Market Overview
Market sentiment has been boosted in recent days as the prospects for passing tax reform in the US Senate have improved and ever strengthening US economic data have impacted across markets. Treasury yields have jumped and perhaps more importantly, the longer end of the yield curve has steepened with the move. With traders moving out of Treasuries, other less risky assets such as gold and the Japanese yen have also been underperforming. This could all now begin to come to a head tonight though with the potential for a vote in the Senate in an attempt to pass the tax reform bill. A successful passing of the bill would likely steepen the US yield curve further and hit the safe haven plays. The dollar would be boosted, whilst US equity markets would also have another shot in the arm. However, any delay to the vote could equally hit sentiment, with profit taking coming on any riskier assets should the bill be voted down.
It is also the day of the bi-annual OPEC meeting today. Oil prices have risen strongly in recent months with steady expectation building that OPEC will agree to extend its production cuts by another nine months from the current end of March 2018. Any underwhelming move could easily result in a correction, whilst there is even a risk of a “buy on rumour, sell on fact reaction” too. It may need to be something fairly impressive to prevent a correction.
Risk sentiment has also been helped overnight with the China PMIs which have shown improvement overnight. China Manufacturing PMI improved to 51.8, beating expectations of 51.5 (51.6 last month), whilst the China Non-manufacturing PMI improved to 54.8 (from 54.3 last month).
Wall Street closed mixed yesterday with the Dow over 100 points higher, but the S&P 500 down 1 point at 2626. This came with banks and retailers strong, whilst the tech sector had a slip. Asian markets were mixed, with the Nikkei +0.5%, whilst European markets are also mixed, with the FTSE 100 again set to underperform on the strength of sterling.
In forex, there is a risk positive feel to majors today, with the yen being a key underperformer, whilst the Kiwi was weaker after business confidence in New Zealand fell sharply.
In commodities, gold is edging slightly lower, whilst oil looks supported initially in front of the OPEC meeting.
Inflation is in focus on the final day of the month with both the Eurozone and US set to announce key data points today. The flash reading of November Eurozone inflation is at 10:00 GMT and is expected to improve to +1.6% for headline (up from 1.4% last month), whilst the core Eurozone inflation is expected to tick slightly higher to +1.0% from the 0.9% last month. After the German inflation came in slightly higher that estimates yesterday the market will be keeping an eye out for a potential upside surprise in the Eurozone reading today.
Eurozone unemployment is also at 10:00 GMT and is expected to stay at 8.9%. Into the afternoon, the Fed’s preferred inflation reading the core Personal Consumption Expenditure for October is released at 13:30 GMT. The expectation is that core PCE will grow by +0.2% on the month which could mean that there may be a tick higher from the year on year reading of +1.3%. However there was little sign of any pricing pressures in the GDP data yesterday so this may again be another subdued reading.
Weekly jobless claims are at 13:30 GMT and are expected to again be similar to last week, with 241,000 expected (239,000 last week). Aside from the data, FOMC members Randal Quarles and Robert Kaplan (centrist, voter) speak at 17:30 GMT and 18:00 GMT respectively.
Chart of the Day – USD/CAD
An uptrend since the September low may have been broken by the month long 250 pip consolidation band between 1.2665/1.2915, however the dollar is regaining some upside momentum once more for another challenge on the key resistance at 1.2915. Yesterday’s move above 1.2835 was also a third consecutive strong bull candle and came with momentum indicators turning around. With the RSI having held consistently above 50 in recent months, a push to a three week high and the move towards the mid-60s reflects the growing strength of momentum. The MACD lines looking to cross higher again above neutral would also be a medium term buy signal. The 1.2915 resistance is a key longer term level to watch as this also marks a confluence of technical resistance with the 50% Fibonacci retracement of the huge 1.3793/1.2058 correction which comes in at 1.2925. A breakout would open 1.3000 again but also the 38.2% Fib level at 1.3130. The consolidation range breakout would imply 250 pips of upside towards 1.3165 in the coming weeks. The hourly chart shows 1.2800/1.2835 is supportive initially before a near term pivot around 1.2750.
