Market Overview
As if we did not already know it, Donald Trump seems to want to continue to ramp up the rhetoric in the trade dispute with China. Perhaps what we did not know was that Trump is willing to go all in.
On Friday, Trump talked about a further $267bn of tariffs on top of the potential $200bn which has recently been consulted on which is itself on top of the $50bn of tariffs already officially in place. How Emerging Markets (EM) react to this will be key for risk appetite in the coming days. Already the dollar is looking to regain strength in the wake of a strong payrolls report on Friday, and if we see currencies such as the Chinese yuan coming under pressure, then the dollar could surge again, at least against EM currencies.
For now the reaction seems to be relatively well contained and the yuan is fairly stable but if this comes under selling pressure there could be a renewed bout of risk aversion. Although they were broadly weaker, the selling pressure in Asia has not been precipitous, whilst European markets are ticking only slightly lower at the open and US futures are up. Asian data has been interesting overnight, with Japanese GDP better than expected at an annualized 3.0% for the quarter, whilst China inflation was also higher than expected with CPI at +2.3% (+2.1% exp, +2.1% last) although producer prices dropped with the PPI at +4.1% (+4.1% exp, +4.6% last).
Wall Street closed lower again with the S&P 500 -0.2% at 2871 with futures looking to unwind some of this move. This has left Asian markets mixed, with the Nikkei +0.3% (on stronger growth) but Chinese Shanghai B -1.0% lower. European markets are mildly lower in early moves.
In forex markets there is a mild degree of dollar strength continuing from last week, but the yen is an outperformer after Japanese growth impressed.
In commodities, gold is slipping back a touch further on the dollar strength, whilst oil is starting to form support again
Traders will be looking out for monthly UK GDP numbers today at 09:30 BST which is expected to growth by +0.2% in July (having grown by +0.1% in June). UK Manufacturing Production is also at 09:30 BST and is expected to have grown by +0.2% for the month of July (+0.4% in June).
Chart of the Day – EUR/GBP
With a floor seemingly starting to form on sterling as Brexit newsflow has recently become more supportive, the outlook is starting to turn around on EUR/GBP. Friday’s intraday break below £0.8935 not only confirmed the breakdown of the three month uptrend channel, but it also marked the first key support having been breached within the former recovery. With the market now posting a lower high of £0.9052 (below the £0.9100 August high) the market is now also posting lower lows. Although the market did not sustain the break into Friday’s close, the move is being led by the momentum indicators, with the RSI falling below 50 to its lowest since the uptrend channel began, whilst the MACD lines are finding traction in an acceleration lower and the Stochastics have crossed back lower again. Support in line to be tested comes in at £0.8895 and then £0.8850 initially. It now seems as though near term rallies are a chance to sell. The hourly chart shows a near term resistance band initially £0.8955/£0.8990 to look for the next selling opportunity.
There is another test of support underway now as the pair has dropped back in the wake of Friday’s strong payrolls report. A decisive bear candle with a close around the day low is putting immediate pressure on the $1.1505/$1.1530 support again. A close with a 1.14 handle today would certainly now be a negative development for the euro (whilst also being dollar positive). The momentum indicators show this is a key moment, with the Stochastics accelerating lower and the MACD lines threatening to cross down. A breach of $1.1505 would also complete a small head and shoulders top implying around 200 pips of downside and a test of the key August low around $1.1300 again. The importance of last week’s high of $1.1660 is also growing as a lower high (effectively the right hand shoulder). The hourly chart shows a market on the brink but not yet with negative configuration near term.
Sterling may be holding up better than the euro in combating the renewed dollar strength, but the bulls still have work to do to prevent the recent recovery from rolling over. The support around $1.2800 remains key and for now technical indicators are not showing the deterioration that is present on EUR/USD. The RSI is holding around 50, with the MACD lines still rising and Stochastics solid. However, there is a shooting star candlestick from Friday’s session to consider, whilst the early hints at a move lower today could begin to weigh. Friday’s high of $1.3028 is another failure to hold a move above $1.3000 and reflects the ongoing choppy market that is likely to now prevail (due to the uncertainties of Brexit politics mainly). The hourly chart reflects this stable outlook near term, with the initial support at $1.2870 still intact. Initial resistance is $1.2960/80 but the slight negative bias needs to be watched.
The last couple of weeks has shown Dollar/Yen lacking any decisive direction. Each time there is a candlestick that seems set to provide the impetus for a move, we see a retracement move. And so, once more following Thursday’s decisive bear candle, there has been a bullish pullback. As the European session takes over today we see a doji candle, again lacking direction. The momentum indicators reflect this, with the RSI and MACD lines almost entirely neutral, and although there is a slight negative slip on the Stochastics there is little really to go on. Within the medium term range above the pivot at 110.00, there is now a higher low support at 110.35. Resistance is mounting between 111.75/112.15. The hourly chart shows a very mixed outlook with initial resistance at 111.25.
Gold
The market has spent the past week fluctuating around $1200, but with the strong payrolls report on Friday there has been a slip back which is threatening to test the key near term support at $1189 again. The bulls would have been hoping to leave this support behind in their recovery, for it to play out as another higher low above $1183 but this is now under pressure today. A breach of $1189 would not be decisively negative, but a move below $1183 would be a significant blow as it would once more open the $1160 key low. There is a negative bias to momentum that is developing, with the Stochastics tracking lower but whilst the RSI remains above 40 and the MACD lines have not crossed lower, there will still be a sense that the recovery remains in play. The problem is that the resistance is mounting now at $1207 below the rebound high of $1214. The hourly chart shows the bulls under pressure today as a negative bias takes hold and intraday rallies are now being sold into and $1196/$1200 is building as resistance.
WTI Oil
The correction on WTI has progressed for the past four sessions to put pressure on the old pivot of $67.00, however, for now the pivot support is holding. The momentum of the correction is though now coming through on signals such as the MACD lines which are threatening to cross lower around neutral and Stochastics which are accelerating lower. A closing breach of $67.00 opens the medium term range lows again and puts the market once more below the 144 day moving average. Although in itself this is not an overly negative move, it reflects the fact that the medium term bulls are no longer in control. With the RSI in the low 40s the market has tended to bottom around here in the past two months, so this will become a gauge of the selling pressure. The early signs today are reasonably positive, with the market responding well to Friday’s rebound off the pivot. The momentum on the hourly chart has ticked higher, and a move above the $68.50/$69.00 resistance would really improve the outlook again.
The market continues to consolidate having retreated back to the 76.4% Fib level at 25,845. However amidst this consolidation comes a concern that the momentum indicators are beginning to roll over. Chief concern comes with the Stochastics, which are now tracking lower having completed a bear cross. The MACD lines are also threatening to follow suit and it now puts added pressure on this consolidation to build support above last week’s low at 25,806. Whilst the support remains solid there is an argument to say that the slip back on the momentum is actually a positive for the medium term push higher, as it helps to renew upside potential. However should the market now complete a closing breakdown below 25,806 then this ends the consolidation and the move turns corrective once more within the uptrend channel (which comes in today at 25,510). The key higher low at 25,608 would also then come into play, whilst leaving Thursday’s high at 26,074 as a lower high key resistance.
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