Market Overview
The word “insight” is not something that is usually associated with Donald Trump, but unfortunately the same cannot be said of the word “incite”. Trump’s somewhat provocative language over North Korea at the UN this week (talk of “destroying” another country is never great, really) were only ever likely to bring about the next step up in geopolitical tensions. So reports that North Korea are now planning another nuclear test, potentially in the Pacific, have impacted on market sentiment today.
So with geopolitical tensions rising again, safe haven assets are performing better, with the yen and gold rebounding, whilst Treasury yields have started to drop away again. Equities are also seeing some corrective pressure, with selling in the Asian session filtering into the European trading day.
Focus for traders of UK assets will come on a key speech on Brexit by UK Prime Minister Theresa May in Florence. Could this be a turning point in the floundering negotiations with the EU? A “soft Brexit” focus would come with reports of potentially a two year transition agreement and possible opening bid of a €20bn divorce bill. However, the EU would also want progress on Northern Ireland and the rights of EU citizens for real progress to be made. Sterling will be reactive to this speech today.
Wall Street closed lower last night, breaking a run of nine positive sessions on the Dow, with the S&P 500 -0.3% at 2500, whilst Asian markets were lower (Nikkei -0.3%) and there is early weakness in European markets.
In forex the dollar is under corrective pressure across the majors, with the yen being an outperformer. Only sterling (possible concern over May’s speech) and the Kiwi (a riskier risk commodity currency but also with uncertainty of elections being held today in New Zealand) are underperforming.
In commodities, gold is bouncing whilst oil is also holding up ahead of a meeting of OPEC to discuss the potential for further production curbs that could include Nigeria and Libya.
Traders will be looking for the flash PMIs today for the Eurozone and US, however it is central bankers and politics that could be a major driver. The ECB’s President Draghi is expected to speak at 09:00 BST and euro traders will be watching closely. However the real interest for sterling traders will be in UK Prime Minister Theresa May’s speech on Brexit in Florence. Anything that points towards a “softer” and more conciliatory Brexit would positive for sterling.
Today is also the Parliamentary elections in New Zealand so this could impact on the Kiwi.
The Eurozone flash Manufacturing PMI is at 09:00 BST and is expected to dip slightly to 57.2 (from 57.4) whilst the Eurozone flash Services PMI is expected to remain flat at 54.7.
The US flash Manufacturing PMI is at 14:45 BST and is expected to improve slightly to 52.9 (from 52.8), whilst the US flash Services PMI is expected to drop marginally to 55.8 (from a downwardly revised 56.0 last month).
Chart of the Day – AUD/USD
The Aussie looks to be topping out now. The hawkish surprise from the FOMC and comments from RBA Governor Lowe that there was a lack of urgency over rate hikes pulled the Aussie sharply lower in yesterday’s session. On the technicals this formed a strong bear candle which confirmed a breach of a near four month uptrend. This move comes with a close below $0.7935 which arguably also completes a near term top pattern and implies 165 pips of downside to $0.7770. This would suggest that the key support at $0.7805 which was the August low may now come under threat. The concern is that the momentum indicators nowhere near confirmed the September high on the price. This medium term negative divergence is also worsened by the RSI struggling below 50, whilst with the MACD and Stochastics lines are also both finding downside traction. The deterioration in momentum suggests that rallies will now be seen as a chance to sell. There is now a near term 50 pip sell zone between $0.7935/$0.7985 which is being tested by an early rebound today. Another lower high below $0.8035 would bolster the corrective outlook. Initial support is $0.7965.
Has the dollar recovery already run out of steam? After Wednesday’s bearish engulfing candle it looked as though the euro bulls were under pressure however the moment appears to have been somewhat brief as a positive candle formed yesterday to add almost 50 pips back on the day, whilst the early gains today also reflect this. However, until the market breaks back above the $1.2030 resistance from Wednesday’s high the euro bull will not be sitting entirely comfortably. On a medium term basis though, all still seems to be well, with the uptrend channel intact, and momentum indicators at least not turning negative. The RSI continues to hold above 50 with MACD lines on a relatively benign drift lower, although the Stochastics are teetering on the brink and is the one real concern. Whilst the support at $1.1820 remains intact the outlook will remain positive. With momentum indicators wavering around flat, the hourly cart simply shows a range play which means that intraday corrections are still a chance to buy. Support at $1.1860 is firming now.
