Market Overview
The immediate market fear over the escalation in the trade dispute seems to be calming down once more. The US has raised tariffs and China has responded. Now we wait for the next move. In the meantime, Donald Trump has been upbeat over the prospects of an agreement, which he notes would be “very positive” (although we are not entirely sure who for at this stage). It is just that is may take a few weeks to know. Trump says three or four weeks, but with the G20 summit at the end of June, where he and President Xi are sure to meet, it could be longer.
For now, markets look subdued, like an injured animal licking its wounds. Treasury yields have settled down, interestingly with the 3 month to 10 year spread around zero.
The dollar, which had come under some pressure on the reaction to the dispute escalation, is also finding its feet again. Markets tend to react too far, and a 70% probability of a December rate cut (according to CME Group (NASDAQ:CME) FedWatch) seems a little extended. Gold is slipping back, and oil is finding support. Equity markets have found support too. But for how long? The next shock is likely to be on discussion of the remaining $325bn of Chinese imports. For now though there is a sense of consolidation and support to rebuild.
There has been a muted reaction to what seems to be unambiguously disappointing Chinese data overnight which missed expectations across the board. China Industrial Production fell sharply to 5.4% (+6.5% exp, +8.5% last). China Retail Sales also disappointed at 7.2% (+8.6% exp, +8.7% last). China Fixed Asset Investment which is around 60% of investment fell to 6.1% (+6.4% exp, +6.3% last). This suggests the stimulus of earlier in the year has much further to go to make a lasting improvement.
On the economic calendar, the (second) flash reading of Eurozone Q1 GDP# is in focus for the European morning at 10:00 BST.
Expectation is that there will be no change from the prelim +0.4%, with the year on year again re-iterated at +1.2% US Retail Sales at 13:30 BST are expected to show sales ex-autos improved by +0.7% on the month in April (+1.2% in March). Empire State Manufacturing (New York Fed) index for May is at 13:30 BST and is expected to slip slightly to +8.5 (from +10.1 in April).
US Industrial Production is at 14:15 BST and is expected to be flat on the month in April at 0.0% (-0.1% in March). It will also be worth keeping an eye out for Fed speaker Randy Quarles (permanent voter, leans hawkish) who gives a speech at 14:30 BST.
N.B. Apologies for the lack of a Daily Report yesterday. This was due to a worldwide Reuters data technical issue.
Chart of the Day – EUR/AUD
We highlighted the weakness of the Aussie recently and this has now made a key break on another major cross. On Euro/Aussie the resistance at 1.6120 has been in place for much of 2019. Tested last week, Monday’s decisive positive candle saw the market close at a four month high and open the next key resistance of the September/October highs around 1.6360. The market has been building an uptrend in the past few weeks, coming in as a basis of support around 1.6015 today. Strong positive momentum indicators confirm the breakout, with the RSI and MACD lines at four month highs. This suggests that intraday weakness is a chance to buy. Yesterday’s unwind back towards the breakout at 1.6120 hit this support almost to the pip before pulling higher again. This increases the importance of this as a basis of support near term. There is a mini buy zone now between 1.6075/1.6120. There is also a near term pivot around 1.6000 (coinciding with the mini uptrend) but look to use any pullbacks as an opportunity to buy for the upside potential towards 1.6360. A close above initial resistance at 1.6195 continues the move higher.
With the dollar recovering some lost ground in the past couple of sessions, the recovery on EUR/USD has slipped again. This now becomes a crucial period in this rebound of the past few weeks. The rallies within the bigger downtrend tend to last around two or so weeks before finding resistance and selling off again. There is an array of technical barriers overhead for the euro to stumble at and this is threatening to be the case again. The resistance of the late April high at $1.1265 was hit again on Monday, whilst the resistance of the 55 day moving average (today at $1.1254) also played a role. A couple of negative candles see the positive momentum of the rally slipping. If we see a third negative candle today then the selling momentum could begin to mount. There is already a sell signal threatening on Stochastics. The RSI is back under 50 having failed at an area where previous near term rallies have failed. The hourly chart is suddenly looking more correctively configured. Hourly momentum has become negatively configured, whilst a near term pivot at $1.1220 is now initial resistance. A move back below the old key support at $1.1175 would be a signal that the bulls have lost their way again. Support is at $1.1160/$1.1165 but a a test of $1.1110 would be then preferred.
