ECB Rate Hike This Week

September 6, 2022

Expect some nervous jitters. This is a big rate hike for them.

PRE-OPEN MARKET COMMENTS TUESDAY – Last Friday the market seemed content with the jobs report and the lower than expected hour wage component. After 2.5 hours of trading, the bottom fell out and the S&P 500 reversed almost 100 points. The upward sloping D1 trend line and horizontal support at SPY $390 were tested a second time. This will be a nervous week for the market as the ECB prepares to hike rates 75 basis points on Thursday.

This year the ECB has only raised rates by 50 basis points compared to the 225 basis points in the US (with another 100 basis points likey this year). Economic conditions in Europe have been soft and that is why the central bank has been reluctant to raise rates. Energy prices are soaring in Europe and Putin has shut down the Nord Stream pipeline. Initially it was explained as normal maintenance, but now Putin stated he won’t turn the pipeline on until some of the sanctions are lifted.

Energy shortages and blackouts were the theme this weekend. Oil prices remain high. China has power outages because of the drought (low hydro production) and California has record shortages (heat).

China is the biggest market threat in my opinion. There are signs that growth is slowing. The zero tolerance Covid-19 policy has 60 million people on lock down. The power outages are creating another round of supply disruptions.

The Fed is expected to raise rates by 50 basis points on September 21st. Given the hawkish rhetoric in Jackson Hole, that is trending towards 75 basis points now. Last week’s jobs report was good and it will give them breathing room to go there if they want.

ISM services will be released 30 minutes after the open. Be aware of that release.

August and September are typically the weakest months of the year. Once we get past the FOMC meeting in 2 weeks, I believe we will have an opportunity to sell OTM bullish put spreads. We need to watch for signs of support. SPY $390 is an important level. We want to establish a higher low at this level. If it fails, we will still be in a holding pattern.

Day traders should watch for a “holiday hangover”. Don’t expect the volume and trading activity to spring right back. After the nasty reversal Friday, we are not likely to have a substantial bounce until the downside is tested and support is established. That means the early bounce is likely to fail. If we see stacked red candles in the first 30 minutes, a gap reversal is likely. A better scenario for us is a weak rally with mixed candles and overlap. That would give us some time to find relative weakness. I suggest waiting for the ISM services number before attempting trades.

Support is at the low from Friday and resistance is at the high. This is likely to be an “inside day”.

The ECB will hike rates this week and support at SPY $390 needs to hold.

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