Market Overview
There has been a degree of uncertainty that has taken over markets as this week has developed. The change factor seems to have been a recovery on Treasury yields, which has in turn stabilised the dollar. Yields have picked up as a run of data out of the US has come in ahead of expectations. Starting with a surprisingly positive Nonfarm Payrolls report, inflation for both consumer and producers has been positive. There is a sense that the previous move into Treasuries and out of the dollar has been overdone. Coupled with a huge supply of Treasury issuance on the market this week, yields have pulled strongly higher (10 year yield up 20 basis points in just over a week). This stabilising of the dollar is also generating an uncertain outlook on Wall Street, and holding patterns across major forex. The huge corrective profit taking on gold looks to be a little more stable, even if the market is lower today. After wild volatility and a 10% correction on gold, the dust is still settling. However, the question of whether this is the end of the correction is still likely to be determined on the composition of any US fiscal support program (if one can be agreed). Risk appetite has also not been helped overnight by the announcement of Chinese data where industrial production and retail sales both missed expectation, suggesting the recovery is not going to be smooth in China either.
Wall Street closed marginally lower with the S&P 500 -0.2% at 3373 and still off its all-time highs. Despite this, the US futures are unwinding these losses early today with the E-mini S&Ps bouncing +0.3%. Asian markets have been mildly positive overnight, with Nikkei +0.2% and Shanghai Composite +1.0%. European indices are though looking a touch cautious, with FTSE futures and DAX futures marginally lower. In forex, there is a shade of risk aversion creeping in, with the slightest USD gain. It is interesting to see AUD performing well again, whilst NZD continues to struggle. In commodities, Gold is back lower by -0.5% but silver sharply down again -4%. Oil is once more mixed.
Friday is a day packed with data on the economic calendar. Eurozone Flash GDP for Q2 at 1000BST is the second reading of Eurozone growth and is expected to be unrevised from the “Preliminary Flash” reading of -12.1% (after a Q1 decline of -3.8%). Into the US session, the tier one data comes thick and fast. First up at 1330BST the US Retail Sales which are expected to show ex-autos sales being +1.3% in the month of July (after a +7.3% bounce in June). US Industrial Production for July is at 1415BST and is expected to grow by +3.0% on the month (after +5.4% growth in June). Capacity Utilization is expected to improve to 70.3% (from 68.6% in June). Finally the Michigan Sentiment at 1500BST is expected to decline slightly to 72.0 in August (from 72.5 in July). This is expected to be driven primarily by a deterioration in the current conditions component to 81.8 (from 82.8) whilst the expectations component is expected to improve slightly to 66.7 (from 65.9 in July).
Chart of the Day – AUD/JPY
With the increase in bond yields hitting the yen and risk appetite remaining broadly positive, Aussie/Yen has regained some upside momentum this week. However, as this market seems to still be fairly uncertain right now, we see a slight pullback in the past couple of sessions. Despite this, the trends remain positive and the bulls will be eyeing the next opportunity to buy into the weakness to test key resistance 76.85 for a move to the highest level since May 2019. The resistance of the June/July highs at 76.75/76.85 are under pressure after a series of higher lows throughout the past couple of months. A closing breakout would be the next step forward for the recovery. Strong momentum configuration is seen through RSI and Stochastics indicators suggesting weakness is a chance to buy (although there is a slight caveat with a lack of traction in the MACD lines). There has been a consistent use of the rising 21 day moving (today at 75.78) as a basis of support for the past six weeks. The hourly chart shows initial support around 75.85/76.25. Breaching 75.65 as an initial higher low would be disappointing now, whilst below 74.80 would mean the bulls lose control. We look to buy the weakness for a breakout above 76.85 which opens 77.50/78.85 as the next resistance band.
There is a sense of uncertainty as EUR/USD has re-asserted the trading range 1.1695/1.1915 in recent days. However, the improvement that has come in the past couple of sessions has been gradually fizzling out. We continue to view 1.1800 as a key near term gauge for this range and the retreat back towards this seems to be once more using this as a pivot support this morning. Hourly technical indicators suggest that this continues to play as a near term trading range. This means that the next break (either below 1.1685 or above 1.1915) is clouded in uncertainty. We are still minded of the huge run of dollar weakness and euro strength in recent weeks, which has not yet had any real corrective pressure. This lends us to prefer pressure on 1.1695. Technical momentum signals have tailed off on a near term basis, but remain positive on a medium term outlook. How the market reacts around 1.1800 pivot will determine our view, but for now the outlook has become somewhat neutral. Initial resistance at 1.1850/1.1865.
