Fed Repo Operations Driving Markets | Morning Express
E-mini S&P (June) / NQ (June)
S&P, last week’s close: Settled at 4245.75, up 7.75 on Friday and 17.50 on the week
NQ, last week’s close: Settled at 13,994.25, up 34.50 on Friday and 227.50 on the week
Fundamentals: Friday certainly left something to be desired. We viewed Thursday’s CPI data as the biggest hurdle on the week, and it was. The S&P withstood a rise in inflation to close at a fresh record high. Also, other U.S. benchmarks and risk-assets seemed to be on the verge of breaking out themselves. Friday’s have typically been strong when such green lights have emerged and although stocks finished higher, it was broadly a lackluster session. What changed? Quietly, the Federal Reserve’s Reverse Repo Operations were also gathering steam. Demand for the Fed’s facility mounted for the last couple of weeks as financial institutions had more and more cash on hand. In fact, during the last week of May the Fed’s daily operations exceeded $400 billion for the first time since December 31, 2016 and it has yet to sink back below that watermark. The previous record was on December 31, 2015 at $474 billion. This was taken out on May 28th and a new record was set each day last week, leading up to Friday’s $547 billion. What does this all mean? Given the mounting liquidity, it gives credence to the Fed tapering bond purchases. Coincidentally, the Federal Reserve begins a two-day policy meeting tomorrow and we look forward to their decision and quarterly projections due Wednesday at 1:00 pm CT. We plan to provide more context on these developments as the week unfolds into Wednesday.
Technicals: Quadruple witching is this coming Friday, and we always roll on Tuesday’s. We prefer to not start the week with a new contract as we are still memorizing new levels. Volume usually transitions by Monday, but Open Interest may stick with the old contract into the middle of the week. Friday’s disappointment was the byproduct of Thursday’s strength and at the end of the day, Friday was not bad, nor did either index do anything wrong. In fact, both the S&P and NQ responded terrifically to support and laid extremely constructive groundwork through what felt to be a lackluster session. It was that constructive groundwork that paved the way for a strong close, which has now set up for a strong start to the week. Ultimately, Thursday’s CPI whipsaw provides several levels of technical significance. For the S&P, it confirms our previous rare major four-star resistance aligning with the old record as a new floor of support; the tape remains very bullish while out above here. On the low end, we will look to major three-star support at 4218.50 as a level defining last week’s late strength and a break below here will build for a near-term failure. Similarly, the bulls are in the driver’s seat for the NQ while it holds out above ... Sign up for a Free Trial at Blue Line Futures to have our entire fundamental and technical outlook, actionable bias, and proprietary levels for the markets you trade emailed each morning.
Crude Oil (July)
Last week’s close: Settled at 70.91, up 0.62 on Friday and 1.29 on the week
Fundamentals: Crude Oil is padding gains into the onset U.S. hours as it stretches to the $72 mark. The demand landscape received an adrenaline jolt over the weekend with TSA checkpoint numbers topping 2 million on both Friday and Sunday. Additionally, officials in Vienna have were unable to reach an agreement on Iran over the weekend. Although talks are ongoing, an Iranian official said “technical, political, legal and practical issues remain”. This points to what we highlighted last week; “the toughest decisions lie ahead”. Iran’s presidential election is Friday, and it seems increasingly unlikely that a deal will be struck before then. The one-two punch of TSA and tepid Iran talks has brought a tailwind to an already bullish tape to start the week.
Technicals: We took an outright Bullish approach on Friday as we believed higher prices was a strong probability. However, we also believed such strength was an opportune time to reduce exposure ahead of Iran talks over the weekend. The strength has continued, and our momentum indicator is climbing, denoted as our Pivot below; the tape will remain very bullish while out above ... Sign up for a Free Trial at Blue Line Futures to have our entire fundamental and technical outlook, actionable bias, and proprietary levels for the markets you trade emailed each morning.
Gold (August) / Silver (July)
Gold, last week’s close: Settled at 1879.6, down 16.8 on Friday and 12.4 on the week
Silver, last week’s close: Settled at 28.146, up 0.115 on Friday and up 0.25 on the week
Fundamentals: Given Thursday’s close, there is no asset class on the board that has been more disappointing in the last 24 trading hours than the precious metals. Furthermore, there is no asset more disappointing than Gold, which has lost as much as 3.2% from Friday’s high, a high that arguably stuck its nose above a technical breakout point. We believe there to be two major factors in such disappointment. First, Congress agreed to a watered-down infrastructure bill and less spending strengthened the U.S. Dollar. Second, the Federal Reserve’s Reverse Repo Operations mounted to consecutive records each day last week. We discussed the topic in detail in our S&P/NQ section above, but what Gold traders must understand is that the record operations points to financial institutions being flush with cash. If there is such liquidity outstanding, then it gives credence to the taper discussion. Coincidentally, the Federal Reserve begins a two-day policy meeting tomorrow and we look forward to their decision and quarterly projections due Wednesday at 1:00 pm CT.
Technicals: Gold has fallen precipitously through levels of support and is now testing into major three-star support at 1848.4-1855.6. We want to see a response here so that Gold can begin repairing such significant damage. Gold’s rebound from the March low has been tremendous, so it is not surprising to see a pullback, but this has been a bloodbath over a short period of time. Below our first layer of major three-star support is our rare major four-star level at ... Sign up for a Free Trial at Blue Line Futures to have our entire fundamental and technical outlook, actionable bias, and proprietary levels for the markets you trade emailed each morning.
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