To Hike or Not to Hike?

Nick Mastrandrea Market Tea Leaves

Good Morning Traders,

As of this writing 4:20 AM EST, here’s what we see:

US Dollar: Dec. USD is Up at 97.975.
Energies: December Crude is Down at 51.46.
Financials: The Dec 30 year bond is Up 3 ticks and trading at 164.10.
Indices: The December S&P 500 emini ES contract is 6 ticks higher and trading at 2139.50.
Gold: The December gold contract is trading Down at 1269.60. Gold is 3 ticks lower than its close.

Initial Conclusion

This is not a correlated market. The dollar is Up+ and crude is Down- which is normal and the 30 year bond is trading Up. The Financials should always correlate with the US dollar such that if the dollar is lower then bonds should follow and vice-versa. The indices are Up and Crude is trading Down which is correlated. Gold is trading Down which is correlated with the US dollar trading Up. I tend to believe that Gold has an inverse relationship with the US Dollar as when the US Dollar is down, Gold tends to rise in value and vice-versa. Think of it as a seesaw, when one is up the other should be down. I point this out to you to make you aware that when we don’t have a correlated market, it means something is wrong. As traders you need to be aware of this and proceed with your eyes wide open.

Asia traded mixed with half the exchanges higher and the other half lower. As of this writing Europe is trading mixed as well.

Possible Challenges To Traders Today

– Philly Fed Manufacturing Index is out at 8:30 AM. This is major.

– Unemployment Claims are out at 8:30 AM EST. This is major.

– Existing Home Sales are out at 10 AM EST. This is major.

– CB Leading Index m/m is out at 10 AM EST. This is major.

– Natural Gas Storage is out at 10:30 AM EST. This is major.

Treasuries

We’ve elected to switch gears a bit and show correlation between the 30 year bond (ZB) and The YM futures contract. The YM contract is the DJIA and the purpose is to show reverse correlation between the two instruments. Remember it’s liken to a seesaw, when up goes up the other should go down and vice versa.

Yesterday the ZB made it’s move at around 11 AM EST when most of the economic news was reported. The ZB hit a low at around that time and the YM hit a high. If you look at the charts below ZB gave a signal at around 11 AM EST and the YM was moving lower at the same time. Look at the charts below and you’ll see a pattern for both assets. ZB hit a low at around 11 AM EST and the YM hit a high. These charts represent the latest version of Trend Following Trades and I’ve changed the timeframe to a 30 minute chart to display better. This represented a long opportunity on the 30 year bond, as a trader you could have netted about 20 plus ticks per contract on this trade. Each tick is worth $31.25. We added a Donchian Channel to the charts to show the signals more clearly.

Charts Courtesy of Trend Following Trades built on a NinjaTrader platform

Bias

Yesterday we gave the markets a downside bias as the Bonds and Gold were both trading higher and ordinarily this would represent a downside bias. The markets had other ideas as the Dow gained 41 points and the other indices gained ground as well although fractionally. Today our bias is neutral.

Could this change? Of Course. Remember anything can happen in a volatile market.

Commentary

Yesterday it seemed as though the market was waiting for something to occur. Yesterday morning the market was poised to go lower but when the session opened, that didn’t occur. Instead the market went higher but then the Beige Book came out at 2 PM EST and guess what? The Dow dropped 50 points. It seems as though the US economy isn’t as robust as many seem to think it is as the growth was minimal at best. For some time now we’ve been saying that the economy is not a booming one and although the recession ended (in theory) some time ago; the US economy hasn’t been anywhere near the 5% growth rate that we expect when a recession is “over”. Because of this some economists are now saying that the Fed won’t raise in December as many expect they will. I don’t think they’ll raise either, but for a different reason. Why would the Fed raise in December and potentially ruin the holiday shopping season? If they raise there is a valid fear that consumers will tighten and not spend and I don’t think they want that. If they decide to raise it will probably be in 2017 but again as in all things, only time will tell.

Author

Nick Mastrandrea

Market Tea Leaves

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.