Market Overview
The FOMC monetary policy decision has disappointed. Markets seem to be seeing this as a policy mistake. There has been a decisive dovish shift in expectations of future rate hikes for 2019, with perhaps just one priced into Fed funds futures. However the Fed is still guiding for two (albeit down from the previous three).
There was also only marginal ticks lower to inflation forecasts where expectations seem to be suggesting otherwise. This was a yield curve flattener, where longer dated yields fell whilst shorter increased. The 2s/10s spread has fallen from over 15bps to just 10bps.
Even the dollar could not find any real traction in this Fed decision, as initial dollar gains seem to have faded. Wall Street equity markets fell sharply in response and futures look shaky today. With the Fed continuing to reduce the balance sheet and not going as far dovish on the dots, it has been a disappointment for many.
Markets (at least initially) are telling the Fed that they believe there will need to be further cutting back of hiking expectations next year. Admittedly, it was a difficult line that the Fed had to tread this has been a decision that has pleased very few people.
The Bank of Japan did little in its monetary policy decision this morning, whilst Australian unemployment ticked higher to 5.1% (and higher than the 5.0% expected).
On Wall Street, a sell-off into the close, with the S&P 500 -1.5% at 2507, whilst futures are a further -0.6% lower today. In Asia, the response has been decisively negative, with the Nikkei -2.8% (an outperforming yen did not help) whilst the Shanghai Composite was -0.6%. European markets are under pressure too today with the FTSE 100 futures -1.8% and DAX futures -1.5%.
In forex, the initial dollar gains of the Fed decision have faded and the dollar is weaker across the G4 majors, whilst the commodity majors are struggling though in the risk aversion.
In commodities we see gold holding ground, whilst the oil price is once more strongly lower.
The UK is in focus today and is it not Brexit for a change (not least directly anyway), with retail sales and the Bank of England on the economic calendar.
The UK Retail Sales are at 09:30 GMT and are expected to show ex-fuel sales grew by +0.2% on the month in November (-0.4% growth in October) which pulls the year on year number back to +2.3% (from +2.7% last month). The Bank of England monetary policy at 12:00 GMT will show no change to interest rates at +0.75% again whilst the minutes are expected to show that this decision is unanimous.
In US data the Philly Fed Manufacturing index at 13:30 GMT is expected to improve to 15.6 (from 12.9 last month). US Weekly Jobless Claims are at 13:30 GMT and are expected to show a mild tick higher to 216,000 (from 206,000 last week).
Chart of the Day – EUR/AUD
The euro is in recovery mode against the commodity majors as risk appetite has suffered in recent weeks. This has manifested in an uptrend building in the past couple of weeks (which comes in today at 1.5840) and a major breakout above resistance at 1.5890 (the previous December high) as the market continues to recover. The decisive closing breakout above the 50% Fibonacci retracement of the 1.6357/1.5343 and this has gone through the 61.8% Fib level at 1.5970 which has now become a basis of support this morning. This continued recovery is backed by the improvement in momentum indicators with the RSI accelerating above 60, the MACD lines accelerating above neutral and the Stochastics rising above 80. The market is rallying towards a test of the next reaction high at 1.6250. The 76.4% Fib is a potential consolidation point at 1.6120 with the breakout at 1.5890 initially supportive.
The euro had been strong throughout the session yesterday in the run up to the Fed. The gains were pared after the Fed announcement, but there is still seemingly an appetite to buy the euro. A mild positive close (although closing 65 pips off the day high is not ideal for the bulls) is being followed by initial gains today. Although the market yet again failed to close above $1.1400, for the ninth time in three weeks, now that the Fed is out of the way, today’s session could be crucial. Already there is another upside test. A close above $1.1445 would be a near term breakout and help to build the bull case. Momentum indicators are ticking higher again and if the RSI went above 55 it would confirm a three month high too. There is a feeling that positive momentum is building, but can the bulls make their move? Initial support now $1.1330/$1.1350.
Cable has continued to consolidate over the past week. Having bounced off $1.2525, a rebound is putting consistent pressure on the confluence of the pivot at $1.2660, the six week downtrend (currently $1.2655) and the falling 21 day moving average (currently $1.2702). This is a crossroads for sterling. Momentum indicators are still positioned negatively on a medium term basis, but are also threatening to continue a near term improvement which could change the outlook. Above $1.2660 the resistance is still considerable, initially around $1.2800/$1.2850, but there would be a better technical configuration. The FOMC meeting has done little to impact on the outlook, and it will be interesting to see with the UK Parliament about to go on a two week break (from Brexit as much as anything) whether the technicals begin to play more of a role. A close above initial resistance of Tuesday’s high at $1.2705 opens a recovery.
With the dollar bulls unable to find too much headway on the FOMC, there is a continued risk aversion that is benefitting the yen. Subsequently, the medium term consolidation that the market has been in for the past month or so has now been broken to the downside. The market is now on a run of four completed negative candlesticks and with over 50 pips of downside this morning, this looks to be about to become a fifth. Furthermore, a breach of 112.20 on a closing basis would be a decisive change to a more corrective outlook. It would confirm the broken six month uptrend, with a decisive breach of the 89 day moving average (currently 112.58 and which has been a basis of support in recent months). Also, there is a significant deterioration in the momentum indicators, with the RSI below 40 for the first time since August, also which was the last time the MACD lines were in bearish decline below neutral. Selling into strength for a test of key support at 111.35. The hourly chart shows 112.20/112.60 is now a near term sell zone.
Gold
A bearish engulfing candle (bearish key one day reversal) has the ability to negatively impact on the outlook for gold. This pattern needs to now have a second negative close today to confirm. However there is certainly a feeling within this uptrend channel where corrections are consistently being bought into, that any drop back in the price will be another chance to buy. There is good support still in the range $1230/$$1236 with the recent higher low at $1232. Already the reaction this morning has been positive, with the market ticking higher. Yesterday’s low at $1241 is initial support to watch. The resistance on a closing basis comes in at $1250 whilst yesterday’s high of $1258 is a barrier that is now preventing a move to the resistance at $1266 and the channel high at $1269 today.
WTI Oil
In the wake of the breakdown below $49.40 which was a key outlook changing breakdown. Given the market had been consolidating after the OPEC production cut, to so decisively break the support, this has been a significant move. The old support at $49.40 now becomes a basis of resistance, with the series of lows in the recent range now a near to medium term sell-zone between $49.40/$50.50. The deterioration in momentum indicators, losing the recovery momentum and turning lower is a concern now and rallies are once more a chance to sell. The initial support is at Tuesday’s low of $45.80 whilst there is an old low at $45.60 from August 2017, a breach of which opens further downside towards $42.05 which is another key low from June 2017.
The Dow did not like the FOMC decision. Initial gains were sold sharply into the close, with the market breaching support at 23,345 to close at the lower level since November 2017. With futures set for further weakness, the session low at 23,163 is likely to be immediately tested, but the concern is that there is very little real support now until 22,400 area. Rallies are a chance to sell, with a key area of overhead supply between 23,345/24,000. Momentum is very negatively configured to point towards any rebound struggling for traction now. The RSI is approaching oversold at 30 and this could set up for another technical rebound, but the bulls will still find it very difficult.
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