The Rooster Call: Euro Zone Moving Deeper into Deflation

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

Good Morning Traders!

The end of January already? 

We start the morning with news of Euro zone moving deeper into deflation. Prices for January fell 0.6%, (Financial Times). Eurostat says this is the largest decline since 2009. The problem is structural and answers are difficult.  The idea the ECB can wave a magic wand of QE is more of a dream than reality.  Reality finds industry chasing the cheapest method of production. The cheapest production lies outside of the Euro zone.

Euro zone is caught in a downward spiral of high unemployment causing consumers to hold back on consumption. All the money from QE cannot change this fact unless jobs are created. Why should manufacturers create jobs if consumers are not spending?  Not all the news is negative.  Germany, the economic powerhouse of Euro zone continues showing low unemployment levels and today announced positive retail sales, the best in 2 1/2 years (Reuters). 

We also have news from Japan showing household consumption shrank more than expected (Financial Times), while core inflation fell for a fifth consecutive month in December.  This performance is quite the opposite from Prime Minister Abe and the Bank of Japan’s aggressive mission to create inflation. The Bank of Japan cut inflation expectations to 1%.  Target is 2%. 

In a world of deflation, money will continue chasing the safety of bonds with higher return rates. Thus the underpinnings of the sustained momentum in US Treasury bonds attracting capital from all over the world.  With the USA serving as the only expanding growth engine and talk of potential interest rate rise sometime in 2015, the US dollar continues showing strength.  All eyes are on the USA GDP report issued today at 8:30AM ET.

The world remains “risk” averse with the exception of European equity indexes…and by extension European equities as traders anticipate ECB’s QE will cause a rise in stocks.  DAX and STOXX 50 are expected to continue climbing. We are looking for evidence the DAX may become market anchor. This means we monitor ES to see of ES rises or falls with DAX instead of vice versa.

There’s news about Russia cutting interest rates, but I see little in this action for trading importance.  The Russian economy is imploding, Ukraine is a wild card that could get worse, and the ruble is weakening.  Speaking of Ukraine, it is unfortunate the European Union could not agree on tougher economic sanctions.  The lack of tougher sanctions gives the green light for further Russian aggression in Ukraine.

Crude is flat.  Without any news, traders are working to keep the dream alive holding crude over the critical $44.60 level.  Breaking this level lower suggests $37.10 is next target. 

DAX is lower, still stuck in 5-day consolidation.  Next target is 11,000 on the up side.

ES follows the DAX lower. We continue watching the “head and shoulders” price pattern on daily ES chart.

Coffee incrementally green…hope springs eternal here. Other softs are incrementally lower.

Gold hit our expected target yesterday.  We see a little green this morning, which means nothing. More discussion in the Trader Weekly Review this weekend.

Our March short in Soybeans continues showing no movement.  Support is strong. Here are comments from Allendale with my emphasis in bold: 

Floor sources are suggesting the quiet trade with bouts of abrupt moves has been caused by spreading. Soybeans have been supported by the meal/bean oil spread. Since EPA’s announcement of Argentina biodiesel coming to the US, traders have been buying meal and selling soyoil. Due to meal being a greater portion of the soybeans values it has supported prices. World edible oil values around the world continue to slide which is putting additional pressure on soyoil. Soybean meal out of the US is competitive on the world market for March delivery and is providing support to meal values. 

Allendale also notes: Major index funds are beginning to roll positions forward, Roger’s fund started yesterday rolling from March to May, and Goldman roll starts Friday Feb 6th.

The next USDA supply and demand report is on February 10. Mark your calendar. IF soybeans do not fall, we should assume they will grind higher into this report.  Once the report is released a knee-jerk could occur. All the fundamentals favor us, but either farmers are not selling or bearish speculators are afraid of continued selling at these levels.  For the moment we hold.

US GDP just released came in at the low end of consensus range suggesting the USA economy cooled down in the fourth quarter after a stunning third quarter (revised to 5.0% growth!). USA traders will likely assume the slowing growth could cause the FED more reasons for exercising patience with any benchmark interest rate increase. As I write, ES is non-responsive to the GDP report. Bonds rose. US dollar and Euro show no reaction.

We have Chicago PMI at 09:45AM ET – This could move the intra-day market for equity indexes.

Consumer Sentiment released at 10:00AM ETFED Tarullo speaks at 12:45PM ETFED Bullard speaks at 7:00PM ET

Trade well today and enjoy your weekend!

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