Tetsu Emori's Real Trading Strategy March 10, 2017 08:30
Distributor: ECM

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Good morning.
Thank you for your continued support today as well.

This time we have created "Fundamentals Analysis of the FX Market: Foundations."
It explains the way of thinking about the FX market that I have discussed in my newsletters so far.

You can register at the URL below.
https://fx-on.com/douga/detail/?Id=53

Please take a look.

Tomorrow, Saturday, March 11, I will be speaking at Investment Strategy EXPO 2017. I will also attend the evening networking event.
https://www.tradersshop.com/topics/expo2017/index.html

I look forward to interacting with all of you.

〔EQUITY MARKET〕
U.S. stocks moved roughly sideways. With the February jobs data due the next day, a cautious mood intensified. The February jobs report is released on the 10th; unless it is quite weak, the market is expected to see a rate hike decided at the FOMC meetings on the 14th-15th. Market focus is turning toward the pace of future rate hikes. If the pace of hikes accelerates, U.S. stocks may have limited upside. Meanwhile, the ECB, at its regular Council meeting, kept policy unchanged, while President Draghi indicated that the urgency to take additional measures to combat deflation has diminished. In response, bonds were sold and yields rose, and financial stocks were bought on the prospect of widening net interest margins. On the other hand, as crude oil plunged below the $50 level, energy stocks were sold, and the Dow fell as much as about 78 points at one point. However, toward the close, it rebounded sharply from oversold conditions, returning to positive territory. From this movement, it is clear that demand to buy on dips remains strong, and many investors are seeking to buy on pullbacks. Among individual names, Johnson & Johnson rose 1.5%, while Exxon Mobil and Chevron rose 0.8% and 0.4%, respectively. On the other hand, Caterpillar fell 2.0 due to accounting issues. Apple also declined 0.3% on reports that the iPhone 8 release could be delayed.

Meanwhile, President Trump reportedly met with CEOs of regional banks and pledged to remove excessive financial regulation. The meeting was attended by NEC Chairman Gary Cohn and Treasury Secretary Mnuchin. Trump said that “regional banks lending to small businesses are essential to the U.S. economy,” and that regulations would be reviewed to allow safe lending expansion according to the size of financial institutions.

The U.S. import price index for February rose 0.2% from January. Import prices excluding petroleum rose 0.3%. On a year-over-year basis, overall prices were up 4.6%, excluding petroleum up 0.8%. For the week ended March 4, initial jobless claims rose by 20,000 to 243,000, above market expectations of 235,000. The previous week marked the lowest level since March 1973. Initial claims below 300,000 are considered strong for the labor market, but remaining below 300,000 for 105 consecutive weeks is the longest stretch since 1970. The newly reported initial claims figure overlaps with the February employment data and survey.
The February employment report is also expected to show solid payroll gains. Market expectations for nonfarm payrolls are up 190,000 from the previous month; January was up 227,000. The February unemployment rate is expected to fall by 0.1 percentage point to 4.7%. According to ADP and Moody's Analytics' February national employment report released on the 8th, private-sector employment rose by 298,000, marking a significant increase in about a year. The U.S. labor market is said to be at or near maximum employment, making it harder for employers to find workers with the necessary skills. Against the backdrop of a tightening labor market and rising prices, rate hikes are believed to be certain. Yellen has already hinted at a rate hike at the March 14-15 FOMC. The Fed raised rates twice in December, and this year 2017 is expected to see three rate hikes. Whether that number increases will be the major focus of this FOMC.

This is the key point to watch.

