Market Overview
In a week of uncertainty, major markets have been continually seen sentiment shifting back and forth, but as the weekend approaches once more there is a swing to a more positive mind-set for traders. This comes as the US/China trade dispute negotiations have come back to the fore, in a positive way.
Suggestions are that the US is considering reducing some tariffs on China during the negotiations as a way of getting more in return. Although there is no movement yet, there is apparently a discussion within the White House over how to proceed, with Treasury Secretary Mnuchin in favour, but push back from Trade Representative Lighthizer. This puts the prospect of resolution back in the spotlight and will help risk today.
The risk rally that markets saw last week was much due to the positives coming out of the US/China trade negotiations and this puts that back on the table once more.
Equities on Wall Street have certainly felt the benefit, gaining further ground in their recovery, whilst Asian markets were also higher with Europe set to follow suit.
The yen is weakening and Treasury yields are higher, in a reflection of improved risk appetite. However, as ever there tends to be a data point to once more just rein in any thoughts of rampant bullishness, with Japanese inflation missing to the downside in December and reflecting the further concerns of a global cyclical downturn. Japan core CPI fell back to +0.7% (+0.8% exp, +0.9% in November).
Wall Street gained solidly last night with the S&P 500 +0.7% and futures are holding higher by +0.2% today. This has helped Asian markets higher, with the Nikkei +1.3% and Shanghai Composite +1.5%. In Europe there are also gains to be had early in the session with FTSE futures and DAX futures both around +0.5%.
Forex majors show a risk positive outlook, with the yen the main underperformer and a broadly neutral dollar. After a strong run higher yesterday, sterling has slipped back a touch in early moves.
In commodities, gold and silver are flat, but the oil price is again a beneficial of good newsflow over the US/China trade dispute.
With the ongoing US Government shutdown, it is difficult to rely on US economic announcements on the calendar, however, industrial production and Michigan Sentiment are possible today. However, first up in the European session we are on the lookout for UK Retail Sales at 09:30 GMT which expected to see ex-fuel sales to fall by -0.6% in December but this smacks of a re-alignment of sales away from Christmas towards Black Friday after November’s +1.2% MoM growth. This would take the YoY adjusted retail sales a shade higher to +3.9% (from +3.8%).
Canada inflation is at 13:30 GMT which is expected to see headline CPI stable at +1.7% (+1.7% in November).
The USIndustrial Production is at 14:15 GMT which is expected to show monthly growth of +0.2% in December (+0.6% in November) and Capacity Utilization to remain steady at 78.5 (78.5 in November). The prelim University of Michigan Sentiment is at 15:00 GMT which is expected to fall back to 97.0 in December (from a final reading of 98.3 in November). Also look out for the FOMC’s John Williams (NYSE:WMB) (permanent voter, centrist) who is speaking at 1405GMT.
Chart of the Day – Silver
As the dollar has rallied and there has been less positive newsflow to drive risk appetite, we see silver coming under pressure. The technicals on silver are now turning corrective again. The rally around the turn of the year has tailed off in the past couple of weeks and a new corrective move is forming. This comes as a series of lower highs is forming in the midst of increased frequency of negative candles. With yesterday’s negative candle, there is now a decisive deterioration in the momentum indicators, with a bear cross sell signal on MACD and the Stochastics accelerating lower. The RSI below 60 adds to the building deterioration, but this would accelerate were the RSI to fall below 50. There is a mini downtrend which is a basis of resistance at $15.65 today, with a lower high at $15.70, whilst the outlook is increasingly positioning for an unwind which could see the market back around the $15.00 breakout. Initial support is at yesterday’s low of $15.41.
