The Rooster Call: ECB Holds Rates at Record Lows

Hit the Mark Trading’s Brief Review of Overnight Market Action Setting the Tone for the Trading Day

Good Morning Traders!
As expected the ECB held rates at record lows. Nothing new here, keep moving. We await the Draghi press conference for forecasts of inflation and growth…both likely too high AFTER downward revision.  Confidence for Draghi is the name of the game in this kind of press conference. Exude confidence, remain upbeat, act as if there’s more the ECB can do.

The European Union and especially the Euro zone is being hit left and right with the worst possible storms affecting consumption and exports.  Consider the following…

  • China is the Euro zone’s largest trading partner.   China is slowing.
  • Deflation denied, yet a part of life as consumers pare back spending.
  • Sluggish economic growth. Today PMI improved for Eurozone’s composite PMI registering 54.3 in August versus 53.9 in July. Composite adds manufacturing and service sectors. Market positive data point.
  • A currency refusing to fall…which bucks history. QE normally causes a currency to lose value (Japan/England/USA are our guides).
  • Ukraine is like a baby left on the door step and a Russian bear threatens.
  • Greece, is it fixed yet? Sure, with more money…more bail out funds and the prospect of canceling past debts
  • And now a major migrant crisis driving up the cost of social services. Those migrants have to find work competing with the existing labor pool. This is an incredible tragic humanitarian crisis.
  • Like the USA, European manufacturers are sourcing more including assembly of product in cheaper locations, i.e. Asia searching for lower labor costs.

The ECB’s quantitative program might be extended according to an ECB offcial speaking last week. We will likely see if Draghi is asked about this. The stock reply is “look we just started this program in March, but if we need to do more we will do whatever it takes.” Quite frankly, the ECB has a very difficult job.  I still expect the Euro will fall to parity with US dollar before this is all over.

This just in: Draghi says Euro zone may see negative inflation rates in coming months…that’s deflation.

Yesterday, large hands controlling the ES, i.e  big money, used the opportunity of China’s market close today and Friday as an opportunity to drive up ES with impunity…at least for two more days. The move accelerated after 3:45PM ET, a time most retail traders are done for the day.  Running the ES higher to the tune of $700 per contract was like taking candy from a baby.

I think the forces involved also expected dovish comments today from Draghi and no change in ECB position.  Now with Friday’s Employment Situation report we have a market that can rise if new job creation is less than 200,000 (no FED rate increase for September. Alternatively, if big money presses further, we could see a rise in ES even if a robust jobs reports is released with the financial press saying “the USA is the only game in town.”

Any sell-off today in ES is evidence the big money is taking profits in front of Friday’s report.  Again, with the gyrations of China’s market out of pocket for two days, big money saw little downside risk.

ES has crossed 1962.50 resistance. This is a big deal. Next stop is 1998 to 2000. I don’t know how long this move can last knowing how the Chinese markets have dictated the recent global drop in equity index futures.   For now, immediate focus is price hitting 1976.50.  Crossing this level  likely assures us of our higher targets. NOTE: if ES drops below 1962.50, all bets are off for higher price action.

In other news, the IMF said late Wednesday, “China’s transition to a lower growth…appears to have larger than previously-envisaged cross-border repercussions, reflected in weakening commodity prices and stock prices.”  Of course this is old news for active traders. The IMF is a huge proponent of money printing to solve all problems…expect more of the same advice from this group.

Crude inventories were reported higher yesterday by 4.7 million barrels…the largest one-week rise since April (Reuters), but New York crude traders once again ignore the fundamentals. They have the money to push the market and we are simply followers. The price rise in crude is credited to a “risk-on” attitude in equity index futures. Technically, it’s consolidation after a surprise run.

Nothing has changed on the fundamental front for crude. In September USA refineries will use less crude as they switch over to winter blend. We expect to see crude inventories build this month. Seasonally, crude starts a down hill ski slope for price expectation. Only OPEC can alter the direction of this market or a geopolitical event.  Note if the ECB lowers growth forecasts, by extension we expect implied less energy usage.

Japan’s Services PMI saw an increase, which is market positive for Japanese markets. Too bad manufacturing and consumer spending data points are dismal.

Grain Update 

Corn harvest starts later this month.  Traders will watch the weather for any possible sign of freeze hitting northern crops.

Yesterday, Allendale’s survey finds corn yields at 167.1 bushels, and soybeans at 45.4 bushels an acre, below the USDA figures but the second strongest on record.  We also hear from commodity broker INTL FCStone raising forecast for US corn yields to 165.9 bushels an acre, from the 165.0 bushels an acre it forecast last month. Soybean yields were seen at 45.4 bushels an acre, from the 45.0 bushels an acre forecast a month ago.

Brazilian Real hit a 12-year low making Brazilian crops the cheapest on the planet for global buyers. Let’s face it…we live in a cost cutting world and international sourcing. I have seen reports in years past where farmers would buy hay from overseas if the price was right. Commercials who use Corn and Soybeans will do the exact same thing. Cut your input costs and reap more profit is business 101.

The tremendous export strength out of Brazil guarantees larger plantings in the new season. Now we just need LaSalle Street in Chicago (grain traders) to wake up to the new reality of lower bean and corn prices. This is a major fundamental shift especially for soybeans, in my opinion.
Economic Events

Chain Store Sales
7:30 Challenger Job-Cut Report
8:30 Gallup US Payroll to Population
8:30 Initial Jobless Claims
8:30 International Trade
9:45 PMI Services Index
9:45 Bloomberg Consumer Comfort Index
10:00 ISM Non-Manufacturing Index
10:30 EIA Natural Gas Inventory
4:30 Money Supply
4:30 Fed Balance Sheet

 Markets

  • Equity index futures green except for the Nikkei 225.
  • VIX falls, yet remains above 20 considered a “danger zone.” We expect movement for day traders.
  • Bonds incrementally higher on news of more initial unemployment claims than expected. Also possibly Draghi’s comments of negative inflation. Bonds are day trading instrument today and Friday.
  • Crude incrementally lower both Brent and USA. Always a day trading instrument.
  • Gasoline incrementally higher as we go into the final summer holiday weekend.
  • Natural gas incrementally higher nothing special.
  • Gold starting a whack day. Day traders take note.
  • Silver lower…could follow gold.
  • Copper higher go figure.
  • Corn lower as expected.
  • Soybeans lower day trading market potential.
  • Softs mixed but nothing special other than Sugar testing resistance area.
  • New contract low for December Coffee.
  • US dollar higher on Draghi.
  • Euro lower on Draghi. Good candidate for day trading.
  • Yen incrementally higher.
  • Pound lower following Euro.
  • Canadian dollar incrementally green in super tight range…nothing special. This is a broad based theme instrument…following crude.
  • Aussie lower incrementally with Euro.

Think About This!
Did you have a rough August in your trading?
Consider these professionals courtesy of Seeking Alpha: Bill Ackman has joined a string of high profile hedge fund managers in reporting deep losses for August as global markets tumbled amid fears of slowing growth in China. The firm’s Pershing Square Holdings portfolio dropped 9.2%, and is now down 0.1% since January. Last year the fund gained 40%, beating the S&P’s 13.7% gain. Other hedge fund losses for August: Greenlight Capital -5.3%; Third Point -5.2%; Jana Partners -4.3%; Viking Global -2.1%; Omega Advisors -6%; Andor Capital -4.5%.

To learn more from Martin, visit HitTheMarkTrading.com to join his mailing list and receive blog updates.