Market Overview
Markets are gearing up for what is set to be a crucial Fed meeting this week. Any signal that hints at what might push the Fed one way or another is being amplified. A terrible reading from the New York Fed manufacturing has once more elevated expectation of a dovish FOMC decision (although this is a survey taken in the midst of the US/Mexico tariff threats that subsequently have come to nought).
Treasury yields are ticking lower again, which is a drag on the dollar, whilst yield differentials are again pulling in favour of yen outperformance. As the dollar goes down, this is once more helping to build support for gold. Crucially though it does seem as though this is all noise around the edges whilst traders brace themselves for the FOMC meeting. How the Fed sets its stall out for a new potential rate cutting cycle, could be decisive for medium term market outlook. Given that equities have gone almost nowhere for the past week, this is another area likely to be conclusively drive by the Fed.
It is worth keeping an eye on sterling today, coming under pressure amidst the elevated prospects of a no deal Brexit. The second round of the Conservative Party leadership election sees Brexiteer Boris Johnson seemingly set to sail through to the final run off. Yesterday saw sterling breaking down to five month lows against both the dollar and euro. Newsflow on UK politics remains a drive of sterling underperformance.
Wall Street closed marginally higher yesterday (S&P 500 +0.1% at 2890) whilst US futures are giving back these gains this morning at -0.1%. There was a mixed to slightly negative outlook across Asian markets with the Nikkei -0.8% and Shanghai Composite all but flat. In Europe there is another mixed look in early moves, with the FTSE futures +0.1% whilst DAX futures underperforming with -0.1% hints at mild risk aversion today.
In forex, the risk averse move are also being reflected in JPY and CHF outperformance, whilst AUD is under pressure.
In commodities, gold has found its feet once more this morning trading +$6 (or +0.5%) higher. Oil has taken yesterday’s slip back and again trades marginally low today.
Traders looking at the economic calendar will be on the lookout for the German ZEW Economic Sentiment this morning at 1000BST. Consensus expects a deterioration to renew with a drop back to -5.9 (-2.1 in May) whilst the ZEW current conditions component is also expected to deteriorate to +6.0 (from +8.2). Eurozone final HICP is also at 1000BST with no change expected to the flash readings of +1.2% on core HCIP and +0.8% on core HICP.
For the US data later in the session, the US Housing Starts for May are at 1330BST and are expected to improve to 1.30m (from 1.29m in April), whilst Building Permits are expected to improve marginally to 1.24m (from 1.23m in April). Aside from the data, will also be worth watching out for the comments of ECB President Mario Draghi who is speaking at 0900BST.
Chart of the Day – USD/CHF
An interesting crossroads has been reached on Dollar/Swiss. The recovery from 0.9850 has progressed well in the past week. However, the rebound has now unwound to a confluence of resistance. The six week downtrend and former support of the old May low at 1.0005 join today, just around the psychological parity level. Can the dollar bulls sustain this recovery? Momentum indicators are still improving but for now have just unwound back towards neutral. The bull cross on the MACD lines is a important turning point though. This is only the third bull cross of 2019 and the previous two have been the signal to sizeable recoveries. The hourly chart shows strong recovery momentum with hourly RSI consistently supported around 40 and hourly MACD lines consistently holding above neutral. There is initial support at 0.9950/0.9960 with Thursday’s higher low at 0.9915. With yesterday’s intraday correction bought into, the bulls will still be confident despite the early slip today. A recovery is still looking solid, but the run of higher daily lows needs to continue (latest at 0.9965). A breakout above 1.0005 (especially on a closing basis) would be a sign of continued strength for the next key resistance at 1.0100.
Having so decisively broken back under $1.1265, the bulls are looking to fight back. A session of fluctuation ended with mild gains yesterday and the bulls have carried that into today. However the key test remains how the bulls deal with $1.1265 which is now a basis of resistance. This is now a key near to medium term pivot. Holding on to support at $1.1200 is important as a gauge. The momentum indicators have dropped away again and the concern is that corrective signals (such as the Stochastics bear cross) and RSI under 50 are reflective of a market increasingly selling into strength again. A failure under $1.1265 would add to these concerns. A close below $1.1200 would re-open the $1.1110 lows. The importance of $1.1265 is such that a decisive close above brightens the outlook once more. The hourly chart shows that this rebound has simply unwound hourly RSI to 60 and hourly MACD to neutral. If the sellers are in control, then it is an ideal opportunity again.
