Market Overview
Market sentiment has been rattled early on Monday morning, as the “No” victory in the Italian referendum has prompted the resignation of Prime Minister Renzi, hitting the euro and bringing political risk back to the forefront of traders’ minds. The euro has been hit initially by the result, but this was a result that, to an extent, had been foreseen (yes, the opinion polls actually got one right) and this could help to contain the selling pressure.
However, the result of the Austrian presidential election showed that the populist movement is not having it all its own way, as the left leaning former leader of the Greens, Alexander van der Bellen, won the vote. Despite this, sentiment for equities is under pressure in the Eurozone for fear of what the Italian referendum could mean for other big elections in the Eurozone next year and, of course, the plight of Italian banks.
Wall Street closed basically flat on Friday with the S&P 500 +0.1% at 2192 whilst Asian markets have been lower overnight and European markets are weaker in the early moves today. It is interesting to see the euro having bounced from its initial sell-off and the reaction of European traders today will be crucial. The dollar is trading higher against all forex majors today, with gold and silver also slightly weaker. The oil price has given back just under a percent this morning, as traders react to a rise in the US rig count amid fears that the US could take up the slack created from an OPEC production cut.
Traders will be watching for the service sector PMIs throughout the day to impact on markets. The final composite Eurozone PMI is at 0900GMT and is expected to stay at the flash reading of 54.1 (up from 53.3 last month). The UK services PMI is at 0930GMT and is expected to dip slightly to 54.2 (from 54.5). The ISM Non-manufacturing PMI is expected to improve slightly to 55.3 (54.8 last month). There are also a couple of FOMC speakers today with Bill Dudley (1330GMT) and James Bullard (1905GMT).
Chart of the Day – EUR/JPY
The euro has been under pressure this morning after the result of the Italian election, but will it materially change the outlook for EUR/JPY? The initial spike lower has bounced strongly intraday and the low at 118.70 was above the key reaction low during the bull run at 118.50. This is clearly an important support that the bulls will be watching today, should the selling pressure ramp up during the European session. The daily momentum indicators have been hit, but not dramatically and the RSI is holding above 60, which has been a key barometer in recent weeks.
The old breakout resistance at 120.15 will now be seen as an important level, as if the market reacts back to hold above this level, then this will be taken as a positive response from the bulls. The hourly chart shows that technical indicators are already improving and a higher reaction low at 119.50 holding would be needed to prevent a retest of 118.70. If the bulls can ride this one out then they will increase in confidence for a resumption of the test of the huge resistance at 122. A two day close above 122.00 would continue the rally and open 124.40/124.60.
EUR/USD
The euro has been coming under renewed pressure early on Monday morning in the wake of the defeat for Prime Minister Renzi in the Italian referendum. A brief breach of the support of the low at $1.0515 took the euro to its lowest level against the dollar since March 2015, when the euro hit a critical low at $1.0456. However the initial move has not been confirmed by continued downside and it will now be crucial to see how the Europeans react this morning.
The technical indicators that had been improving up until last Friday, are now threatening to turn over again, but nothing too bearish has been seen yet. The hourly chart is also not excessively bearish either yet and if the market can hold above $1.0500, the impact of the referendum will have been relatively limited. There is initial resistance around $1.0580/$1.0625.
The outlook for Cable has been improving in the past few sessions and a closing breakout above the previous key resistance at $1.2673 has put the recovery on much stronger footing now. Another strong bull candle has now opened the next resistance at $1.2796 and the momentum is increasingly positive. The RSI is now above 60 with the MACD lines above neutral for the first time in 11 weeks, whilst the Stochastics are also rising.
The early dip in the Asian session has already found support at $1.2623 which is above the near term pivot at $1.2557. Hourly momentum indicators are positively configured and suggests that corrections are being seen as a chance to buy. Initial resistance is $1.2737.
A second corrective candle has been seen as the potential for a continued corrective move grows. I have been looking at the momentum indicators, which are falling away and are close to giving sell signals now. This would be the RSI below 70, the MACD lines crossing lower and the Stochastics falling back below 80. None of these conditions have been met yet and I am mindful that this is a very similar set up on the chart to how the pair pulled back a week ago, only to then break higher once more.
A third bear candle would be a signal to take note of. The hourly chart is also interesting in that not only has the first pivot support been breached at 113.90, this level is also now becoming a basis of resistance as the market begins to build a series of lower highs. The support at 112.85 (today’s low) ad 112.00 now protect the key near term support at 111.35. The bulls are looking tired, but a decisive move above 113.90 would re-open 114.82.
Gold
The selling pressure has slowed again, but for now we must wait to see if this is anything more than a bear market rally. The daily momentum indicators will be worth watching as the RSI has been negatively configured for several weeks, stuck below 30. However, the MACD lines are slowing their corrective move, whilst the Stochastics are beginning to pull higher. The market had bounced $27 to its reaction high overnight, but whilst the resistance at $1197 and overhead supply at $1200 remains intact it is difficult to really say that this is a recovery that can be backed.
The hourly chart shows that the market continues to trade under the moving averages and under the two week downtrend (despite a brief overnight breach), whilst hourly momentum indicators are simply suggesting this is an unwinding move that is another chance to sell. A move back to below today’s low at $1171.20 would re-open $1166 and $1160.
WTI Oil
The oil price continues to remain strong in the wake of the OPEC agreement to the implementation of production cuts. The candles are getting less bullish as the days progress (natural after such a huge initial reaction) but this has been coming as the market has approached the key overhead resistance at $51.93. The bulls have just had the reins pulled back slightly in the early moves today and this will add to the importance of the $51.93 resistance.
Brent crude has already broken out above its equivalent resistance so this will give the bulls hope, whilst the momentum indicators are still strongly configured for further upside potential. The bulls will also be positive on the intraday support that the market formed on Friday on a previous breakout around $50.25. Corrections are still being seen as a chance to buy. The bulls will remain confident whilst above support at $48.75/$49.20. Above $51.93 opens minor resistance at $53.90 but the overhead supply at $56.50/$62.60 will be the next target for the recovery.
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