The Rooster Call: ECB Preparing Rate Cuts?

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

Good morning, traders! Reuters has an exclusive report on the ECB preparing a package of rate cuts and other targeted measures to fight inflation and stimulate the economy. This is big news. The ECB is considering “negative” interest rates, which means banks pay the ECB to park money at the ECB. The idea is negative interest rates will force banks to lend more. That’s the theory. A rate cut is also planned from the already low .25%. If done, this would cause the Euro to fall. Keep in mind, the report is based on “unnamed sources.”

A QE type stimulus is not in the cards at this point for the ECB according to the report and according to Draghi, who has back-peddled on the issue.

If we step back we see the ECB is struggling after saying for years the economy is getting better. The truth is central banks in the USA, Euro zone, and Japan have engaged in a grand experiment that only works if everyone (all the major central banks) sing from the same song sheet. As long as the printing continues and the pledges of very low interest rates, the game can continue.

The UK has managed to heal her economy better than most to the point currency traders have bid the pound higher anticipating interest rate tightening. This has caused the Bank of England worry over having too expensive a currency, which would cut into exports and raise interest rates as the economy picks up steam. Today, the head of the Bank of England talked down the Pound. The goal is to keep the currency low preventing the Euro zone from having a favorable currency advantage.

Last night German Consumer Price Index (CPI) met consensus of -0.2 month over month. Year over year is 1.3%. French CPI met consensus of 0.0% increase month over month. Year over year for France shows 0.7% CPI. No inflation for the number one and number two Euro zone economies.

Euro zone industrial production month over month came in at -0.3%. Year over year actual is -0.1%. So much for recovery efforts.

I have mentioned in your nightly video the idea this week’s surge in the S&P 500 could be due to traders anticipating a QE style stimulus in Euro zone, which would bring more money to the markets keeping global risk assets climbing. Equity markets care about one thing only…the next infusion of liquidity…the next speech suggesting liquidity. If central banks left everything alone, the massive correction they have sought to avoid would take place. With central bank action keeping equities alive, again the game can continue indefinitely.

I pity the gold bugs who point to Germany in the 1920’s as the next state of America and Europe. Not going to happen as long as the central banks play the game communicating to each other their moves. They are the guardians and the public is provided an image central banks are the only entities who can “fix” the global economy. This is the biggest farce pulled on the public. Politicians hide behind the FED in the USA and the FED understands it’s role in this subterfuge.

I watched Yellen speak to the Senate last week. The politicians claim concern over debt levels and defer to the FED as the miracle worker trying to fix the economy. Any fix will take drastic job creating action along with reforming the US tax code. Neither will happen until a political party gains power in both the House and the Senate. If we see this power shift, you can bet the USA will embark on a major deficit increasing massive jobs program regardless of whether the party is Democrat or Republican. A jobs program in the form of massive government spending is the missing link for the USA recovery. This will herald a gigantic positive boom in equities.

You have to appreciate the US government rescued Wall Street, AIG, GM, and the big banks with billions upon billions of tax payer dollars. Political pressure is building for a massive program to get Main Street back to work. Everything else mentioned by politicians in the media today is an attempt to avoid real talk of improving the USA economy. At the end of the day, the government is the only force available to provide the economic lift through a likely gigantic infrastructure package. Not building bridges to no where, but real much needed infrastructure upgrades and improvements.

Until we see a unified political change determined to improve the US economy, we are left with a stock market judged by professionals as moving side way with an upward bias (according to the VIX).

Gold is a lost cause until the seasonal time for a lift just bouncing at this time.

Bonds are strong as smart money bets on continued sluggish economy and low interest rates from here to eternity. Crude marches to its own drum in May with little correlation to other markets.

On Monday and again last night I issued new option trades taking advantage of a listless market…a market rising on very low volume. I even made a separate video for option traders suggesting adding crash trades only because we are taking on additional risk AND because we understand equity indexes are in an oversold condition.

Seasonally, stocks tend to drop in mid-May and start rising in June leading into the summer rally. However, empirical evidence shows we are in the six month period stocks do not typically perform well. Therefore, any rise in stocks is likely due to central bank action. Cue the ECB for June 5 meeting with potential change in monetary policy. Cue the US government, Fannie Mae, and Freddy Mac loosening loan requirements to keep the housing market inflating (announced yesterday).

Meanwhile, consumers are not wildly spending in the Euro Zone, USA, or China. What does this tell you about the confidence of normal folks?

Today’s Reports and FED Activity

08:30AM ET – Producer Price Index
10:30AM ET – EIA Petroleum “Crude” Report

Overnight/Pre-Market

  • Equity indexes very quiet incrementally lower. Get ready for retracement.
  • Crude oil higher marching to it’s own drum.
  • Natural gas flat after falling on nice weather.
  • Heating oil moving higher with crude.
  • Gold and silver higher.
  • Corn flat.
  • Soybeans flat.
  • Wheat lower on reports the field product might be better than expected.
  • Cotton stages a rebound after falling.
  • Coffee incrementally lower (I sent you fundamental information provided by the ICE exchange).
  • 30 Year bonds higher as discussed in your video last night.
  • Yen popped higher.
  • Euro incrementally higher…not much.
  • Pound lower on Bank of England talk.
  • US dollar pausing.
  • Aussie dollar incrementally higher.

Day Trader Bench Marks

Intraday ES Floor Pivots – Using 24 hour electronic market hours 1800-1715 ET.

R3: 1904.75
R2: 1901.75
R1: 1898.25

Main floor pivot: 1895.25

S1: 1891.75
S2: 1888.75
S3: 1885.25

Intraday Euro Floor Pivot – Using 24 hour electronic market hours 1800-1700 ET.

R3: 1.3835
R2: 1.3803
R1: 1.3752

Main floor pivot: 1.3720

S1: 1.3669
S2: 1.3637
S3: 1.3586

Think About This!

We expected S&P 500 would hit 1900. The cash market hit this yesterday, but the futures did not quite “hit the mark.” Now that this “psychological” number has been hit in the cash markets, a retracement in the S&P 500 is highly likely. Yesterday the Russell 2000 fell as the S&P 500 (ES) rose. Not a good sign.

I am amazed people still follow the Dow Jones Industrial Average made up of only 30 companies, some of which are not industrial firms. This is all part of the game played on the public who may not know much about Wall Street, but know enough thinking a rising Dow is good for the country.

We have a lot of activity in the futures/commodities markets as discussed in your video last night across the board in bonds, grains, and softs. Keep your eye on the charts.

Have a great trading day!

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