Market Overview
The dollar bulls have been spluttering in the early part of this week despite the apparent support of tax reform. With passing tax reform through the Senate, Donald Trump is one step closer to getting his first real tangible achievement as US President, however it is not over the line yet. The market reaction has been interesting as initial signs of dollar strength have been tentative. The yield curve in the US has not steepened as it might have done if the market truly believed in the growth (and inflation inducing) potential of tax reform. The US 10 year yield remains stuck around 2.40% and whilst this continues, it will be hard for the dollar to make sustainable headway. The less riskier assets such as the yen and gold which were likely to underperform have held up relatively well. Furthermore, Wall Street exuberance seemed to dissipate yesterday too, with equities lower today too.
Dragging Brexit negotiations are also not helping general market sentiment today, after UK Prime Minister May failed to agree with the EU over the terms needed to move on to trade negotiations. Northern Ireland has historically been an incredibly divisive and difficult issue and it seems once more to be the case in Brexit negotiations. Sterling is under pressure this morning as a result.
Wall Street closed mixed and well off the highs of the day, with the S&P 500 -0.1% at 2639, whilst Asian markets were slightly lower overnight and European markets are also ticking lower at the open.
In forex, there is a degree of mild support for the dollar, with sterling the main underperformer. The Aussie dollar is performing strongly after retail sales beat expectations and the RBA held rates steady at 1.5%.
In commodities, gold is mildly lower and oil is also a touch weaker.
Focus will be on the services PMIs today. The Eurozone final Services PMI for November is at 09:00 GMT and is expected to confirm the flash reading of 56.2 which would mean that the Eurozone Composite PMI is expected to be 57.5 which would be up from 56.0 in October.
The UK Services PMI data is all important as the service sector accounts for around 80% of the economy. After positive readings for Manufacturing and Construction, expectation may be elevated going tonto today’s services data which is expected to slip slightly to 55.0 (from 55.6 last month).
The US trade balance is at 13:30 GMT and is expected to deteriorate slightly to -$47.5bn (from -$43.5bn last month. The ISM Non-Manufacturing is at 15:00 GMT and is expected to slip slightly to 59.0 (from an extremely strong 60.1 last month).
Chart of the Day – EUR/AUD
Calling the top in any market can be a risky game, however when the momentum indicators all begin to align to say the same thing the potential for success increases. Friday’s bearish outside day turned back from a new high dating back to February 2016, whilst another negative candle posted yesterday began to see the selling pressure increase as the market went below the 1.5565 support from last week’s low. Momentum indicators are signalling that the bulls have lost the impetus in the run higher now, with the RSI below 60, Stochastics giving a crossover sell signal (not yet confirmed) and the MACD lines also giving their own bear cross sell signal. Today’s bear candle is adding to the downside momentum too. The hourly chart shows that the market is now trading below a clutch of falling moving averages and that intraday rallies are now a chance to sell. There is initial resistance at 1.5620/1.5640 below another pivot at 1.5680, whilst intraday rallies are now a chance to sell. Initial support is at 1.5505 with 1.5455 the first key reaction low.
The anticipated strengthening of the dollar in the wake of the Senate voting for tax reform has failed to substantially materialise so far as traders seem to be somewhat circumspect. This is reflected in the consolidation on EUR/USD back around the lows of the now four week uptrend channel. A breach of the channel would not be bearish, it would simply reflect the market becoming more neutral once more. The support to watch remains just above $1.1800 with last week’s low at $1.1807. A breach of this support would signal a corrective move beginning to take hold. However, for now we wait, below the $1.1960 two month high and a lower high at $1.1940. Daily momentum is levelling off, still in positive territory, but watch for the Stochastics which are just beginning to drop back a touch. The RSI below 50 would also be a negative signal now. The hourly chart is giving little direction, with the initial support at $1.1928.
