Market Overview
After trading sentiment took a deepening and more aggressive turn for the worse yesterday, there has been something of an early retracement today. There has been a run of dollar strength mostly arising from concerns over contagion from Turkey but also a weakening of the Chinese yuan tied into a rout on commodities with a selloff on equity markets. However, in a rare bit of good news in the trade dispute, China announced today that there would be a trade delegation sent to meet the US counterparts at the end of August. This would be the first such (official) meeting between the US and China in several weeks, hinting at a thawing of relations and has helped to stabilise sentiment today. The Chinese yuan is a big gainer in this, pulling USD/CNH (offshore rate) back from 6.95 to below 6.90 this morning. This is helping to drive a recovery on forex against the US dollar this morning. However, the likelihood is that this is a mere near term unwinding on little real news. The move could though be a case of unwinding some of the hugely long dollar position, but there is nothing fundamental that has changed the story and recent trends on global markets are likely to resume in due course.
Wall Street rebounded into the close, leaving the S&P 500 -0.8% lower at 2818, whilst futures are around +0.4% higher today. Asian markets did though the struggle for traction, with the Nikkei almost -0.1% lighter, however, European markets are taking more of a steer from the US and are looking for a decent bounce today. In forex, there is a rebound in risk, with the yen being the main underperformer, whilst the dollar is also giving back some gains. There is little at this stage to suggest this is a sustainable turnaround though. Australian unemployment came in better than expected at 5.3% (5.4% exp) which is helping the Aussie dollar to be the best performing major currency today. In commodities, there is a mild rebound for gold and silver this morning after huge losses yesterday, but nothing yet substantial. Oil has also tick slightly higher after selling off sharply yesterday on the commodities rout and the EIA inventories coming in way above levels anticipated.
Traders will be looking out for the third of the three key UK key data points of the week today, with UK Retail Sales at 0930BST. The market is expecting adjusted Retail Sales (ex-fuel) to grow by +0.1% in July and be +2.8% for the year (down from +3.0% in June). US Building Permits are at 1330BST and are expected to improve to 1.31m (from 1.29m last month, with Housing Starts expected to improve to 1.27m (from 1.17m in June). Philly Fed Manufacturing is at 1330BST and is expected to slip a touch to +22.0 (from 25.7) which would still be strong.
Chart of the Day – AUD/JPY
Aussie/Yen is a classic forex signal of appetite for risk, and the downside break of the pair below key support at 80.50 has taken the market to its lowest level since November 2016 and highlights increasing fear across financial markets. AUD/JPY has been trading in a 400 pip sideways range between 80.50/84.50 since February, testing both highs and lows of the range several times over the past six months. However, the sharp decline in the past week from the old mid-range pivot at 82.60 has driven a change of outlook, breaking decisively the floor of support and opens for further weakness. The momentum indicators have taken a deteriorating shift now away from a ranging look with the RSI at 30 (and near five month lows), MACD lines accelerating lower and Stochastics bearishly configured. Yesterday’s decisive close below 80.50 confirmed the downside break. There is now a band of overhead supply with the numerous range lows in the band 80.50/81.00 which is now overhead supply for this morning’s technical rally, but this is now a market to sell into strength. There is a band of old support 78.50/79.00 which is initially supportive but the 400 pip breakdown target implies 76.50 in the coming months. A close above 81.00 opens for a bigger technical rally.
The euro found some respite from the selling pressure into yesterday’s close and a further rebound today is seeing EUR/USD higher today. However, in the course of the past few weeks, near term rallies have consistently been sold into and there is little to suggest this will not again be the case today. The market rebounded from around $1.1300 to leave a doji candlestick on the daily chart (potentially signifying uncertainty with the prevailing trend) and with the RSI ticking higher from around 30, there is scope for a rebound. However, the resistance built up at $1.1430 is a near term barrier, whilst the hourly chart shows indicators have already unwound and the market is into the band of resistance $1.1365/$1.1430 and may begin to struggle for traction now. The main overhead supply comes in above at $1.1500. Expect this rally to be short lived and the dollar bulls to regain the ascendancy to retest $1.1300 once more. The next real band of support is $1.1100/$1.1280.
