Market Overview
Politics continue to dominate the agenda with the trade war and political machinations of Donald Trump’s presidency under the spotlight, leading to a more cautious look to markets developing in recent days. The anticipated $16bn of trade tariffs initiated by the US on China imports, subsequently reciprocated equally by Chinese tariffs, have been implemented, thus adding to the reticent outlook on risk. It is interesting also to see the dollar beginning to regain a degree of traction this morning in the wake of last night’s FOMC minutes.
The minutes showed that the Fed is ready to go on its next rate hike (still highly likely to be September) whilst it is also concerned that an escalation of the trade dispute could be the biggest concern to impact on the 'strong' economic activity. Even though Treasury yields have barely budged and the yield curve has continued to flatten, the stronger outlook from the FOMC and the trade fears back in focus have given the dollar renewed strength today. With the negative sentiment from the trade tariffs, there is a corrective feel to equities with the traditional dollar positive/risk negative feel to markets this morning. The big question is whether the dollar correction of recent days will now be roundly seen as a chance to pile back in.
Wall Street closed marginally lower yesterday, with the S&P 500 one tick down at 2862, and with the futures showing this marginally weaker sentiment continuing, there is a cautious feel to Asian indices have been mixed to slightly positive, with the Nikkei +0.2% and Shanghai B index up +0.3%. However, European markets look to be more cautious in their opening moves, which are slightly lower.
In forex, the dollar is stronger across the major currencies. The underperformance of the Aussie dollar is the standout, owing to the increased political risk as Prime Minister Malcolm Turnbull comes under resignation pressure.
In commodities, as the dollar has regained some lost ground, the gold price is dipping back a couple of bucks,, whilst oil is consolidating after a hugely impressive push higher yesterday, helped by a larger than expected EIA crude oil inventory drawdown.
There is a focus today back on economic growth as the flash PMIs are announced for the Eurozone and US. Throughout the early European session, a stream of countries release their PMIs, with the Eurozone Flash Manufacturing PMI at 09:00 BST which is expected to tick a touch lower to 55.0 (from 55.1 last month) whilst the Eurozone Flash Services PMI is expected to improve back to 54.4 (from a revised lower 54.2 last month), with the Eurozone Flash Composite PMI expected to be 54.5.
In the US Flash Manufacturing PMI is at 14:45 BST and is expected to slip a touch to 55.1 (from a downwardly revised 55.3 last month) with US Flash Services PMI at 55.9 (down from a downwardly revised 56.0). US New Home Sales at 1500BST expected to improve to 643,000 (from 631,000 last month), with Eurozone Consumer Confidence expected to continue to deteriorate to -0.7 (form -0.6 last month) although the rate of deterioration is slowing.
Chart of the Day – EUR/AUD
There has been a decisive shift in the outlook in the past couple of sessions, as the euro has started to outperform just as the Aussie has come under selling pressure due to increased political risk. This is reflected in two decisively strong bull candles completed that have put an end to a corrective four week downtrend, with a third on the way today. Suddenly, not only is the question whether a retest of the 1.5890 will be seen, but also a breakout that would open 1.6140/1.6190. The momentum indicators are certainly going with this one, with the Stochastics and now also MACD lines crossing higher, however, the RSI gaining traction above 60 which has been a basis of renewed selling pressure in recent weeks is key. This suggests strengthening momentum and a test of 1.5890 at least. The near term breakout support comes in at 1.5725 but and anything into the 1.5760/1.5800 will be seen as a chance to buy near term.
The euro bulls are still pressing higher but the move is at a key crossroads. Since the dollar rally began in April there has been a run of lower highs and lower lows on EUR/USD that link to a four month downtrend. This trend is being tested now after the euro posted another bull candle yesterday. However, as the market has dropped back in the early moves today, this comes as the RSI has turned lower yet again around 55 (as it did throughout July) and under resistance at $1.1630 (yesterday’s high of $1.1625). This morning’s move is the first time during the recent rally that a previous day’s low has been broken and unless the bulls can react as the session goes on today, then the potential is for this rebound to peter out. The old support at $1.1505 will be gauge now and the hourly chart shows that a move below a higher reaction low at $1.1490 would suggest that the move is turning more negative once more. The importance of $1.1630 as resistance is growing.
