The big event of the past week was the Federal Reserve interest rate decision. I did have an uber contrarian call saying I was expecting the Federal Reserve to cut rates in April. However, the day before the rate decision occurred, this came out from the President:
President Trump called for interest rates to be cut to 1% and for QE to return. Of course he has been saying this for sometime, but I find it interesting this article came out a day before the Fed announcement. I believe the Fed will now cut next month. If they did cut last week, a lot of people would be talking about if President Trump had influenced the apolitical Fed. I believe rate cuts will occur sooner than the 2020 date analysts are expecting.
So what did Jerome Powell say? That the Fed will now take a “patient approach” to monetary policy. The markets didn’t really like what they heard initially, but have now been rebounding. Was Powell not dovish enough?
It is almost as if their is this good cop bad cop routine going on between President Trump and the Fed over monetary policy. Will be interesting to see how this unfolds. If we do see markets begin to fall, President Trump will be quick to say “see I told you we needed a rate cut and QE, this is all the Fed’s fault”.
We had April US employment numbers and they came in at 263,000 new jobs AND the lowest unemployment rate since December 1969! Coming down to 3.6%.
” Still, wage gains did not accelerate as expected, holding at a reading that is consistent with moderate inflation. Moreover, the decline in the unemployment rate was driven largely by the most people leaving the labor force in a year and a half “
Yet the enigma that exists is shouldn’t we be hiking rates if we have a strong economy? President Trump is essentially saying that the economy is so strong, that we need QE and rate cuts…he cannot have it both ways. Generally, when the economy is doing well, you raise interest rates to make access to credit more expensive in hopes of cooling down the economy, especially housing prices and other asset prices. When the economy is doing poorly, you cut interest rates to stimulate the economy by making access to credit available and cheaper.
Again, the Keynesian’s kept rates too low for far too long. Now we are addicted to cheap money, and Keynesian policies have failed, which they will not admit. The role of the central bank (their mandate) is to keep assets propped. If you approach the market with this view, it will make everything clearer.
One other news that was mentioned was how the US-China Trade deal would have some progress by this upcoming Friday. Apparently the deal is close. We have heard this story again and again. I have said how the Chinese actually have the upper hand. It really is President Trump who wants this deal. I expect that this deal will only be a pause to work on a deadline which is years ahead. The markets will likely sell off when this deal is announced because it will not be as great as people were expecting.
An important thing to note for the upcoming week is the New Zealand Interest Rate Decision. The RBNZ is expected to CUT interest rates 25 basis points from 1.75% to 1.50%.
There are not too many set ups for this week, we have had a lot of data come in from the past week, and this week seems like a week where people will digest all this information.
- Monday: BoC Poloz Speech.
- Tuesday: RBA Rate Decision, RBNZ Monetary Policy statement, BoJ Monetary Policy Meeting Minutes.
- Wednesday: RBNZ Rate Decision.
- Thursday: Chinese CPI (April).
- Friday: RBA Monetary Policy Statement, CAD employment data (April), US CPI ex food and energy (April).
Let us start with US equities and the US Dollar.
The US S&P broke to make new all time highs, but then produced a large red engulfing candle subsequently. As of now, it is heading higher to retest the all time highs. I expect markets will go higher, I have outlined many reasons on my blog (Nowhere else to go for yields, supported by the Fed, retirement issues and pension issues if stocks crash).
If we were to pullback lower, I would wait for a break of the 2900 zone.
The Nasdaq reversed on Friday to make all time new highs on the back of good tech earnings. This chart is much better for a move higher as we have the momentum with a large green candle. If we were to break lower, we would need to make out this demand zone at the 7700 zone.
I spoke about watching this chart for guidance on where the main US stock equities will be going. Well we got that break, which leads me to believe we will see higher markets. The midcaps still have some way to go. If this break fails, then I would be more likely to take short positions on the Nasdaq and S&P if the opportunity presents itself.
I have been following the Hang Seng for a few weeks now, and I am liking what I see. Expecting a break to the upside for a continuation to the 31600 level.
There are some equity shorts that I would consider. The UK FTSE is one example. We had our head and shoulders pattern break after a nice uptrend. It seems on the retest that we have held the support turned resistance zone at 7400. However, we did not create a lower low. I would like to see this, and would a provide a nice continuation lower to 7200.
The French CAC40 was progressing to test previous all time high levels (denoted with the blue zone above current candles). However we have stalled, and created somewhat of a double top pattern here. Be patient with this one, wait until the 5540 zone is taken out. We need the break before entering.
Euro Stoxx and the Spanish ESP 35 have similar ranging/topping patterns albeit they do not look as nice as the CAC and FTSE.
This is the chart that I will be watching for this week. We had our US Dollar break out and are now retesting the breakout zone. Again, generally if the dollar goes lower, and bonds go higher, it is stock market positive. However, as I have been saying for sometime, money will still run into the Dollar just because there is nowhere better to go.
US Oil had our head and shoulders break after reaching a flip zone. We had our break and am now waiting for the 61.50 break to confirm a lower low and lower high. Targeting the 58.00 zone.
Brent Crude also has a similar pattern.
Gold still watching the daily break. We are still holding support turned resistance level at the 1286 zone. A close below 1270 would confirm a lower high at 1286 that we can use as our swing level.
Silver had a break which was reversed. Technically we are still under the swing (lower high) at the 15.05 zone. I would wait until this breaks before deciding to go long.
Lot’s of eyes on AUDUSD as it is approaching a daily support level. I would be patient for a reversal here, I would like to see some sort of bottoming pattern which I will look for on the 2 hour or 4 hour chart. The swing point is the 0.7055 zone on the daily chart which needs to break to see an extended move up to the 0.72 zone.
The CHFJPY also at an important support zone. Showing signs of a double bottom here, and would like to see the swing at the 109.70 zone break to nullify the downtrend and begin a new uptrend.
Really like EURAUD, unfortunately we got the break on Friday. We closed below the 1.594 zone and are now retesting that zone. I will wait for a lower low to be formed once we close below 1.5920 to confirm a lower high that I can use for my swing point.
NZDCAD is at an interesting daily level here. The RBNZ is expected to cut rates, so has the rate cut been priced in? The big flip one for a reversal is the 0.8970 zone. Ideally, would like to see a pattern here. Just watch out though because this support zone is obvious, and generally, we can see a lot of price volatility here to take out stops before rising.
We will end with CADCHF. Nice rejection at a resistance zone and creating a topping pattern. Would like to see 0.7550 break to confirm a downwards move. Not that there looks to be a cup and handle type pattern forming if we break to the upside. I don’t favour an upside break as much because of all the choppy levels afterwards.
A bonus for the Bitcoin and crypto fans. Awhile back ago, we spoke about the break of the 4250 zone and how it will lead to an uptrend wave. Well we have had multiple waves higher, although they are not the best looking type. We are not going to test support turned resistance at the 5900 zone. If we get a nice rejection off of here, this zone will now become a flip zone (where price has been support AND resistance) and it will be even more important going further.