Cable continues to exhibit very similar traits to that of EUR/USD. Ranging for the past couple of weeks, Cable is holding support at 1.2980 but below resistance of 1.3185. Momentum indicators have tailed off and are retreating from their extremely strong positions of the late July bull run, but for now this is a consolidation. Within the range we continue to view initial resistance between 1.3100/1.3130 which has seen minor rebounds fail this week. Candlesticks with long upper shadows but small bodies imply a market were the bulls just cannot get traction. If this is followed by negative candlesticks, then it would suggest bull failure and mounting negative pressure. For now there is a marginal negative bias within the two week range and we favour a test of 1.2980, but there is a lack of conviction either way right now. Initial support around 1.3000.
Having looked so assured throughout much of this week, the bulls have just had a pause for thought in the past 24 hours. The rally has stuttered, but so far with the two week uptrend still intact and the market holding above 106.60, the recovery is still on track. However, yesterday’s neutral candle came with a long lower shadow, which suggest the threat of selling pressure which could not be sustained. The market is though just edging slightly lower again today and is eyeing a test of the two week uptrend at 106.60. It means that the near term breakout support 106.45/106.60 is an important near term support level to watch today. A closing breach could see the mini recovery losing momentum. Resistance is also growing around 107.00, a level which has all but capped the gains in recent sessions. The recovery needs a move above 107.50 to really suggest sustainable traction. A close below 106.00 would suggest a faltering rally and a retest of 105.30 key higher low.
For a while now, we have been looking to use a near term correction on gold to be a medium term buying opportunity. After the 10% correction in the past week, the move appears to be settling down now. Subsequently, we believe that this run higher is likely to be getting back on track once more. The technicals are stabilising, with RSI around 50 and Stochastics also beginning to tick higher, although the MACD lines which are more of a medium term indicator, are still in retreat. The main caveat for us comes not from technicals, but of how the market would respond to a US fiscal support package. This is likely to cause some near term volatility again if/when announced. In its absence though, the gold bulls are starting to get going again. The hourly chart shows improvement through higher lows and higher highs in the past 48 hours. Following initial consideration of resistance at $1940/$1949, the market is looking to pull higher again, and to use this as a basis of support now. The hourly momentum indicators are no longer corrective and are at least taking a more neutral configuration. It means that support initially at $1920 but more importantly at $1906 is growing in importance now as a near term gauge. Yesterday’s high of $1965 is an initial barrier this morning, but a retest of 1980/$1984 (old consolidation resistance) could now be seen. We cannot ruled out another lurch lower on the announcement of a US fiscal support package, but it looks to be that this weakness is a chance to buy and the market is looking for medium term opportunities now.
Considering the bulls have struggled for weeks to close the big bear gap at $45.20 and doing so has come with no change in sentiment on oil. A continued inability to get any sustainable traction to the upside means that the shackles remain very much on for the bulls. There is still a pull higher, where a series of higher lows remains intact and the market eventually pushed through resistance. However, it remains a painstaking rally of fits and starts but no conviction. In the past couple of weeks the resistance has formed at $45.80/$46.25 and we still prefer a positive bias towards testing this. Buying into the weakness is still also a preferred strategy, with $44.25 being initial support in the past week. Holding above $41.30 maintains the recovery outlook. Above $46.25 opens $53.10/$53.80 as the next resistance, but do not expect it to get there very fast.
In recent sessions, the bull run on the Dow is just beginning to show a few signs of fatigue. The market may have only closed -0.3% lower last night, but another (marginally) negative candlestick also breached the previous day low for the first time in ten sessions. It was also a second session in a row of a lower daily high too. At this stage, these are only minor signals, but makes for a more cautious market. It comes with the RSI hitting around 70 this week (potentially stretched) and Stochastics beginning to tail off. The bulls now need to defend the band of near term breakout support 27,580/27,625. A closing breach of 27,580 could see the market dragged back towards 27,070. We would still view any near term correction as a chance for the next medium term buying opportunity. However, the upside potential for this bull leg is questionable now. Resistance at 28,045 and 28,155 is now increasingly important.
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