish expectations. In that EIA report, crude oil inventories were drawn down by 9.589 million barrels last week, the largest since July. Additionally, Imports increased last week. This is a stark reminder that this is typically a seasonally bullish time of year. This coupled with sanctions (Venezuela and Iran) and reduced exports from Saudi Arabia continues to lift price action. This morning, Philly Fed Manufacturing was a bright spot in an otherwise downbeat string of Manufacturing reads, and this could help breathe life into risk sentiment.
Technicals: Given a soft tape early in equity markets and copper trading nearly 4¢ from the overnight high, both of which we find technically overvalued, we will again find value in fading the $60 region in crude.
Gold (GCJ)
Yesterday’s close: Settled at $1,301.7, down $4.80
Fundamentals: Gold settles at 12:30 pm CT which does not take Fed meeting or minutes into account. Price action surged yesterday after the Fed confirmed even the most dovish projections. They signaled no rate hikes this year and one in 2020, adding that they will end unwinding their balance sheet in September. While this is a more accommodative Fed than imagined for the foreseeable future and the Dollar Index traded sharply lower late yesterday, it is bouncing back this morning with the British pound getting tagged by a penny amidst Brexit chaos, and after the Band of England policy meeting this morning. The Swiss National Bank also held a policy meeting this morning and the Franc is lower. These coupled with soft PPI data from Germany and a stronger than expected Philly Fed Manufacturing has forced the euro to give back the bulk of its gains this morning, strengthening the dollar. On the bright side, gold is holding ground very well given this recovery in the Dollar Index. The Chinese yuan (USD/CNY) is still in the red though it has pared some overnight losses; a weaker USD/CNY is very supportive to gold.
Overall, the landscape in which the Fed provided yesterday is exactly why we have been unequivocally bullish gold and will remain so. Treasury yields in the U.S and those from around the world are all lower, we view this as fuel for the metal.
Technicals: Price action is holding firm, but we must see a close above $1,315.3 in order to confirm this upbeat momentum.
Bill Baruch provides technical levels on all markets throughout the week at BlueLineFutures.com
