Market Overview
Since the trade talks between the US and China broke down in May, the G20 summit has been seen as a key date in the diary.
The next time the paths of Presidents Trump and Xi would naturally cross would give them an opportunity to get round a table again in the hope that the two would be able to come to some agreement that would avert an all-out trade war which would risk plunging the global economy into recession. It is mutually beneficial for both countries to come to an agreement, but Saturday’s meeting is still highly uncertain of a productive outcome.
Steve Mnuchin recently suggested there was around 90% agreement, something that was also apparently the case when the talks broke down last time. There is a cautious consolidation that has overcome major markets in recent days as traders have looked towards the meeting at the G20 this weekend.
There could be a significant impact on markets should an agreement (or traction towards an agreement) be seen.
The knock on impact on the Fed (who would not be so compelled to cut rates) would have an impact across asset classes. Yields would jump, the dollar would regain lost ground and equities (which have jumped on the promise of looser Fed monetary policy) could slip back. Hence consolidation continues today. Aside from the G20, watch out for Eurozone inflation this morning. The clamour for a more dovish ECB would grow harder to ignore if inflation were to drop back further today.
Wall Street closed mixed last night with the Dow 10 ticks lower whilst the S&P 500 was higher by +0.4% at 2925. US futures are all but flat, and whilst Asian markets have been cautiously lower (Nikkei -0.5% and Shanghai Composite -0.9%), the Europeans are taking the lead from the US, with FTSE futures and DAX futures around the flat line.
In forex, there is a cautious consolidation look to the majors, with mild outperformance of JPY and CHF, but with little real direction. NZD is also holding its recovery. This slight air of caution is also reflected in commodities, with gold +$3 higher and oil off by half a percent.
There is a big focus on inflation for the economic calendar today. However, first up is a final reading of Q1 UK GDP at 0930BST which is not expected to see any revision from the +0.5% (+0.5% prior reading, +0.2% in Q4 2018). The UK Current Account deficit is also at 0930BST and is expected to show a deterioration to -£32.0bn in Q1 (from -£23.7bn in Q4 2018) which would be the biggest quarterly deficit since Q2 2016.
Flash Eurozone inflation for June is at 1000BST which is expected to see headline HICP remaining at +1.2% (+1.2% in May) with core HICP improving to +1.0% (from +0.8% in May).
Into the US session the Fed’s preferred inflation gauge, US core PCE for May is at 1330BST and is expected to stay at +1.6% (+1.6% in April). The final reading of Michigan Sentiment is at 1500BST which is expected to be revised mildly higher to 98.0 (from 97.9). The University of Michigan data will be of added interest after the Conference Board’s Consumer Confidence showed a big miss earlier in the week.
Chart of the Day – NZD/USD
The Kiwi has had a remarkable recovery rally in the past couple of weeks. This move has kept going in the wake of the RBNZ monetary policy meeting, but now the rebound has reached a key crossroads again. For the past 12 months the kiwi has consistently seen major turning points in the pivot band $0.6685/$0.6720. A breakout above $0.6685 for a two month high and the bulls look increasingly well positioned now. The RSI in the high 60s is its strongest since January, whilst the MACD lines have bull crossed and are pulling above neutral. The hourly chart remains strongly configured and intraday corrections remain a chance to buy. However, it is important to break clear of this pivot band $0.6685/$0.6720 for the bulls to open upside. Subsequently, a closing breakout above $0.6720 is key now. This would then open $0.6780. Whilst the higher lows continue the outlook will remain positive. The initial support band $0.6660/$0.6670 needs to be watched today.
Having broken out to three month highs last week, the neckline support around $1.1350 has become a key pivot. The market has spent much of this week using this as a floor, with old resistance becoming new support. This has meant a consolidation has developed across EUR/USD. Recent candlesticks have reflected this, with a doji candle yesterday perfectly summing this up. There is a lack of direction on the pair as traders look at key fundamental (Eurozone inflation) and geopolitical (G20) factors. Technically the outlook remains positive. Momentum is settling in positive configuration as the market consolidates the breakout. However, a close below the $1.1325/$1.1350 neckline would be a corrective signal, especially after all the consolidation as the market has pulled back from $1.1410. With little technical direction on the hourly chart either, we await the next catalyst.