U.S. Treasuries fell. As expectations for rate hikes rose, long-term yields rose to about 11 weeks highs and short-term yields rose to about a 7.5-year high. The rise in yields is driven by stronger payroll growth and wage growth. CME FedWatch shows a 91% probability of a 25 bp March rate hike. The 10-year yield rose 4 bps to 2.594%, briefly hitting 2.607% for the first time since December 16 of last year. The 2-year yield rose 2 bps to 1.371%, briefly at 1.379%, the highest since August 2009. Yields broadly rose, but the 2s-10s spread remains negative at around -1.23%, and rising rates have not yet posed a serious threat to equities. Historically, during stock peaks in 2000 and 2007, this spread turned positive, meaning the short-term yield exceeded the long-term yield. The correlation with unemployment is high, but the spread will not shrink unless unemployment falls into the low-4% range. This implies substantial remaining room for Fed rate hikes. Because of the large potential for rate hikes, there remains room for further stock gains as well.
In the euro area, although the ECB kept policy unchanged, the view that there is no longer an urgency for stimulus sent Germany's 10-year yield up 5 bps to 0.43%, a one-month high. The ECB indicated that it would maintain its accommodative stance at least through the year. The main policy rate is 0%, the marginal lending rate is 0.25%, and the central bank deposit rate is -0.40%. All are at record lows, with rate holds recorded for eight meetings in a row since April 2016. As for QE, as decided at the December meeting, assets purchases were reduced from 80 billion euros to 60 billion euros per month from April and would continue through year-end. Meanwhile, the statement removed the line “the Council would use all available measures as warranted to reach the objective.” Draghi explained that this was because “there is no longer any urgency.” Given rising global inflation, excessive easing could become counterproductive. The euro area’s February year-over-year inflation rose to 2.0% and is now near the ECB’s target of just under 2%. However, the impact from higher oil prices is seen as temporary, and the ECB’s latest inflation projections for 2017 are 1.7% and 2018 1.6%, still below target. Draghi said at the press conference that “we cannot be sure inflation is on a rising path yet,” emphasizing the need to maintain easing. Here are the ECB’s latest euro-area projections (the figures in parentheses are the December 2016 projections).

GDP growth rate Inflation
2017 1.8% (1.7%) 1.7% (1.3%)
2018 1.7% (1.6%) 1.6% (1.5%)
2019 1.6% (1.6%) 1.7% (1.7%)

【US Stock Trading Strategy】
The Dow, S&P 500, and Nasdaq keep longs. Upside remains capped, and a correction trend continues. Until the jobs data and the FOMC pass, some selling is inevitable. On the chart, important support is at 20,750, where the index has stopped falling. If it rebounds, we can consider the near-term bottom confirmed. In any case, the long-term upward trend remains intact. The basic strategy is to stay long and be ready to buy dips. There is strong optimism for the Trump administration to implement pro-growth policies for the economy and corporations.
The upper limit of the Dow’s March bullish scenario is 21,250, but if the decline slows, this level will be tested again. A pullback to as low as 19,880 is possible, but if it falls to that level, it would be a dip-buying opportunity, and one should be prepared. As repeatedly stated, it is prudent to focus on U.S. equities. Even when accounting for inflation, the U.S. offers overwhelming advantages. Buying dips in U.S. stocks over the long term is the core strategy of stock investing. This long-term, stable return is not typically achievable with Japanese stocks.

【Dow Jones: 2017 Expected Range】
Bullish 19,310–23,185 (year-end 22,870) / Bearish 16,050–20,195 (year-end 17,850)

【Dow Jones: March Range】
Bullish 19,880–21,250 / Bearish 18,410–20,015

【US Treasuries Trading Strategy】
Keep the 10-year on the sidelines.

【Japan Equity Market Commentary & Analysis】
Japanese stocks are barely holding their downside; upside remains heavy, with the trend still pressured. USD/JPY is testing the 115 level, pushing Chicago trading higher. USD/JPY sits at a crucial level; a close above 115 would likely attract buying in Japanese equities. However, we see limited upside for USD/JPY, and our prior view remains unchanged. Focus on companies with growth potential that are less affected by FX fluctuations, as well as domestic-oriented and growth/early-stage tech stocks. In the short term, the advance-decline ratio is rising; while some say this indicator is not reliable in rising markets, caution is warranted.
Until the U.S. jobs data and the FOMC pass, moves may be limited, but as long as U.S. stocks stay firm, Japanese stocks are unlikely to crash. A strong yen-hedging approach would favor high-quality exporters that can withstand a stronger yen, domestic-demand stocks less sensitive to FX, and growth/early-stage stocks. This is essential.

