Market Overview
Markets remain fearful of a Donald Trump victory and the dollar is under pressure. Safe haven assets such as US Treasuries, the Japanese yen and gold are rallying, whilst higher risk plays such as equities are being sold. Moreover though, the dollar is corrective and this is impacting across the forex majors, with even the embattled sterling managing to rally against the greenback.
In the past week, the Trade Weighted Dollar Index has dropped from 99.0 to 97.1, which is almost 2.0%. Even the Fed has done little to support the dollar, in spite of there being little change to the expectations of a rate hike. The Federal Reserve quite predictably chose to hold off from increasing the Fed Funds rate, given the proximity to the Presidential election. The FOMC believes the “case for an increase in the federal funds rate has continued to strengthen” but has chosen to “wait for some further evidence of continued progress”. Whilst there was no explicit point towards a December hike, there is little to suggest it will not happen. According to the CME Group FedWatch tool, the probability of a December hike remains above 70%. For now the dollar is running on politics and not economics or fundamentals. Non-farm Payrolls may create some volatility tomorrow but it is Trump’s polling that seems to be key right now.
Equities remain corrective with Wall Street again falling away last night as the S&P 500 fell -0.7% to 2097. Asian markets have been mixed although the better than expected China services PMI has helped Shanghai to outperform, Japan is on national holiday today. European markets are trading lower in early moves. In forex, the dollar is again weaker across the forex majors with the safe haven yen the standout performer. Gold and silver are also back higher whilst oil has managed to unwind some of yesterday’s significant losses.
The services PMIs are in focus today with the UK services PMI at 0930GMT expected to dip very slightly to 52.4 (from 52.6) whilst the US ISM Non-Manufacturing PMI is at 1400GMT which is expected to be 56.0 (down from 57.1). Also in focus is the Bank of England’s Super Thursday in giving its rates decision, minutes and quarterly inflation report. No change is expected to the 0.25% rates or QE, but it will be interesting as this is the first public questioning Mark Carney will have had since his announcement over ending his tenure in June 2019. US Factory Orders are at 1400GMT and are expected to be +0.2% for the month. For the UK there is also a decision on a court hearing on the legality of Theresa May triggering Article 50 which is due to be announced at 1000GMT and could also have a significant impact on sterling.
Chart of the Day – S&P 500
For several weeks the drift of lower highs and deteriorating momentum has been threatening a top pattern on the S&P 500. Now the breakdown has been achieved with a two day close below 2120 as the market has become increasingly fearful of a potential Trump victory but also I feel the concern over a Fed rate hike in the offing in the coming weeks. The technical outlook is increasingly corrective. The implied downside move is 60/70 ticks from the 2120 neckline which means 2050/2060 could easily be seen, with 2050 also being an old basis of support. The concern is that the momentum indicators continue to suggest downside potential with the RSI only in the mid-30s, but also that rallies should be treated as a chance to sell. This means that the resistance now in at the neckline of 2120 should be watched as an area of overhead supply. Yesterday’s high around 2109 means that there is now a band of resistance to sell into between 2109/2120. The initial support is yesterday’s low at 2094 with 2075 another minor support, however the major support of the post-Brexit low is not until 1992. It would need a move above the late October high at 2154 to change the corrective outlook.
The euro continues to rally against the dollar as the fearful markets continue to re-price for a potential Trump victory. It will be interesting to see if this rally begins to stutter though ahead of Non-farm Payrolls and polling day in the US next Tuesday. Technically the move is now seeming to push through the resistance of the long term pivot at $1.1100 and I think that if this is backed by a confirmation of the RSI above 60 then this move could easily continue back towards a test of the old downtrend which links the lower highs over the past few months. The hourly chart is though hinting at a possible slowing of the run with hourly RSI, MACD and Stochastics all just rolling over in the past day. Initial support at $1.1085 but with the longer term pivot still a feature around $1.1050 this could easily be an area in which the market begins to settle prior to the big decision of how to trade in the wake of the result of the election.
With the dollar correction of the past few days, Cable has really begun to take off and is now on the brink of a confirmed breakout. The trading range between $1.2080/$1.2330 has been in place for the past three weeks and had previously been threatening a breakdown, however the change in tack has the bulls in the ascendency for now and this has driven some intraday attempts to break to the upside. A confirmed breakout above $1.2330 would complete a 250 pip base pattern target to $1.2580. The momentum indicators are now far more positive for the near term recovery and a closing breakout today would confirm the move. For the medium to longer term I would still be viewing rallies as a chance to sell. There is some minor resistance around $1.2480 which was posted just after the flash crash but realistically there is little really until $1.2600 area. The hourly chart show a reaction low late yesterday around $1.2280 which is initial support with more considered support at $1.2250.
The outlook has changed on many of these dollar pairs and the safe haven attraction of the yen has helped to drag Dollar/Yen lower to breach two key levels of support. Initially the support at 103.15 was the first really key reaction low within the October recovery, however subsequently today the market has also broken below another key reaction low at 102.80. The strength of the bear candles reflects the selling pressure, with the momentum indicators all sharply corrective now, with the RSI well below 50 and the Stochastics falling sharply. The concern would be that there is actually very little real support now until the old lows again. There is a minor pivot at 101.20 but until the crucial 100 level there is little significant support of any note. The hourly chart shows negatively configured momentum and intraday rallies that are being sold into. There is a band of resistance now between 103.00/103.50 which will be eyed for potential selling opportunites.
Gold
Gold has shot higher in recent days as part of the Trump “fear” trade. Three strong bull candles in the past four days have unwound gold back above $1300 again. There is now a band of resistance between $1300/$1310 to negotiate. Yesterday’s candle was very interesting though as the price failed to hold on to the initial break above $1300 and posted a close at the marabuzu (the mid-point of the traded range) which would suggest the bulls are still lacking a bit of conviction. If today’s move again fails to close above $1300 having had another intraday move above it, then there may be some starting to question the move. In effect this is a medium term unwind to the neckline of the previous breakdown in October. The momentum indicators need to continue to improve with the RSI holding above 60 especially notable. The hourly chart shows positive momentum but also a mild rolling over of the RSI, MACD lines and Stochastics. The support at $1295.50 will now be watched as a breakdown could induce a correction. For now I am happy to stick with the rally but I am very aware that this is a tenuous rally that could be short-lived.
WTI Oil
An enormous inventory build in the EIA crude oil stocks of 14.4m barrels has sent WTI oil crashing through the long term uptrend that has been in place since February and is becoming an increasingly concerning sell-off. The daily RSI is below 40 and has further downside potential, whilst the Stochastics and MACD lines are corrective too. Whilst yesterday’s low at $44.95 is the immediate support, the next support of note is $44.20 but the subsequent key level is the September low at $42.55. Another aspect for concern is that the old support and pivot around $46.50 has become the basis of resistance and is also coinciding with the underside of the old uptrend and also the 144 day moving average. The hourly chart shows intraday unwinding rallies are being sold into with the hourly RSI failing in the mid-40s, the hourly Stochastics rallies failing with negative configuration and the hourly MACD lines consistently negative. There is now a band of resistance between $46.50/$47.35 which would now grow as resistance and a near term sell-zone on a bounce.
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