Pulling back from the resistance around $1.2760 there has been a slow drift lower. The size of the recent candlestick bodies suggests there is very little conviction in the move. Furthermore, the pivot at $1.2650 has also remained intact during this period of trading. With the lack of conviction also reflected across momentum, this is another market in need of a push. Perhaps the G20 meeting will provide it. We are looking at two scenarios on a technical basis. A closing breakout above $1.2760 completes a six week base and opens a recovery of around 250 pips. A closing breach of $1.2650 support opens the $1.2505 key June low. Given the UK political uncertainty, the bias remains to the downside. However, it could be the G20 summit which is the driver near term. The dollar would rally off a successful meeting and be Cable negative.
The downtrend channel continues to play a major role in restricting the rallies. Subsequently near term strength remains a chance to sell. Time and again throughout the last two months, the 21 day moving average has called the highs. Currently the 21 day ma is at 108.15 and the channel resistance at 108.20. Yesterday’s intraday failure at 108.15 looks worrying for the bulls, given the formation of a small shooting star candle. With momentum indicators all medium term negatively configured, everything is still playing out for further weakness on Dollar/Yen. Another negative candle today with a close below 107.50 would re-open the recent low at 106.75 and further downside in due course towards 104.50/105.00. The resistance at 108.80 is now key.
Gold
The corrective move back from $1439 seems to have used the 23.6% Fibonacci retracement of the $1269/$1439 bull run (at $1398) as a basis of support. We have been talking of the importance of the psychological $1400 level, which is also a pivot on the hourly chart. Yesterday’s move bounced off $1400 almost to the tick, which only serves to increase the importance of this area of support now. Technically, despite upwards of $40 of decline from the high, gold remains strong. There are no technical sell signals on momentum, RSI holding above 70, no MACD cross and Stochastics looking strong around 80 still. A move below $1400 would be the corrective signal now. Whilst this level remains intact, it is difficult to get too much conviction in a correction. However, given an early failure at $1424 today (a shade above a mini pivot at $1420 on the hourly chart), this needs to be watched as resistance of a potential lower high. It is likely that this is all playing as consolidation before taking direction off the G20 meeting over the weekend. A successful Trump/Xi meeting would be gold negative.
WTI Oil
After a bull run of +15% in the past week and a half, the bulls had pause for breath yesterday. A day of consolidation with a neutral candlestick is pulling the market sideways for now. This has continued early today. The rally has formed a steep uptrend, so the remotest sign of consolidation would likely breach the trend. However, this should not be seen as the end of the bull run quite yet. Momentum is strong and simply consolidating. The RSI is hovering around 60, Stochastics settling in strong configuration and MACD lines are still advancing. A consolidation a shade below the 50% Fibonacci retracement of $59.60 does not necessarily mean an imminent reversal. There is continued positive configuration on hourly momentum as the market seems to be into a wait and see mode for now. There is support $58.20/$58.65, whilst a move to close above the 50% Fib and ideally above $60 would re-open the rally once more.
Another slight close lower on the Dow reflects the ongoing caution in the market as the G20 summit kicks off. Despite having pulled back from a multi-month high of 26,907 in the past week, for now, this move seems to be fairly well contained. Although the Stochastics have cross lower (an initial sell signal) there is a more benign look to a slip back on RSI and consolidation on MACD. This looks to be an unwinding phase for the Dow which has yet to do any real technical damage. There is breakout support at 26,249 but the first level of support to watch is on the hourly chart at 26,410. For now, the hourly momentum has unwound back towards neutral levels and this is simply a consolidation. However, breaching a first higher low at 26,410 would be a warning, something that would grow below 26,249. Weakness is a chance to buy still and back above 26,660 re-opens the upside. The G20 fallout will be the key caveat though if the talks between Trump and Xi end badly.
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