【Nikkei 225 Futures Trading Strategy】
Maintain longs. The situation remains unchanged. Many investors may feel there is no need to panic-sell. With today's square-off (SQ), U.S. payrolls data, and next week's FOMC, there are many events, but markets cannot be guided by them alone. However, until USD/JPY breaks sharply, declines are unlikely, and upside potential is not expanding. The upper bound of the March bear scenario is 19,850; breaking above this would be the first sign to shift to a bullish scenario. We should keep monitoring this level. There are reports of a possible crash on the 15th due to many events, but as long as such views exist, a true crash is unlikely. In any case, to withstand near-term fluctuations, maintain ample liquidity and always be ready to buy the dips during a crash.
【Nikkei 225: 2017 Expected Range】

Bullish 18,335–23,400 (year-end 23,020) / Bearish 14,970–19,915 (year-end 15,620)

【Nikkei 225: March Range】
Bullish 19,150–20,950 / Bearish 17,650–19,850

〔CURRENCY MARKET〕
USD/JPY is rising. In response to rising U.S. long-term rates, the yen is being sold and the dollar bought, briefly pushing into the 115 range for the first time since January 27. In a press conference after the ECB's regular meeting, Draghi said, “There is no urgency to introduce additional measures,” denying the need for further monetary easing. This fed euro strength and pushed the dollar higher against the yen. Moreover, German government bond selling spilled into U.S. Treasuries, pressing the U.S. 10-year yield to around 2.6%, prompting yen selling and dollar buying. The February U.S. employment report due on the 10th is expected to show solid results, and the March 14-15 FOMC is viewed as highly likely to raise rates. This will determine whether the dollar's peak is formed.
【Currency Trading Strategy】

We are putting USD/JPY on hold. It has surpassed the important level of 114.75; in the short term, going long would be prudent. If you take a short-term gamble, going long is suggested, but I do not expect it to rise above 118.75. Consider going long based on the rise so far, but today there is a jobs report, so act with caution when taking a position. If rate hikes are priced in, a sharp drop cannot be ruled out. Our plan to short below 113.50 remains unchanged. Also, the expectation that the pair could move to the 104 area by year-end remains.
EUR/JPY is also on hold. Like USD/JPY, it has crossed a key milestone of 121.35; in the near term, long positions look prudent, but sustainability is another matter. The March bearish trend’s range upper limit is 121.30, which is currently above, but if it breaks lower again, the decline could be substantial. Be prepared to sell here.
EUR/USD is on hold. There is no clear direction right now, so there is no need to force positions. We think the dollar may weaken in the future, so we don’t want to sell euros at a low. We will follow the breakout of 1.05 and 1.0650, but March’s low is seen at 1.0355; a short would not yield much.
GBP/JPY is on hold as well. It trades within 138 to 141.70; we will continue to follow breakouts from that range.
GBP/USD is on hold too. It is forming a base near the lows; selling now at current levels is not wise.
AUD/JPY remains long. It is holding its downside and has not broken down yet. We remain long until 85.90 is breached.
AUD/USD is on hold. Shorting now is unlikely to yield much. If supported at 0.7475, it may rise again; we may consider going long on the rebound.
ZAR/JPY remains long. Continue to hold long until it breaks below 8.50.