Sterling has been falling almost non-stop against the dollar for two and a half weeks. In that time there has been the occasional hint at a recovery, but time and again the move has been sold into. UK economic data has done nothing to improve the picture (perhaps retail sales today will be different) but the early morning rebound on Cable seems to be a dollar negative move than anything else. The initial bounce has much to do if it is to be considered a serious recovery. The underside of the old downtrend channel has become a basis of resistance (at $1.2810 today), whilst Tuesday’s high of $1.2825 is key near term resistance. There is a tick higher on a very negative RSI, but as pointed out yesterday, the RSI fluctuated below 30 for four weeks in May as Cable continued to fall. Rallies remain a chance to sell and the likelihood is that this move will be another opportunity. The hourly chart shows this move having unwound the momentum indicators to levels where the sellers have tended to resume control. A band of resistance $1.2720/1.2825 is also a barrier weighing early today. Expect a retest of yesterday’s low at $1.2660 in due course, whilst $1.2600 is on the cards still.
The uncertainty and lack of decisive direction on Dollar/Yen showed through once more yesterday. With broad volatility having been elevated this week, it is perhaps not surprising that the magnitude of the candles has also taken a step up. However, there is also a fluctuation in how the candles have moved, with Tuesday’s strong rebound move simply retracing yesterday. The resistance of the near term pivot band 111.15/111.40 continues to grow, whilst the downtrend of the past few weeks has been breached to signal a very mixed near to medium term outlook. Taking 110.60 as a gauge still, with the market breaching this as a level of support then the outlook takes on a mild negative bias. However, the dollar bulls seem unwilling to give in lightly. Support at 110.10 remains from earlier in the week and is now a signal for confirmed bear direction, with 110.40 initial support.
Gold
Gold remains under significant pressure as any hint of recovery continues to be sold into. Having recalibrated the downtrend channel as the market has accelerated lower today, the price has hit the lower trend line this morning and induced an intraday bounce. However it does not look to be a bounce that will last for long. The market has unwound from the early low $1260 today but has simply unwound the market to yesterday’s close. There is very little on the daily chart to suggest the rebound is being momentum driven, with the RSI still extremely negative, whilst MACD and Stochastics are bearishly configured. This all suggests that near term rallies remain a chance to sell. There is resistance initially around $1180 and then $1194.50.
WTI Oil
Amidst yesterday’s route across the commodities complex, the huge surprise in the EIA crude oil inventory build has driven oil sharply lower. Over recent sessions, WTI has been toying with the medium term pivot at $67 but huge selling pressure has smashed this as a basis of support in a move which seems to be outlook changing, with the market trading below the 144 day moving average for the first time in 11 months. The decisive breach of $67.00 confirms that the bulls have now lost control on a medium term basis and opened the key June low at $63.60 to be tested. The move comes with a decisive deterioration in medium term momentum too, with the RSI below 40 at two month lows whilst MACD and Stochastics accelerate lower again. Near term rallies are now a chance to sell, with the pivot at $67 now a key basis of resistance. Initial support now $64.45.
The prospects of the Dow turning decisively corrective and topping out are increasing as another rebound rolls over once more. Momentum indicators are certainly calling for a corrective move, with the RSI dropping below 50 and at five week lows, a MACD bear cross sell signal gaining traction and the Stochastics heading quickly towards bear territory. The failure to reclaim ground back above the 61.8% Fibonacci retracement level (of 25,367) is a concern as this is now becoming a basis of resistance, and the pressure has breached the support of the higher low at 25,120. A closing breach of the support would complete a near term topping process which would imply a 460 tick further correction towards 24,660. The 50% Fib level at 24,980 is a potential initial consolidation point but the market is certainly threatening to turn more corrective on a near to medium term basis. Price resistance comes in with Tuesday’s high of 25,340 which is a lower high. The failure to fill the gap at 25,493 is also a growing concern as the potential is there for this to be a “breakaway gap” (something that can often be seen at the beginning of a new trend).
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