As with the euro, the rally on sterling against the dollar is struggling around the resistance of the four month downtrend. The rally still looks to simply be a move to unwind the oversold momentum and renew downside potential within the bear trend. The bounce from $1.2660 came to $1.2935 yesterday and with the old support at $1.2955 turning into new resistance, this is a move that the sellers will eye as another opportunity. The Stochastics and MACD lines may be rising still, but with the RSI back around the 45/50 level where the rallies of July succumbed, this seems to be another key crossroads. The resistance of the falling 21 day moving average (currently $1.2910) is another gauge. The hourly chart shows the market having topped out after minor negative divergences and a move back below $1.2810/$1.2825 would be key.
The dollar bulls are looking to renew positive momentum against the yen. Helped higher as Fed monetary policy has played a role to divert attention away from trade tariffs, the dollar bulls have managed to form two consecutive bull candles and a third is looking likely again today. This move is now testing what is something of a tentative downtrend of the past five weeks, which comes in today around 110.85 and a close above this would be a third consecutive strong bull candle, something not seen since the strong run higher of July.. This comes with the momentum indicators beginning to edge higher again (a bull cross on the MACD lines would certainly help the outlook). The resistance in the range 111.15/111.40 is a key barrier near term and will be eyed by the bulls. This improvement in outlook is shown on the hourly chart as the hourly RSI is pushing above 70 for the first time since the market turned lower from 112.20 at the beginning of August. The move above 110.55/110.70 initial resistance is also forming a new recovery trend now leaving near term support between 110.35/110.70 today.
Gold
If this is a rally within the two month downtrend channel, then the move is confirming almost perfectly to the technical. The resistance band of the old lows $1194 and $1204 pulling overhead supply back in to drive renewed downside pressure is beginning to drag the price back lower again. Yesterday’s mild negative session is continuing today as the rebound has rolled over just at the resistance of the downtrend channel (which comes in at $1197 today). The momentum indicators may have broken their medium term downtrends, but the RSI failing at 40 again suggests the bears are still in control. The hourly chart shows a negative divergence on hourly RSI, MACD and Stochastics with the $1201 peak from yesterday as the market starts to fall over again. A move below $1187 would now confirm the bulls have run out of steam, opening $1184 and $1171 initially. The resistance at $1204 remains key near term.
WTI Oil
What a bull reaction! After the larger than expected EIA crude inventory drawdown, oil has continued to rebound hard. The moves higher over recent sessions have been an incredibly impressive response from the bulls, given the tepid move seen in recent weeks. The contract rollover has been taken entirely in the stride of the recovery as the market has now confirmed a breach of the five week downtrend. The run lower throughout this trend has been shown consistently as rallies being sold into, however, there now seems to be real intent building behind this move. This is reflected in the big bull candle completed yesterday. Closing back decisively above $67 after the contract rollover is a strong signal. With the momentum indicators improving, the MACD lines with a bull cross and if the RSI can move above 50 this would be a real signal to suggest the bulls are gaining decisive ground once more. The test of resistance comes in at $68.35 and an upside break would be a key move in the recovery.
After the Dow hit up against the 76.4% Fibonacci retracement (at 25,845), the market is finding consolidation. This comes with traders drawing breath after a run of gains in the previous find sessions that have seen the market rallying over 800 ticks from the 50% Fib level (around 24,980) to 76.4% Fib around 28,845. With the market consolidating, this could again be another important crossroads for the Dow. Unless the bulls react quickly today, a corrective move could result. A second negative candle could be the trigger for profit taking. Leaving the 76.4% Fib behind with a decisive close above would re-open the highs again (at 26,616), but momentum on the hourly chart is looking to unwind and the breakout levels 25,590/25,690 will be seen as supportive initially. If momentum in a correction builds with another bear candle, then a retreat to the 61.8% Fib could be seen once more.
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