The euro has settled, albeit likely to be briefly, after another mini correction within the burgeoning near term uptrend channel. The move back towards the support of the uptrend has started to find a low again as yesterday’s low at $1.1815 has come in as a near term floor. This is just above the trendline which is rising around $1.1820 today. Technically the momentum indicators remain positively configured for buying into the weakness, with only really the Stochastics hinting at anything that would resemble a further correction. However, essentially we will know much more about the direction after any vote takes place in the Senate on US tax reform. The market seems to be biding its time now in front of what could be a crucial move for the dollar and we could know as early as tonight on the move. A breach of $1.1815 opens $1.1712 as the next near term key low. The high at $1.1960 is resistance.
Sterling continues to make strong gains, fuelled by the hope that finally a breakthrough has been achieved in the Brexit negotiations. Cable is now over 250 pips higher than where it sat just prior to the news and shows little sign of stopping. Momentum is strong with the RSI in the high 60s and MACD lines accelerating higher. Both momentum indicators suggest there is still further upside potential in the move. Cable has pushed through the resistance at $1.3450 and now there is little to prevent a move back towards the key post Brexit resistance between $1.3595/$1.3655. The hourly chart shows consistent buying into weakness near term with a band of initial support $1.3375/$1.3385. There could be some added interest today with US tax reform potentially going to a vote in Congress tonight, which if passed should help to support the dollar. However in the meantime, momentum for the Cable bulls remains strong.
Improved risk appetite is really impacting on the chart with a strong rebound that is pulling the market higher. Breaching a sharper two week downtrend, the rebound is now moving to test a three week downtrend. However momentum seems to now have turned a corner and after two strong positive candles the bulls are looking set to add a third. This comes with a crossover buy signal confirmed on the Stochastics and the RSI also gaining upside traction. There seems to be room for this rally to run now, with the next resistance around 112.70. The hourly chart shows a near term base pattern completed above 111.70 which implies a move towards 112.35/112.55, with 111.70 now a neckline support. As with other major pairs though today, there will be a lot of interest in the progress of tax reform which could change the outlook once more depending on the outcome of any vote.
Gold
With a dollar rebound and improvement in risk sentiment, gold has slipped back once more. The market is now back to the support of a shallow three week uptrend after a strong negative candle pulled gold $10 lower on the day. What has been consistent about the push higher in recent weeks has been the reaction of the bulls to a corrective day. Every time there has been a basis of support coming in, so if there were to be another negative candle today, then the selling pressure could quickly mount again. Essentially in the past few weeks the market has been biding its time. The $1300/$1310 longer term pivot again seems to be playing a role as a ceiling and the gradual drift higher has been unable to generate the traction needed to break it. So the consolidation outlook continues. This could all change tonight though as the pass or failure of tax reform could be a key defining move for gold. Support comes in increments, initially at $124.60 and then $1270.50 and $1265. A close above $1300 is needed to generate the upside momentum.
WTI Oil
The oil price had a mixed reaction to the EIA inventories, with the lsightly larger than expected crude oil stocks (could have been a build after the API numbers) seemingly outweighed by larger than expected inventory builds in distillates and gasoline stocks. This pulled the market lower again within the uptrend channel and seemingly has left a potential lower high at $58.30 below the $59.05 high from Friday. However, whilst this is a correction within the uptrend channel, technicals will play very little role today as the OPEC meeting will be in full focus. Any disappointment over the potential extension of the production cuts for another nine months will be met with profit taking. It is likely that a nine month extension (to end December 2018) is the least that the market now expects so it would take a greater production cut of more than 1.8m barrels per day, with Russia fully agreeing, in order to push the oil price materially higher now.
Backing against the power of this bull run is a painful game at the moment. The incredible upside breakout into new high ground in the past couple of sessions has already hit the implied breakout target of 23,960. Near term momentum is extremely strong but also stretched now. The market is trading entirely outside the 2.0 SD Bollinger Bands which is certainly a sign of how overstretched the market is in the near term. Is it ripe for some near term profit-taking now? Maybe, however the sentiment behind this bull run is so strong that there is still potential for a push above 24,000 now. Initial support is with yesterday’s low at 23,873. This rally is though likely to live or die by the progress of tax reform and a successful vote would be the rocket fuel for further upside (although then the question will be how much of the optimism has been priced in will arise). A failed vote will drive an instant correction at least towards the breakout support back at 23,602.
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