Weekly Update 24 Sep 17 – LS Trader

Moody’s, the ratings agency, cut the UK’s credit rating again on Friday from Aa1 to Aa2 on concerns over Brexit, showing once again how hopelessly out of touch these ratings agencies are. One only needs to go back to the global financial crisis to see the high credit rating given to banks and risky mortgage securities by these ratings agencies to see how little they know.

This happened at the end of a week that had seen the British Pound reach its highest level against the dollar since Brexit, and the UK Long Gilt complete a change of trend to down.

Stocks

The Dax finished higher for the third consecutive week, but momentum is slowing. The weekly chart sees the RSI finding resistance at the 60-level, which is bear market resistance. The daily chart shows lots of small real bodies over the past two weeks, and there is not much ease of upward movement.

The Nasdaq 100 has seen some weakness this week and is testing a support zone and the 50-day moving average. For once, the S&P 500 is holding up better and remains above change of polarity support from prior highs and well above its 50-day MA. The RSI also remains above 60.

Commodities

Brent Crude completed a long-term trend change to up for the first time since April and has now stabilised well above the $50 level, closing on Friday at $56.42 basis the December contract. Light Crude continues to lag and remains in a long-term downtrend. Heating Oil remains the strongest market in the energy sector, making its highest print in over two years this week.

From last week: “The uptrend for metals could be coming to an end, at least for now.” That has been the case as Gold fell back below support and has closed right on its 50-day MA.

Currencies

The British Pound rallied to 1.3695 on Wednesday before pulling back to the close on Friday. The long-term trend remains up and could yet continue higher to our next target at 1.3835. Two things of interest to note with the Pound is that there is a fairly reliable 8.1-year cycle evident on the long-term charts, which bottomed earlier this year, as well as heavy commercial buying from insiders as shown by the Commitments of Traders report (COT). This suggests that whatever negativity there is around the UK and Brexit, ratings downgrades, in the media and elsewhere, the smart money is not buying into the negativity.

The dollar index tested resistance, and the Euro tested support, but both narrowly held on, which keeps the current weak dollar trend intact for now, but both trends are likely to be pressured further this week.

Interest rate futures

Interest rate futures have seen continued weakness this week with the shorter-term markets being the weakest. A change of long-term trend to down looks imminent for the 3-month Eurodollar.

Interest rate futures have been weaker still in the UK, where UK Long Gilts broke long-term support and completed a change of trend to down. This is the first time this market has been in a downtrend since March this year. It’s interesting to note that the change in long-term trend happened two days before the ratings downgrade by Moody’s.

In theory, a lower credit rating means higher government borrowing costs and, therefore higher interest rates, which would put additional downward pressure on Long Gilts. We shall see how the market reacts this week.

Good trading

Phil Seaton

LS Trader

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