Market Overview
There is a mildly negative feel to trading sentiment for the new trading week. Traders were a touch betwixt and between with how to respond to Friday’s payrolls report and although the US bond markets shut for Columbus Day today, which could have given rise to a subdued session today. However although bond markets have been key to driving market sentiment in recent sessions, away from the US, there are two major factors that are driving market moves today and set to push a stronger dollar by proxy. In China, after the lull of Golden Week, the People’s Bank of China has cut the reserve requirement ratio by 100 basis points which could pull a weaker yuan and concerns across emerging Asian currencies.
Furthermore, this morning, we see Italian bond yields pushing higher once more as the stand-off over the Italian budget continues. Italian 10 year yields are now over 3.5% on the tens (for the first time since 2014) and this is pushing the spread over German Bund well over 290 basis points again. This is a drag on the euro. A stronger dollar comes from the risk negative impacts of these factors and equities are slipping again. It will be interesting to watch sterling though today after reports that some positive traction was coming in the Brexit negotiations whilst Japanese Prime Minister Abe suggested that the UK would be welcomed into the Trans Pacific Partnership with “open arms”.
There will be a key speech on Wednesday from Michel Barnier, the EU’s chief Brexit negotiator, and as European traders take over today, sterling is slipping back again.
Wall Street close lower again on Friday with the S&P 500 -0.5% at 2885 although futures are a touch lower in early moves today. In Asia, Japan is closed for public holiday, whilst China has returned from Golden Week with a raft of selling to play catch up on. European markets are taking a mixed to negative outlook in early moves today.
In forex, sterling is an underperformer, whilst the euro is also under pressure.
In commodities, gold has dropped back by $6 (-0.5%) whilst oil is also continuing to slip lower for a third straight session.
There are no major economic releases today. Also Japan has a public holiday for Health-Sports Day and the US has a public holiday for Columbus Day. US equities are open but the bond markets are shut today.
Chart of the Day – GBP/JPY
Is Sterling about to break decisively higher again? Amidst the volatility of the UK party conference season and Brexit chatter, GBP/JPY has been consolidated above a near term breakout at 147.00 which is an old pivot and has become supportive again. This has simply become a consolidation within the recovery uptrend of the past seven weeks. Three positive candles are building upside pressure again, whilst momentum indicators having slipped back are beginning to turn higher again. Especially, the focus comes with the Stochastics turning up, and the MACD lines threatening too. The medium term breakout of the 8 month downtrend has become supportive whilst the 144 day moving average which had been a basis of resistance is now supportive. There is still considerable overhead resistance in the 149.70/150.00 range to be overcome, but the fact that in a risk averse market environment and Brexit wobbles, the support for sterling has been impressive. This could drive a sterling breakout in the coming days and GBP/JPY is one to watch.
Three sessions after EUR/USD decisively broke the support around $1.1500 there are still questions over the medium term outlook. Effectively, $1.1500 is now a line to gauge the difference between a corrective near to medium term outlook and a stable outlook. There has been a deterioration in momentum indicators but again, not decisive. The Stochastics are the only indicator flashing a warning sign and even then the signal could quickly turn higher should a third positive candle be posted today. The support at $1.1465 is growing in importance and whilst the reaction high at $1.1595 remains intact the pressure will grow on $1.1500. The hourly chart is relatively stable in outlook now and momentum indicators are taking on more of a consolidation outlook. This remains a market at a crossroads.
With two solid positive candles the outlook is looking to improve once more. Sterling based charts remain difficult to call on a meaningful on going basis due to the complexities of Brexit politics. Seemingly, with a more amenable tone being struck in recent days, sterling prospects have improved. This is reflected in the uptick on momentum indicators and the market turning strongly higher to leave support at $1.2920. The market is trading above a clutch of flat moving averages and a two week downtrend has been broken. This sounds all positive and means that for now there is a positive bias. However, the situation could all change pretty quickly. For the technicals though, resistance at $1.3215 is the next lower high to test, whilst support above $1.3000/$1.3055 retains a more positive outlook near term.
The bulls need to be a touch more wary of this uptrend now there has been a second consecutive negative candle. This is the first time this has happened in the four week uptrend and begins to form some doubt in the mind. The uptrend is now being tested and comes in at 113.55 which is a shade above the first support at 113.50. Momentum indicators are still positive, but the Stochastics have rolled over. The bulls need to prevent support at 113.50 from being breached as it could begin to usher in some profit taking. Subsequent support is 113.15 and 112.50. The hourly chart shows a relatively calm consolidation for now but a move below 113.50 would also complete a small top pattern of 100 pips. Resistance from Friday comes in at 114.10.
Gold
Gold found very little direction out of the Non-farm Payrolls report on Friday. A run of consolidation candles subsequently continues as the market trades around $1200 still. This comes as the 21 and 55 day moving averages flatten (reflecting the near to medium term ranging consolidation, whilst momentum indicators given very little direction either. An early morning slip back has seen the market testing the initial support at $1195. The hourly chart shows a move below here would suggest a mini breakdown that would pressure further weakness into the $1180s again. Support is then $1184 and $1180. Resistance would also then grow at $1208. However, these are still the most minor of details currently as whilst gold trades in the range $1180/$1214 there is little real direction.
WTI Oil
Having completed a second negative session on Friday and a further slip back today, WTI has corrected back to now break the support of a three week uptrend. The profit-taking is growing now and a retreat back to the medium term support at $71.65/$72.90 could be seen. Momentum is gathering in this move now, with the Stochastics crossing back lower on a sell signal and RSI back under 60. A correction would still be seen as a chance to buy, but it just depends upon how far the correction goes before the renewed push higher resumes. Resistance is mounting at $76.90 now whilst a close back above $75.25 (the old July high) would be a positive signal.
Equity markets are increasingly corrective and the Dow is testing its first key supportive indicator. The uptrend of the past 7 weeks (today at 26,550) has come under threat as the market has formed another negative session on Friday as the pressure has mounted. However, an intraday breach of 26,349 could not be held into the close and the move has not been confirmed. A close below would complete a top pattern that would imply 420 ticks of further correction. Saving the support on a closing basis would have been a relief for the bulls and momentum indicators do though retain their positive configuration. For now, this still suggests that corrective moves are opportunities to buy. However the bulls need to resume control soon as the sharper seven week uptrend has been broken. The bottom of the three month uptrend channel comes in at 26,125 and it would need a decisive breach to change the positive medium term outlook.
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