Market Overview
Geopolitical tensions in the Middle East have ratcheted up overnight with the US launching cruise missile attacks on the Syrian airbase reportedly responsible for the chemical attacks this week. This change of strategy against Assad threatens to destabilise the region with Russia and Iran likely to be unhappy with the move. As the US has bombed Syria this has driven risk appetite lower and pushed traders into safe haven plays such as US Treasuries, gold and the yen. The US 10 year yield briefly dipped back below 2.300% today, a level seen as a key pivot for traders. Whether this begins a trend of safe haven buying remains to be seen though, as geopolitical shocks have tended to be less influential on markets recently and can often simply be a kneejerk reaction. This all comes in front of two key events today, with the US President Trump meeting with President Xi of China for a first formal meeting. Also it is Non-farm Payrolls today which will also drive increased volatility.
Wall Street closed marginally higher on the session with the S&P 500 +0.2%. It is interesting to see Asian markets stabilising overnight with the Nikkei +0.4%. The European markets are lower in early moves and it will again be interesting to see if these moves are retraced as the dust settles. Forex markets who the dollar to be a little weaker but with only really the safe haven yen outperforming. Gold has been strong early today, up around $12, whilst oil is also continuing higher amidst the heightened Middle East tensions.
Payrolls will be the primary focus for traders today but in the morning the UK Industrial Production at 0930BST could have an impact on UK assets. With a monthly growth of +0.3% the year on year Industrial Production is expected to improve to +3.7% (from +3.2% last month). However, into the afternoon the US Employment Situation will be crucial at 1330BST. Non-farm Payrolls is always the headline release and is expected to grow by 180,000 on the month. This would be down from the upside surprise of 235,000 last month and in the wake of the very strong ADP number on Wednesday there is a real risk of another upside surprise. However in truth, any number between 150,000 and 250,000 would cause little to impact. The average hourly earnings will be keenly watched with a +0.3% monthly growth expected, which would sustain earnings growth of 2.8% for the year. Other data to watch includes the unemployment rate which is expected to be 4.7% again and the labor force participation which was 63.0% last month. Another key number is the U6 unemployment which at 9.2% still has a little slack to unwind but a downside surprise would be hawkish.
Chart of the Day – EUR/JPY
Euro/Yen has been corrective in the past three weeks as the market has retreated from 13 back to below 118, but this move has been a correction within the longer term recovery uptrend that has been forming over the past 10 months. With the rebound from the support of the uptrend yesterday, could this be the support coming into hat should be bought? The candles in the past three days have been continuing the correction which has recently posted nine closing bear candles in a row. However, the small bodies of the candles reflect a lack of conviction in the selling and once more gain today, early selling pressure has not been sustained. This is the third time that support has formed in the range 117.30/40. It is also coinciding with the uptrend support and the RSI at 30 which is becoming historically stretched. The hourly chart shows an eight day downtrend intact but the momentum indicators are only mildly negatively biased. If the support at 117.30 can hold again today the outlook could begin to improve. A move above 118.80 is needed to complete a small base pattern and imply 150 pips od further recovery, whilst there is a near term pivot resistance at 119.00. A close below 117.30 would re-open the next key support at 116.30.
The euro continues to consolidate but also is now beginning to threaten lower again. The past two completed daily candles have been mildly negative with the momentum indicators beginning to turn lower again the pressure is just increasing slightly. The hourly chart shows the support around $1.0640 is coming under ever more threat as the overhead resistance of the old pivot at $1.0710 continues to weigh. A decisive breach of $1.0640 opens $1.0600 initially but the main support is just under $1.0500 where the $1.0492 February/March lows kicked in. It is payrolls today and the market is likely to consolidate in front of the data but expect volatility to increase after 1330BST.,
Sterling has become increasingly rangebound against the dollar in recent days as the technical indicators continue to become ever more benign. The moving averages are now all within 40 pips of each other, whilst the RSI and MACD momentum is increasingly neutral. The converging trendlines of the hourly chart remain restrictive to decisive direction with yesterday’s reaction high at $1.2505 again finding resistance, whilst the lows of the past few days have all been around $1.2450. This is all comig ahead of Non-farm Payrolls this afternoon which is likely to drive a breakout and some direction. The near term key levels to watch are support at $1.2415 and resistance at $1.2505.
The support of the uptrend that has been in play since September is being breached but the market is still consolidating sideways. The uncertainty surrounding the recent outlook is shown in the small bodies of the last three closing candles. This reflects a indecision in the market. There has been a pull towards the 110.09 key March low but this support remains intact and even this morning there has been another unsuccessful attempt to breach the key low. The momentum indicators are negatively configured and suggest that the bears remain in control. However whilst the support remains intact there is something of an impasse, and with the upside seemingly limited by the 111.60 old key flor which is now resistance, there is a lack of direction in the market. Perhaps payrolls will provide the catalyst. Below 110.09 opens 109.35, the 50% Fibonacci retracement of 100.07/118.65.
Gold has received a boost from the overnight news of the US bombing the Syrian airbase. The price has broken above the resistance that had been forming at $1261, but has also breached the $1263.80 February resistance too. This means the market is now testing the long term downtrend that has been in place since July 2016. Is this a move that will drive a sustainable upside break? The technicals are strong and there is further upside potential with the RSI around 66. However this was a fundamentally driven move and could easily be a knee jerk reaction that quickly finds its profit takers. Furthermore, it is Non-farm Payrolls today and a strong report could quickly turn a retracement. The hourly chart shows $1261/$1263.80 is now supportive and an unwinding move to close back below this would be a disappointment.
WTI Oil
The reaction of yesterday’s session is encouraging for the bulls. There could have been a change in the outlook following the disappointment of the surprise inventory build on Wednesday but the corrective move has simply been bought into. With the price rallying back above the previous resistance at $51.22 the improving outlook continues and the early moves in today’s session is adding to the improving outlook. The market is positing a continuation of the higher lows and corrections are being bought into. The move has now hit the $52.20 implied base target from the move above the neckline of $49.60 whilst resistance at $52.55 has also been breached. Next resistance is at $53.80. The daily RSI is also subsequently above the key 60 level which has been a struggle for the bulls throughout much of 2017 whilst a close above this level would be a strong near to medium term bull signal. The hourly chart shows initial support at $51.60/$51.90 with a strong band of support now between $49.90/$50.80 with old resistance turning into new support.
After Wednesday’s sharp decline on the back of the Fed minutes it was important for the selling pressure not to ramp up yesterday. A consolidation candle suggests that the market reaction may well have already been contained. On a daily momentum basis there has been little real reaction on the indicators and the RSI continues to consolidate around the neutral 50 point, with the MACD lines settling around the zero line and Stochastics flattening. Although there seemed to be a false break of the 5 week downtrend, if the bulls can now hold and support for another higher low above 20,518 there could be a settling of sentiment once more. The old band of resistance between 20,754/20,777 is once more back in play.
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.