【USD/JPY: 2017 Expected Range】
Bull 115.25–129.85 (year-end 128.35) / Bear 103.60–118.75 (year-end 104.70)

【USD/JPY: March Range】
Bull 117.20–123.04 / Bear 111.75–117.25

【EUR/JPY: 2017 Expected Range】
Bull 119.80–134.85 (year-end 133.70) / Bear 107.95–124.75 (year-end 109.65)

【EUR/JPY: March Range】
Bull 121.15–127.65 / Bear 115.60–121.30

【EUR/USD: 2017 Expected Range】
Bull 1.0270–1.1700 (year-end 1.1550) / Bear 0.9480–1.0695 (year-end 0.9730)

【EUR/USD: March Range】
Bull 1.0355–1.0760 / Bear 0.9960–1.0420

〔COMMODITY MARKET〕
【Precious Metals Market Overview & Analysis】
Gold prices fell for the sixth day in a row, marking a five-week low. With rate hikes widely expected, position-adjustment selling has occurred. Short-term players are selling on the expectation of hikes, but for long-term investors, this drop presents a good buying opportunity. Although the February employment data is expected to be solid, the more important issue is the pace of future rate hikes. If the pace is kept at three hikes, the impact of hikes on the market could be limited, potentially confirming a bottom for gold. Gold has fallen to the 1200 level for now, but the first dip-buying timing is at hand.
Meanwhile, Draghi’s optimism about the euro-area economy, and the removal of the phrase “the Council would use all available measures as warranted” from the statement, suggest paying attention to potential euro rebounds. Also, political risks in Europe could increase gold's appeal as a safe haven.

【Precious Metals Trading Strategy】
Long positions in gold, silver, platinum, and palladium. Gradually advance dip-buying. Expect gold to drop to as low as $1,150. The March bullish range upper limit is $1,240, and it has already moved higher this month. Silver has breached the key $17.15 support, suggesting near-term downside to around $16.70. Platinum has a difficult downtrend, but a long-term bottom may be in. We will continue with a dip-buying approach. In the long run, March’s low will be an important dip-buying point; we will gradually accumulate. In general, do not sell precious metals during corrections; buy on dips. Precious metals are expected to rise in the long term, so holding them and buying more as stock prices rise is prudent. Place them at the core, alongside oil, and consistently pick up dips.

【Gold Price: 2017 Expected Range】
Bull 1117.65–1373.40 (year-end 1329.50) / Bear 1036.65–1187.20 (year-end 1059.00)

【Gold Price: March Range】
Bull 1150–1240 / Bear 1095–1165

【Base Metals Market Overview & Analysis】
Base metals prices are soft. Selling has occurred due to concerns about a rate hike in the U.S. Also, China’s February CPI rose 0.8% from January’s 2.5%, which may have added psychological pressure. Aluminum resisted declines, but copper has fallen to the 5600-level support, and nickel remains near the low range. Zinc is modestly lower, while lead has rebounded. A floor should form soon. Copper’s declines are affected by reduced Chinese imports and rising LME inventories; whether it can hold at current levels is crucial. If expectations for the Trump administration rise again, prices could turn upward.
【Base Metals Trading Strategy】

Longs in aluminum, copper, nickel, zinc, and lead. Prices have fallen quite a bit, but are approaching the anticipated March lower bound, making this a favorable dip-buying opportunity. The basic strategy remains dip-buying, and the long-term uptrend remains intact. Base metals are expected to be promising through 2020. Copper could move toward $7,700 by year-end; however, due to volatility, ensure proper risk management. Nonferrous names show long-term uptrends; as supply-demand improves, a major rally will come. You should consider including copper in your portfolio, even in small amounts.

【Copper Price: 2017 Expected Range】
Bull 5266–7704 (year-end 7522) / Bear 4520–5812 (year-end 4672)

【Copper Price: March Range】
Bull 5665–6250 / Bear 5300–5780

【Energy Market Overview & Analysis】
Crude oil continued to slide. Selling driven by concerns about the largest inventory levels in the U.S. also underpins the view that OPEC cuts may not fully address global supply glut. The EIA reports that crude inventories rose to 528.4 million barrels, the highest on record. The large drop is likely due to liquidations of long speculative positions. In addition to U.S. inventory concerns, there is caution about shale-oil production. However, continuing production at current levels would erode profitability. It remains to be seen whether past lessons will be learned by shale operators. Regardless, there are no oil companies that can sustain production long-term when prices fall below $50. It is important to recognize this. At the same time, Saudi officials said that OPEC should not assume that extended coordinated cuts will offset rising U.S. shale output. Oil prices rebounded due to coordinated cuts, and U.S. shale firms announced plans to increase production at energy-related meetings this week.

