Market Overview
The market impact of Donald Trump’s decision to initiate trade tariffs last week have played something of a seesaw impact on the markets in recent days.
The political pressure on Trump to hang back from Congressional Republicans seemed to be alleviating the near term impact, but the EU have ramped up a retaliation with a list of 100 goods that it would tariff, whilst now the resignation of Gary Cohn, Trump’s lead economic adviser really does stoke fears of an escalation to a trade war again. Cohn was seen as a crucial factor in the Trump administration that would prevent tariffs, but his resignation opens the way for the tariff hawks in the White House to fully lean on Trump to push ahead with a protectionist agenda that had been a key factor in his campaign to become president.
The market clearly sees the dollar as a loser in all of this, judging by the reaction on the Dollar Index which has fallen below 89.50 which had been a reaction low within the recent recovery. Equity markets are not a fan of a prospective trade war either, with a decline on Wall Street futures overnight, whilst safe haven plays such as the yen have benefited and Treasury yields have also dropped. The market is once more taking a risk off shift in sentiment.
Wall Street closed marginally higher last night with the S&P 500 +0.3% at 2728 but Asian markets were lower overnight on the reduced risk appetite, and European markets are under pressure in early moves today, with the export heavy DAX again in focus.
In forex markets there is a mixed reaction initially but the yen is a main outperformer. The Aussie is struggling after Australian GDP for Q4 2017 disappointed and fell to +0.4% (+0.6% exp, +0.7% in Q3).
In commodities, there is a consolidation on gold whilst the oil price is just under a percent lower as traders worry over the economic impact of a trade war.
The morning is fairly quiet for economic data aside from the revised (ie. the third) reading of Q4 2017 Eurozone GDP at 10:00 GMT which is expected to be confirmed at +0.6%. Into the afternoon, the US ADP Employment Change is at 13:15 GMT which is expected to drop back to 194,000 (from 234,000 last month).
The Bank of Canada monetary policy announcement is at 15:00 GMT with consensus not expecting any move on rates at +1.25%, especially given the potential economically destabilising impact of the renegotiation of the NAFTA treaty driven by President Trump.
The EIA oil inventories are at 15:30 GMT and are expected to show another crude oil inventory build of +3.0m barrels whilst distillates are expected to drawdown by -1.5m (-1.0m last week) along with gasoline inventories expected to drawdown by -1.9m (after a build of +2.5m last week).
Markets will also be watching out for the comments of a couple of FOMC members with Atlanta Fed President Raphael Bostic (voter, mild dove) at 13:00 GMT and New York Fed’s Bill Dudley (voter, centrist) at 13:20 GMT.
Chart of the Day – AUD/JPY
The decline of Aussie/Yen over the past four weeks has been steadily progress with a series of lower highs and lower lows where old support becomes new resistance. A downtrend channel has been dragging the market lower over recent weeks and although was breached on an intraday basis yesterday, still plays a key role in maintaining the negative configuration. The formation of a second consecutive positive candle looked to improve the near term outlook, but this has already been discounted by early selling pressure today. A retest of Monday’s session which came bang on the key support of the April 2017 low at 81.50 should now be seen. It is also interesting to see that yesterday’s intraday rally hit at the resistance of the old February lows around 83.30. Rallies have consistently been used as a chance to sell and configuration of momentum indicators confirms this. There is initial support at 82.03 from today’s early low which is likely to be retested. The market would need a decisive close above 83.30 to signal the bulls are gaining confidence, whilst the resistance at 84.12 also needs to be overcome for a sustainable improvement.
The euro bulls are back in firm control as the market has now formed a run of four consecutive positive sessions following the bullish engulfing candle last week that turned sentiment around again. The decisive move above the near term resistance at $1.2360 has now cleared the way for a move towards the highs at $1.2555 one more. A strong bull candle added almost 70 pips yesterday and the market looks set for further gains today as the bulls have continued to push higher. The momentum indicators are configured positively now with the MACD lines set to cross higher just above neutral (a strong signal) whilst the RSI and Stochastics are also advancing strongly. The hourly chart shows the near term breakout at $1.2360 will now become a basis of support and there is now a key higher low at $.12265. The ECB is going to start to loom on the horizon and could cause some caution to enter, but the technical outlook is strong to buy into weakness now.