The market may have stalled in its advance this week but given the sharp upside move above $1.3500 through a raft of key resistances, the breakout being consolidated is a positive for sterling. The upper band of the uptrend channel that has been in play throughout 2017 is now becoming supportive (today at $1.3445) whilst the support band of the old key breakouts $1.3445/$1.3480 is also holding. The bulls will have been reassured by yesterday’s solid positive candle which added 85 pips on the day and has helped to bolster the support of this week’s low at $1.3450. Momentum remains strongly configured, although the RSI has historically struggled to sustain a move above 70 for too long. This would suggest that the bulls will need to breakout to the upside again otherwise a stale bull move will find profit-takers moving in. The resistance at $1.3655 needs to be taken out. Today’s session could be pivotal with Theresa May’s Brexit speech likely to define negotiations at least for the coming weeks. A conciliatory speech akin to a “soft Brexit” would be supportive.
It is interesting to see that whilst the dollar lost ground against other majors yesterday, Dollar/Yen has only started to correct overnight. This in the wake of suggestions that North Korea could be set to ratchet up geopolitical tensions further. This has led to a move back into safe haven assets and the yen has strengthened. The move is looking to unwind some of the gains of the past couple of weeks on Dollar/Yen. However this still looks to be an unwinding move within the key breakout above 111.00. This level is now a basis of support. For now the correction is under control and an uptrend of the past two weeks is broadly intact, however the bulls would not want to see 111.00 breached. Strong momentum indicators are beginning to tick lower but this is currently just an unwinding move. The hourly chart reflects tis, with positively configured momentum indicators unwinding back to levels where the bulls have returned recently. Resistance is now in place at 112.70.
Gold
Yesterday’s confirmed breakdown below $1300 support was a key medium term move that confirms that the outlook has changed. Rallies are a chance to sell and the overnight reaction higher should fit into that category. The sequence of lower highs of the past two weeks (the latest at $1316) coupled with a break below $1300 now means that the old long term pivot at $1300/$1310 now becomes a basis of resistance and a prime “sell zone” for this rebound. Momentum indicators have taken a more corrective configuration recently and with a downtrend linking the recent lower highs coming in at $1309 today, this rebound is within the scope of being seen as a rally to be sold into. The hourly chart shows negatively configured momentum indicators with any move on the hourly RSI into 60/65 or the MACD lines failing around neutral will be seen as a chance to sell. Initial support at $1287.60 is likely to be retested in due course.
WTI Oil
Corrections on oil remain a chance to buy and the reaction to initial downside yesterday suggests that the bulls are still happy to support the market. Despite an intraday decline the market closed back well into the upper half of the session and the bulls seem to have weathered a brief storm intact. Momentum indicators are still positively configured with the RSI into the low 60s and a six week high, whilst the MACD lines continue to track higher. This all points towards a decisive breakout to hold above the old $50.50 resistance for a test of the May high at $52.00 in due course. The market is trending higher over the past three weeks now and the higher low at $49.20 is becoming an increasingly important near term basis of support.
Dow Jones Industrial Average
The market has failed to make it 10 positive candles in a row, however this should still just be a minor blip in the push higher into all time-highs. The support of Thursday’s low at 22,315 is the first key reference for the bulls, but even if there were to be a near term correction that develops, the strength of the bull trend will continue to drive the market higher. The RSI has pulled back below 70 which could be argued to be a sell signal but this is very isolated at this stage and there needs to be far more confirmation before jumping ship on this bull run. Continue to look to use intraday weakness as a chance to buy. The key support is at the recent breakout at 22,179, whilst the upside target of 22,675 remains on. Initial resistance is now 22,420.
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