However, Saudi Energy Minister Khalid Al-Falih stated at the same meeting that “U.S. shale should not simply ride the rebound in oil prices.” Still, the outcome depends on U.S. shale producers. We will monitor developments.

【Energy Trading Strategy】
Long WTI and Brent; long NYMEX gasoline and heating oil; long natural gas. We had anticipated a drop to as low as $48.75, and that pullback has arrived. There is an opportunity to buy at such low levels. As with any market, there is risk of a deeper pullback, but as noted, price levels are determined by position-demand/supply. Therefore, buying on dips is appropriate. This month, moves have been within the bear-range; concerns are not off, but if declines are temporary as in January or February last year, it would be an ideal dip-buying opportunity. Our fundamental view remains unchanged: improved supply-demand balance could push toward $75 by year-end. Oil should remain a long-term portfolio holding.

【WTI Crude Price: 2017 Expected Range】
Bull 50–74 (year-end 70) / Bear 35–58 (year-end 38)

【WTI Crude Price: March Range】
Bull 53.20–63.70 / Bear 47.85–55.10

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◆ Notice
We publish a newsletter on trading strategies for the Nikkei 225 options.
It is "Tetsu Emori's 225 Options Real Trading."
If you are interested, please subscribe.
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＊ Seminar Schedule

March 11 (Sat) Investment Strategy Fair (Tokyo)
https://www.tradersshop.com/topics/expo2017/index.html

March 14 (Tue) Sunward Trading Seminar (Tokyo)
http://www.sunward-t.co.jp/seminar/2017/03/14/

March 18 (Sat) Monex Securities Seminar (Nagoya)
https://seminar.monex.co.jp/public/seminar/view/3660

March 28 (Tue) Japan Individual Investors Association Seminar (Tokyo)
http://www.jaii.org/2017/02/6791

March 29 (Wed) FX Trade Seminar (Tokyo)
http://www.gaitame.com/seminar/1703/29_li_emori.html

（In addition to the above, we also conduct private/separate seminars. If you are interested, please contact us.）

＊ TV Appearances

March 23 (Thu) 10:45–11:00 Stock Voice TV "Tokyo Market Wide" (Tokyo MXTV)
http://www.stockvoice.jp/

＊ Radio Appearances

March 16 (Thu) 15:10–16:00 Radio NIKKEI "The Money ~ Market Premier" (Premier Securities)**
http://market.radionikkei.jp/premiere/

March 17 (Fri) 21:30–22:00 Radio NIKKEI "Yo-Tre!" (FX Prime by GMO)**
http://market.radionikkei.jp/yorutore/

March 24 (Fri) 16:00–16:20 Radio NIKKEI "GO!GO! Jungle Market" (GogoJan provided)
http://market.radionikkei.jp/gogo/

April 20 (Thu) 15:10–16:00 Radio NIKKEI "The Money ~ Market Premier" (Premier Securities)**
http://market.radionikkei.jp/premiere/

June 15 (Thu) 15:10–16:00 Radio NIKKEI "The Money ~ Market Premier" (Premier Securities)**
http://market.radionikkei.jp/premiere/

＊ Regular Contributions Schedule

“Toyo Keizai Online” (every Thursday)
http://toyokeizai.net/

“Monex Mail” (First and Third Fridays)
http://lounge.monex.co.jp/pro/special1/

“Monex Securities—FX Outlook Report”

“Monex Securities—Monex Gold Report”

Tetsu Emori's Real Trading Strategy

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2017/3/10 Tetsu Emori's Real Trading Strategy