Given the rally on the majors against the dollar yesterday, a decisive negative candlestick with a key downside break to multi-month lows is a real concern for sterling. The underperformance of the pound is once more being laid bare. UK politics is undoubtedly still sterling negative and rallies are a chance to sell. What is now a run of four negative candles in a row has broken below support at $1.2555 to open levels not seen since the turn of the year. This means that the support at $1.2475 and the spike low at $1.2435 are the next important areas of note. Momentum indicators pulling decisively lower again add to the negative outlook. The RSI is now down around 30, although given the previous move lower went into the mid-20s, this level should not necessarily be restrictive. Given that the Stochastics are in decisive decline and MACD lines are crossing lower, this is a market still under big downside pressure. There is now a band of resistance $1.2555/$1.2605 to capture the next lower high.
We continue to view Dollar/Yen as a market to sell into strength. Although there has been a consolidation over the past couple of weeks, at no stage have the dollar bulls managed to regain any sort of control on this market. Resistance is continually found at lower levels within a downtrend channel (which comes in as resistance at 108.90). The trend channel is also flanked by the falling 21 day moving average at 108.90 too. Momentum indicators remain negatively configured and reflect an outlook of selling into strength. The RSI has again rolled over, now under 40. The hourly chart shows RSI and MACD in deterioration again. Initial support at 108.15 protects the key lows at 107.80.
Gold
In the wake of Friday’s failed breakout, there have been some mixed signals thrown out by gold. Friday’s doji is still a potential exhaustion signal, but the initial selling pressure in yesterday’s session has been bought into. Only a small negative close in the end leaves the market sitting at a crossroads as the disappointment profit taking has not set in yet. Momentum indicators remain positively configured on a medium term basis, and it is interesting that the bulls are again happy to quickly come in to support the market. Ticking higher early today reflects this. However, it would not take much for a near term corrective outlook to form, especially if a negative divergence on the RSI (and potentially Stochastics) that are threatening, begin to take hold. The hourly chart shows a near term pivot at $1330 is still holding and is a basis of support. However, a failed rally under $1348 (the old higher which is a basis of a pivot) would again add to the potential for a bull failure. A move below $1330 would open $1319/$1324 support. It is important to reflect upon any corrective move as still just corrective within the medium term uptrend now and our preferred outlook is that it would ultimately represent a medium term chance to buy.
WTI Oil
Since Thursday’s day of elevated volatility, the market has begun to settle again. However, given the recent downward pressure, this does not bode especially well for the bulls. Yesterday’s small negative candle with a small daily range suggests a market that has absorbed much of the recovery and is once more reverting to the position of recent weeks, which is to sell into strength. Although the sharp three week downtrend has been broken, this has not been a signal to the start a recovery. Momentum indicators remain stuck in negative configuration and although they may have stabilised slightly, there is no realistic sign of recovery. Resistance at $54.80 remains untested, whilst the intraday high from Thursday at $53.45 is also still intact as the market has rolled back over. With a drift towards more negative positioning on the hourly chart, the initial support at $51.60/$51.70 is the only factor preventing pressure on the $50.60 key low again.
The consolidation continues. The Dow has now spent the past six sessions consolidating in a range of around 300 ticks (just over 1%). The floor remains the previous breakout level at 25,958, whilst last week’s high at 26,249 is resistance. Momentum indicators are increasingly benign with RSI and Stochastics increasingly flat. The MACD lines are also back around neutral. With yesterday’s daily range of just 115 ticks (the Average True Range is currently around 250 ticks) this is clearly a market waiting for the FOMC meeting on Wednesday. It is difficult to see much direction in front of that meeting (unless geopolitics blow up in the meantime). A closing break either side of the support at 25,958 or resistance at 26,249 would drive direction.
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