As equity markets make a topping formation and US 10 year yield retest 3% level, the chances of a FED hike in 2019 is declining. Govt pressure will build up on Powell into 2019 and we believe this will damage FED ability to freely raise rates even if they wish to. We highlight a few key charts and setups to watch out for as you start a new trading week.
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Equity: Choppiness ahead
The SPX is looking increasingly likely to form a base at 2600. It is a are of solid support. Expect range based moves between 2550 and 2950 over the next 6 months. Economy is doing just ok while FED scales back expectation of any agressive hikes into 2019. Equity markets will slowly form a top over the next few months before the correction begins in 2019 somwhere near March/April.
USDJPY: Looks a two way trade
USDJPY is going to react to the falling US yields at some point. We suspect that the next move in USDJPY could be down. However a move above 113.7 will neutralise our downward bias and we will be looking to long at 113.9.
US 10 year yield: Is it a trend change ?
The US 10 year yield has contracted from 3.15% to 3.050%. This is reflecting
Iron Ore: Not as negative as it sounds
According to Metal Bulletin, the price for benchmark 62% fines slumped 2.8% to $70.13 a tonne, leaving it at the lowest level since October 8. It’s now lost 9.2% since November 9, including 6.1% in the past three sessions alone. However they are well above the 2018 lows seen in low 60s. So while the dollar had rallied above 97, Iron ore continued to be above the lows. Good buying despite the recent falls. Once dollar starts to weaken, Iron ore could pickup fairly sharply to 80$.
AUDUSD is above 50 DMA suggesting a trend change in its downward direction. We see a confirmation of our thesis that AUDUSD will move to equilibrium to 7400.
However the DBC which is the commodity tracking fund is own to 2018 lows. It tells us that it is oversold and hence a bounce is expected. That will help commodities to rise.
The XLU is the defensive ETF and is driven by utilities. Smart Money often moves into this ETF before market correction. As things stand now, we see XLU weakening after breaking above to new highs and then dipping below. We see a period of choppy action in XLU into year end. This suggests that equity markets generally will not see any deep correction and will recover starting 2019.
The financial ETF which preruns a broader equity rally, is consolidating at 26. There was a dip to 25 but then a recovery suggesting that the downward momentum has been broken. However only above the strong resistance at 27-28 can we confirm that the current downtrend is fully over.Watch those levels.