The consolidation around $1.3000 has been broken as sterling has slipped and the dollar regained strength once more in recent days. Reduced hope of a Brexit compromise is a key factor in this move. The two negative candles of the past two sessions brings the key support at $1.2865 from April back into range. Whilst an initial consolidation has set in early today, there is little real expectation that this would be the precursor to a recovery. The hourly chart shows negative configuration across momentum indicators, with yet another pivot forming resistance overhead. In the past couple of weeks, successive pivots at $1.3080, $1.3035 and now $1.2965 have formed. The RSI is failing consistently at 60 and MACD lines under neutral. Intraday rallies are a chance to sell. Below $1.2685 opens $1.2770/$1.2815.
The dollar has found its feet and the demand for a safe haven yet has just begun to dissipate. How the market responds around the old 109.70 support could now be key. Yesterday’s positive candle was a good response from the dollar bulls and early gains today continues this move. However, there is overhead supply now around 109.70/110.05 and a failure around here could see this move short-lived. Momentum indicators have settled down, but more needs to be done to suggest this is a potential sustainable recovery. The hourly chart shows a pivot at 110.25 which needs to be overcome for the recovery to really find its feet. A move above 60 on the hourly RSI would also help.
Gold
The knee jerk move into safe haven assets in the wake of China’s retaliation on trade tariffs has begun to dissipate. The question is whether the recovery on gold can now be sustained? Breaking the 11 week downtrend is encouraging for the bulls, but there is still a suggestion that near term rallies remain a chance to sell. Near term rallies of recent months have continually failed at 55/60 on RSI. Again in the past couple of days this could be happening. There is a long term pivot band of resistance between $1300/$1310 and again Tuesday’s high of $1303 is a concern given the slip back. Reaction at the $1289/$1291 near term breakout support could be key as if this support is breached then the bulls will see their breakout undone. As this would come with failures on momentum too, it would increase the negative pressure again. Caution needs to be taken with the manner of the upside break of the trend. How the market responds today could be crucial. Holding $1289/$1291 and breaking back above resistance at $1303 is now key.
WTI Oil
After a run of little real direction, some volatility on oil, however, essentially this is just noise within the consolidation. Monday’s bull failure never saw the sellers reacting with any conviction. Subsequently yesterday’s mild positive candle has settled the market back into wait and see mode again. This comes with RSI and Stochastics increasingly benign and lacking direction. The failure at $63.35 increases the overhead supply around $63.00, but the support at $60.00 is equally as solid. This is a market lacking decisive signals right now. Given the moves of the past week and a half, there needs to be confirmation of any break before moving with conviction. In the meantime look for closes outside the $60/$63 range.
It has been an extremely wild ride on Wall Street since the escalation of the trade dispute took hold last week. Friday’s bull hammer was completely smashed out of the water by a massive sell off of over 600 ticks. Yesterday’s rebound has looked to counter the sell-off but as yet has far more to do. Is this the start of a recovery, or another chance to sell into strength? Technically, you would say the latter. The market has been in decline for the past couple of weeks, finding resistance at successively lower levels and breaching supports. It is a concern that yesterday’s rebound closed 150 ticks off the day high (around the midpoint of the session). The resistance has also come at 25,689 around the 76.4% Fibonacci retracement at 25,715. The importance of support at 25,210 (the March is crucial now). This comes as the RSI has bounced off 30, Stochastics hovering around 20 and MACD lines looking to fall below neutral. If the market deteriorates again from here to break support it would be a multi-month low and a significant breakdown. Resistance at 26,019 is a key lower high now.
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