The pace of the correction has just slowed in the past 24 hours or so and with a neutral doji candlestick formation yesterday thoughts turn to a potential basis of support forming. The momentum indicators have been slipping back recently, but retain what is a neutral medium term configuration. The RSI is again holding up in the mid-40s as it has done for the past two months, whilst MACD lines are still above neutral. There is a near term corrective downtrend in the past seven sessions coming in at $1.1410 today, whilst having broken below a near term pivot at $1.1420 the question is now whether the bulls can break back above this resistance to regain a degree of control. Yesterday’s low at $1.1365 will be seen as a gauge of support now. An upside break with a close above $1.1420 will put pressure back on $1.1500 once more.
Initially it looked in the wake of the political uncertainty this week that sterling would struggle, however there does seem to be a floor around $1.2800/$1.2815 which the bulls are working from. Yesterday’s move higher came through renewed sterling strength (belief of a path towards a softer Brexit) and the strong bull candle took the market back to the $1.3000 psychological resistance. On a technical basis it is important that whereas previously rallies were being sold into, this has now flipped around. Corrections are seen as a chance to buy and the resistance of old reaction highs is being broken. There is an old pivot around $1.2920 which is now a basis of support to watch. Above $1.3000 the test is $1.3070 initially before the key November high at $1.3175. With the strength of momentum indicators, there is a growing appetite for recovery, it is just whether the political developments can allow a sterling recovery to be sustained. There is a good band of support $1.2800/$1.2920.
Better risk appetite and a stable dollar has allowed Dollar/Yen to recover. This push through 109.10 with a closing breakout now effectively completes a small base pattern than implies around 130 pips of further recovery towards 110.40. This move is being accompanied by improving momentum indicators with the bull cross on MACD and bull kiss on Stochastics. The question for the bulls is now whether the overhead resistance can be broken. There is overhead supply from the old key low at 109.75 and around 110.00 to contend with. Into today’s session the hourly chart shows that the breakout around 109.10 is a near term basis of support, whilst any move that allows the hourly RSI to unwind into 40/50 and the MACD lines around neutral will be considered a chance to buy. There is a higher low at 108.65 that the bulls will now want to hold on to.
Gold
It is interesting to see gold continues to consolidate although there is a corrective outlook developing on Silver. The consolidation of the past two weeks has actually shown little sign of any corrective momentum building. Momentum indicators have been gradually ticking lower, but in a consolidation this helps to unwind stretched momentum, and for now this is a condition that is helping to renew upside potential. Equally though, the prospects of an upside break above $1298 remain difficult as each move into the mid-$1290s meets a wall of resistance. Initial support around $1286 needs to hold within the range for the bulls to retain a degree of confidence in an upside break. The two week range support at $1276 is increasingly important in this. The long term resistance of the pivot band $1300/$1310 is a key barrier for the bulls to overcome.
WTI Oil
The past week has seen oil develop into a trading range between $50.40/$53.30 in a move that has pull the reins on the bull recovery. However, the basis of support between $49.40/$50.50 remains strong and this is still likely to simply be a move that is a consolidation within the recovery. The rally uptrend comes in around $49.40 today, whilst the 23.6% Fib retracement of the bear market is a consolidation point at $50.50. The hourly chart shows fairly neutral momentum but a move above $52.50 this morning is helping to improve the outlook. It will still need a closing break above $53.30 to be considered a conclusive breakout that would open the December high at $54.75 again. Corrections remain a chance to buy.
The bull recovery continues with the tenth consecutive positive candle (although this does not include ten consecutive higher close). It was interesting to see the bullish gap fill in yesterday’s session which has left support now in the band 24,000/24,100 which has been the springboard for a move to the 50% Fibonacci retracement of the 26,952/21,713 sell off at 24,333. Conventionally, this Fib level may now be seen as a consolidation point, whilst the 38.2% Fib retracement at 23,714 adds to the basis of support now. There is still continued improvement seen across the momentum indicators, with the RSI ticking towards 60, but this now becomes a key moment, as both previous significant rallies in November failed around 60 on RSI. The next resistance is 24,828 which is a minor lower high just under an old pivot at 25,000. Support between 23,800/24,000 is now increasingly important.
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