Traders were warned earlier in the week about an $11 billion dollar rebalance on the last trading day of January, but before that could happen, the BOJ warmed things up by taking the country’s interest rates to negative borrowing cost. I was online Thursday night when the S&P 500 futures started to rally after Japan made is rate decision and the ESH took off to the upside. When I put out a blast on the ICE caht that the USD/JPY was surging after Bank of Japan adopts negative rates, fellow trader and former head of GS prop trading said this, “This Sets the fuel for the world going forward between ECB and BOJ.” At the time I knew what he was saying, and I knew about the end of the month rebalance, but I have to admit, after Thursday’s 1865.75 retest I never thought the S&P would take out the 1910.00 level and the PitBulls 1920.00 level. The ESH16 ended up trading all the way up to 1933.00 to close up 49.4 handles (points), or up 2.65% on the day, and up 68 handles from Thursday’s 1865 ‘double’ bottom.
Trading will never be easy. One of the things every trader must have is a map, an idea of what he or she is thinking. I had that map all week, but after Thursday’s big rip and pull back, I started to get the feeling the S&P had gone too far. That was a giant mistake. After the ESH16 gapped higher Friday morning and started to approach the 1900.00 level I started trying to sell the S&P. I knew the futures were loaded with buy stops above, I knew Japan had adopted negative rates, I knew the story about Credit Suisse saying there was an $11bil dollar rebalance late Friday, and most of all, I knew about the 1865 ‘double’ bottom and all the higher lows over the last few days. That said I tried to sell the early strength and got smoked. I took my hits and decided to let the last trading day of January unfold.
NEGATIVE RATES
In recent months it has become rather clear that many of the global central banks are in a strong dovish mode. This was evident by the ECB’s President Mario Draghi speaking very candidly suggesting that stimulus will not soon go away and even giving evidence that more easing could occur as soon as March. Reiterating this approach was the Bank of Japan who took it a step further and announced a set of negative interest rates. All of this on the heels of the U.S. Federal Reserve’s rate hike in December. Furthermore, last week the FOMC meetings press release suggested that even with the recent worldwide volatility, which the Fed is monitoring, Yellen & Company were only willing to come across less hawkish rather than dovish. Since the Fed meeting last week, many institutions are calling for more than one rate hike this year, but next one will most likely not to occur until sometime this summer.
So now it appears that the world is in a new kind of arms race, or a “currency war” as it’s been called, as the large European and Asian economies, including China, attempt to weaken their currency while the U.S. has begun a cycle of rate hikes. The long term effects on Japan’s economy remain to be seen as the decision to go to negative rates comes at a cost. Banks are finding it difficult to pass along such paper to their customers, which in turn, causes effects seen around the world.
In Asia, 7 out of 11 markets closed higher (Shanghai Composite -1.78%), and in Europe 10 out of 12 markets are trading lower (DAX -0.78%). The first trading week of February includes a total of 24 economic releases including the International Trade and January jobs number on Friday, 10 T bill or T bond auctions or announcements and three Federal Reserve bank presidents speaking. Today’s economic calendar includes Personal Income and Outlays, Gallup US Consumer Spending Measure, PMI Manufacturing Index, ISM Mfg Index, Construction Spending, Federal Reserve Vice Chair Stanley Fischer speaks in New York, and earnings from Aetna Inc (AET), AFLAC Inc (AFL), Alphabet Inc (GOOG), Mattel Inc (MAT), Wynn Resorts LTD (WYNN), and more…
MOC BUY $4 BILLION
Our View: I am not sure you are supposed to sell the S&P today or wait for 1950? Things have gone from extremely negative to extremely positive in one day, but the big question is… has the S&P bottomed? I thought it did when it traded down to 1804.25, but there are so many cross currents it’s sometimes hard to see through the woods. That said, after Friday’s $4 billion to buy on the close, we have to wait to see if the mutual funds keep buying right into the first few days of the new month.
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As always, please use protective buy and sell stops when trading futures and options.
- In 7 Asia out of 11 markets closed higher : Shanghai Comp -1.78%, Hang Seng -0.45%, Nikkei +1.98%
- In Europe 10 of 12 markets are trading lower: CAC -0.89%, DAX -0.78%, FTSE -0.83% at 5:15am CT
- Fair Value: S&P -6.95, NASDAQ -9.13, Dow -86.36
- Total Volume: 2.4mil ESH and 12.8k SPH
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