Market Overview
We are in the midst of number of disputes/renegotiations over trade, leading to uncertainty over how global trade links involving the US might look going forward.
Stresses on emerging markets and global supply chains have helped to strengthen the dollar in recent months. Relations with China have been key for market sentiment, and it is difficult to know how an agreement between the US and Mexico, announced yesterday fits into the larger picture. The initial reaction seems to have been risk positive, but the moves on the dollar could be key. Yields have ticked slightly very slightly higher (although the yield curve continues to flatten, as per the 2s/10s spread which is now below 20 basis points), and the dollar has found a degree of support this morning, but direction looks uncertain. Last week’s speech by Jerome Powell at Jackson Hole hit the dollar and it still needs to find a footing once more.
The dollar weakening in the past few sessions and has also come to break some key downtrends and further question the longevity of a the medium term rally. However, this US/Mexico deal is important for how the market views other trade renegotiations. Already, tone surrounding US trade with China remains negative, with Trump saying that 'it is not the right time'.
For today, equities look to be supported on the perception of better risk appetite, however, the dollar is also starting to claw back some recent losses and is higher across the majors. In recent months the dollar has performed strongly on emerging markets weakness, so this coming on the Mexico deal would suggest perhaps the market is not so impressed after all. How the dollar moves over the coming days could be key.
On Wall Street another all-time high was seen on the S&P 500 (+0.8% at 2897), but futures are stalling the rally early today. Asian markets have also pared gains into the close with the Nikkei +0.1%. In European markets there is a mixed to slightly positive open but the gauge on sentiment could be taken on how the DAX trades as it is a very export heavy market.
In forex, USD has found a touch of support after recent weakness, with GBP a key underperformer, but also interestingly, the commodity currencies struggling as well (AUD and NZD) which could be a sign that sentiment is not all that strong today after all.
In commodities, the mild dollar outperformance is pulling on gold which has slipped back a touch after two strong sessions, whilst oil it also a touch lower.
It is a quiet European morning for traders with regards to the economic calendar today. The S&P Case Shiller House Price Index is the first real focus, at 1400BST which is expected to stay at +6.5% (from +6.5% last month). The Conference Board’s Consumer Confidence at 15:00 BST for August is expected to remain strong at 126.80 although this would be down from 127.40 and would be the lowest level since April. The Richmond Fed Composite index is also at 15:00 BST and is expected to slip a touch to +18 (from +20 last month).
Chart of the Day – GBP/AUD
Will the bear trend continue? The downtrend that has been in place for the past four months came under serious threat amidst last week’s rally, but a decisive corrective bearish candle around the trend resistance suggests that the bears may not be done yet. The pivot around 1.7650 that put paid to the mid-August rebound, seems to still be a factor (with the high around 1.7590), whilst the market struggled under the 55 day moving average (currently 1.7703) as it did in July. However, the bulls are still fighting and this is clearly a key crossroads for the market, with momentum indicators suggesting as much. The RSI has turned lower again around 55 as it did through the resistance of early July, but how the MACD lines now move could be the key. The MACD lines have turned up again, but as a failure under neutral would be a renewed sell signal. With a neutral candle on Monday, and an early pull higher today has left initial support at 1.7505. Should this rebound fail and then post another bear candle today, it would add bear momentum and bolster resistance around 1.7590. Support at 1.7405 is a higher low above 1.7280. The hourly chart shows 1.7580 is a near term pivot as resistance now.
The recovery on EUR/USD has come with little fanfare, but has been impressive nonetheless. Thursday’s negative candle seems to have merely been a pause for breath as the rebound has since continued to push higher. Moving above the resistance at $1.1630 in a decisive manner goes a long way towards aborting the near to medium term negative outlook. The bulls will now be intent on pulling above the July resistance and confirming a renewed momentum in the recovery. The momentum is increasingly impressive now, with the RSI into the high 50s and at its highest since March, whilst the Stochastics are also strong. If the MACD lines can rise above neutral then the configuration will be medium term bullish once more. The breakout above $1.1630 becomes a basis of initial support now and the old floor at $1.1505 again is a key gauge as corrections are increasingly bought into. Initial resistance at $1.1745.
Even as the dollar has suffered renewed corrective pressure in the past few days, it is interesting to still see sterling struggling to make any significant headway on Cable. As we have seen EUR/USD bursting higher, on Cable the positive candles of Friday and Monday have not even yet wiped out the downside move from Thursday. The resistance at $1.2935 is intact from last week and the overhead supply of the old $1.2955 low also remains intact. The technical outlook is improving though, with the four month downtrend breaking. However, there is still much to do for the medium term outlook to sustainably improve, as the RSI is still struggling in the mid-40s whilst MACD lines limp higher. The support at $1.2800 has to remain intact now as a higher low, but a close above $1.2935 is also needed otherwise the bulls will quickly tire.
It is interesting to see the momentum of last week’s rally has just been curbed, once more at the old 111.40 pivot. A decisive close above 111.40 would be a positive development, but for now this remains a very ranging market. The momentum indicators are no longer looking corrective, but equally with the RSI struggling in the mid-50s, and MACD lines unable to generate traction, the bulls seem unable to break the shackles. Even a close above 111.40 would still have question marks under 112.15. Support at 109.75 is now key, but this is a market still searching for decisive direction.
Gold
A huge turnaround on Friday has dramatically improved the technical outlook. The consistent two month downtrend channel has been broken as a strong bull candle has been followed up by another positive session yesterday. Breaking through the falling 21 day moving average and above the old key $1204 pivot has flipped the outlook. The $1183 reaction low is now a higher low and the momentum indicators are leading the market higher. The resistance at $1217/$1220 is now the difference between a technical rally that flounders and a rally of substance. The hourly chart shows support at $1202 as an initial gauge.
WTI Oil
The bulls continue to rebuild their position of control as the market has continued to recover. Bouncing from $64.45, WTI has posted seven positive sessions in the past eight days and also pushed above the first key lower high within the previous sell-off at $68.35 which confirms the broken bear trend. This comes as momentum indicators continue to improve impressively, with the MACD and Stochastics lines having both crossed higher and advancing well, whilst the RSI is into the mid-50s and at its strongest since the July correction kicked in. The next key test is $70.45/$71.10 and with momentum building well, this should be seen now. As sentiment has picked up, how the bulls react to the first bear candle will now be key. Another higher low above $66.00 will be a strong signal, especially if it is above the old pivot at $67.00.
A renewed bull run has materialised as the market has pulled decisively higher. A huge bull candle which gapped higher at the open and did not look back has left support around the 76.4% Fibonacci retracement level at 25,845 and has re-opened a full retracement to the all-time high at 26,616. Any retreat to the 76.4% Fib level is now a buying opportunity. Momentum indicators are strongly configured with the RSI pulling into the high 60s, whilst the MACD and Stochastics lines tick higher again, and all showing further upside potential. The medium term bulls will note how the correction last week found a higher low at 25,608 which is in the support band of the 25,587/25,693 old breakout highs. There is minor resistance at 26,338 but the market has taken on a strong outlook to buy into weakness once more.
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