Cable is also building a recovery, with four positive candles in a row. However there is far more that the bulls need to do in order to take this move as a decisive push higher. Although the medium to longer term uptrends remain intact there is still a sequence of lower highs and lower lows over the past five weeks. Despite this though, the initial resistance at $1.3855 has been cleared now and if the market can begin to trade decisively above the falling 21 day moving average (at $1.3912 today) then the outlook will begin to look more positive. The psychological $1.4000 barrier has put paid to previous rallies and is the next test, whilst the bulls need to break through $1.4070 to start breaking more significant resistance. The momentum indicators are set up for the bulls to take on control again, with the MACD lines looking to bottom around neutral, the RSI picking up from 40 and Stochastics now also rising. The hourly chart shows a positive sequence of higher lows and higher highs forming over recent days, and a move above $1.3930 would continue this, whilst there is a good band of support now $1.3815/$1.3875.
Rallies within the eight week downtrend remain a chance to sell. Once more we have seen that play out this week, with old support becoming new resistance. The old lows at 106.35 formed a barrier to a recovery yesterday to form a marginally corrective candle that has opened the door for further selling of Dollar/Yen overnight. The market is subsequently coming back to test the old low of 105.50, which if broken on a closing basis would re-open the downside towards 102.50 again. The intraday lows of recent sessions at 105.23 also come in as minor support. The momentum indicators are set up to suggest rallies are a selling opportunity with the RSI failing around 40 but also with further downside potential (the February low hit 23 on the RSI). The hourly chart reflects the negative near term outlook, trading below all moving averages and momentum indicators negatively configured. There is a band of resistance to use for any intraday rallies at 105.85/106.35.
Gold
A strong positive candle has seemingly put the bulls back in control with a decisive break of the recent two week downtrend. However the key break of resistance at $1341 remains to be seen as the market has looked at this level this morning and shied away. Despite this though the momentum indicators are now looking more positive and in the least, the recent low at $1302 looks firmly set. A closing breakout above $1341 would re-open the highs at $1362/$1366 but the bulls need to continue their good work from yesterday. The hourly chart is set far more positively now too with the MACD and RSI lines far more strongly configured, whilst intraday corrections look to be a chance to buy now. Anything around 35/50 on the hourly RSI is being bought into, whilst around neutral on hourly MACD lines is also an opportunity. The market is looking to use an old pivot at $1332 as support early today, with $1325/$1327 a further pivot support area.
WTI Oil
The market has been looking to tick higher this week with a bullish candle on Monday helping to prevent a corrective outlook taking hold, however the near term sentiment remains uncertain as the price has fallen over again. A doji candle yesterday has added to the uncertainty. Daily momentum indicators are neutrally configured with the MAD lines hovering around zero and the RSI flat around 50, whilst it is interesting to see the market again failing back below the old pivot at $62.85. The reaction high at $64.25 remains a key barrier and since the beginning of February the market has been forming a symmetrical triangle of converging trend lines, something that has been accentuated further by yesterday’s reaction high at $63.28. Momentum on the hourly chart has rolled over again and ranging configuration is in place. The near term pivot around $62.85 is a gauge with initial support now $61.10.
In line with what looks to be increasingly choppy sentiment across financial markets, just when it looked as though the Dow bulls had found some traction, a decidedly mixed candle was formed yesterday that questions the recovery. Although the market closed marginally higher on the day, a negative candle formed following an early jump higher at the open that was sold into. The move adds uncertainty to the prospects of a recovery. The fact that this came around resistance at the 50% Fibonacci retracement of the big sell-off (at 24,988) also adds further credence to the trading around Fib levels becomes more of an interesting strategy near term. In line with this lack of trend, the daily momentum indicators are neutrally configured with a slight negative bias which questions the recovery under the 50% Fib level. This is reflected in the hourly momentum which is taking on a more ranging configuration with the hourly RSI struggling around 60 and the MACD lines beginning to plateau around neutral whilst the hourly moving averages are flattening. Yesterday’s low at 24,708 is initially supportive with the 50% Fib level at 24,988 preventing a continued rally towards 61.8% Fib at 25,372.
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