There is a near term uncertainty to the outlook suddenly. Having peaked at $1.3550 it looked as though the bulls had lost control, but yesterday’s long legged doji candle probably reflects perfectly the mood around Cable right now, one of indecision. This is driven by the political backdrop surrounding Brexit negotiations that are dragging on. This drag is beginning to hit sterling this morning and a move below yesterday’s low at $1.3415 is a concern. An unwind to the key breakout at $1.3335 still seems to be perfectly possible if this move continues amidst the political uncertainty in the next couple of days. The European traders have taken over this morning with a negative attitude to Cable and momentum on the hourly chart is turning more negative. The next support is $1.3375. The politics moves forward to Thursday now where May and Juncker next meet. Before then, trading will be on rumour and speculation of the prospects of a deal.
The dollar bulls failed to push on yesterday and it was interesting to see that the recent rebound hit the pivot resistance around the old neckline at 112.95 only to fall away again. The resulting intraday drop meant that a doji candle formed (not far from being a gravestone doji in fact) which reflects added uncertainty to the recovery. The momentum indicators have been improving, with the crossover buy signal on the MACD lines a positive medium term indication. However the candles of the last two sessions are questionable for the bulls and there needs to be a decisive reaction today to get the recovery back on track. So far, there has been a marginally positive reaction higher, with the hourly chart indicators turning higher again from areas where the buyers have been supportive. Watch 112.35 support today as an initial key indicator of intent. A close below 112.35 (yesterday’s low) would suggest a rolling over near term. The bulls need to break decisively through 112.95 to regenerate upside momentum in the recovery.
Gold
The bearish momentum that was likely to have been generated from the passing of tax reform through the Senate has so far not been seen. Yesterday’s mildly positive candle has steadied what might have become a wobbly ship, and for now the market remains in range mode. The momentum indicators are interesting as the more sensitive Stochastics and RSI are showing signs of continued consolidation, whilst the MACD lines (which take more of a bigger picture view) are crossing lower. This all suggests that the pressure is mounting on the range lows, but for now the support is holding on. The low at $1270 remains intact which protects $1265/$1263 and ultimately the key October low at $1260. The hourly chart has become somewhat more of a consolidation in the last few days (leaving aside the Michael Flynn related volatility) with almost no near term directional bias. A chart awaiting the next catalyst.
WTI Oil
OPEC’s deal seems to be supportive, but with the bulls failing under $59.05 on Friday to leave a slightly lower high at $58.88, is the momentum coming out of the bull run? The market looks to be pulling back once more and this could begin to turn into a correction of the bulls are not careful. A multi-month uptrend channel is in formation still, however a sharper 6 week uptrend is being tested following yesterday’s strong negative candle. The recent sessions have all had higher lows as the market has formed support at $56.75, but the 6 week trend support is $57.50 today and is creaking, whilst the 21 day moving average has also been consistently supportive for several weeks, (today at $57.08). If these are broken the bulls will begin to lose their control. Look also at the momentum indicators which are also testing multi month uptrends. This is one to watch increasingly.
Wall Street has been like a juggernaut in its bull run higher, however the reaction to the passing of tax reform will have been a concern. An initial strong gap higher but the positivity dissipated as the session wore on yesterday. The resulting intraday pullback has now closed the initial breakaway gap at 24,322 and this will be a concern for the bulls. The subsequent reaction today could be key as to whether the market begins to correct again. Is this a “buy on rumour, sell on fact” moment? Batting against the bull trend has been a tough game over recent months, but another negative looking candle today would begin to draw in corrective momentum signals again. Friday’s low at 23,921 is key support near term, with the hourly chart showing initial support around 24,200/24,250. Hourly momentum is also now showing signs of bearish divergence. We may not have seen “the” high, however, “a” high looks to be in place for now.
DISCLAIMER: This report does not constitute personal investment advice, nor does it take into account the individual financial circumstances or objectives of the clients who receive it. All information and research produced by Hantec Markets is intended to be general in nature; it does not constitute a recommendation or offer for the purchase or sale of any financial instrument, nor should it be construed as such.
All of the views or suggestions within this report are those solely and exclusively of the author, and accurately reflect his personal views about any and all of the subject instruments and are presented to the best of the author’s knowledge. Any person relying on this report to undertake trading does so entirely at his/her own risk and Hantec Markets does not accept any liability.