Market Overview
There is a growing concern across financial markets that a global economic slowdown is increasingly taking hold. This reflected in the soft data coming out from PMI surveys across the world. The US has been seemingly chugging along quite nicely, but the ISM data yesterday for US manufacturing fell sharply to 54.1 (from 59.3) in what was the biggest one month decline since 2001.
It is unwise to take one month in isolation, but coming in the wake of disappointments from China (in contraction) and the Eurozone (barely growing), the US at over 54 is still healthy growth, but the speed of the slowdown is the fear. Fed Funds futures are now pricing in no rate hikes for 2019 and for rate cuts to resume in Q2 2020. This is the latest in a stream of economic data concerns seen in recent weeks that have sent risk appetite tumbling. There is though a glimmer of hope this morning as China has announced trade talks with the US on 7th/8th January at a vice-ministerial level. This has boosted risk appetite today and some of the money that has switched into safe havens is starting to reverse. The question is whether an end to the US/China trade dispute is enough to jump start a slowing global economy again. Obviously Non-farm Payrolls will take a big focus today, but it is certainly worth looking out for Fed chair Powell who is speaking at 15:15 GMT.
FOMC centrist Robert Kaplan advocated holding off on rate hikes for a couple of quarters at least, will Powell give similar hints? Markets are getting to the stage that they need reassurance that the Fed is taking this situation seriously.
Wall Street fell sharply into the close last night with the S&P 500 -2.5%, at 2448, but with futures rebounding by a percent on the China trade hopes. Asian markets have been mixed, with the Nikkei playing catch up -2.3%, but the China Shanghai Composite +2.0%. European markets are going with the rebound today, with FTSE futures +0.7% and DAX futures +0.8%. In forex, there is more of a risk positive theme, with the yen underperforming and the Aussie higher (certainly a reversal from recent days). This could though consolidate in front of payrolls today. In commodities, there is a consolidation on gold and silver, whilst oil is benefitting from the potential demand impact of the hope in the US/China trade dispute.
The US jobs report dominates the economic calendar today but is not the only release to watch out for. The European services PMIs are released through the morning with the Eurozone final Services PMI at 09:00 GMT and expected to confirm the flash reading of 51.4 (51.4 flash, 53.4 November final). The Eurozone Composite PMI is expected to be confirmed at 51.3 (which would be down from 52.7 in November).
UK Services PMI is expected to improve a shade to 50.7 (from 50.4) and it will be interesting to see whether the re-stocking for Brexit in the manufacturing data is reflected also in services.
The Eurozone flash inflation for December is at 10:00 GMT and is expected to drop on the headline inflation to +1.8% (from a final +2.0% in November), whilst core inflation is expected to remain at +1.0% (+1.0% in November).
US Employment Situation for December is at 13:30 GMT and headline Non-farm Payrolls are expected to improve slightly from last month to +177,000 (+155,000 in November). Average Hourly Earnings will; continue to be a key focus in the tightening labor market and is expected to be +0.3% on the month but due to strong comparatives would be a slight drop back to +3.0% on the year on year (+0.2% MoM and +3.1% YoY in November). US Unemployment is expected to remain at 3.7% (3.7% in November) whilst it is also worth watching the U6 Underemployment which ticked up to 7.6% last month which was a five month high.
Oil traders will also be on alert later in the session, with the delayed reading of the EIA oil Inventories at 16:00 GMT which are expected to show crude stocks with another drawdown of +2.0m barrels (-0.1m barrels last week), with distillates a build of +2.5m (0.0m last week) and gasoline building by +2.0m (+3.0m last week).
Chart of the Day – USD/CAD
There have been some huge moves on forex majors in the opening days of 2019, but it is interesting to see that there is been a big shift in outlook on USD/CAD. Hitting a high of 1.3665 right at the end of 2018, two decisive bear candles have set a correction in motion. This could now mean a retreat within the three month uptrend channel back towards a confluence of support around 1.3385. That was the old June breakout which was a basis of resistance in December before a closing breakout set the bulls on their way again. The support of the uptrend channel comes in at 1.3350 today. A series of corrective signals on momentum indicators (MACD bear cross, Stochastics sell signal) have been seen to usher the corrective move. This now suggests that intraday rallies are a chance to sell. There is initial resistance at 1.3560 which shows clearly on the hourly chart as overhead supply. Anything towards 50/60 on hourly RSI and neutral on hourly MACD lines is now a move that unwinds to renew near term corrective potential. There is a band of breakout support 1.3320/1.3385 which is a target zone.
The flash crash that hit across major forex early yesterday did little to really impact on EUR/USD and with a gradual move out of the dollar through the session, means that much of the previous selling pressure is unwinding. The huge negative candlestick from Wednesday’s trading hold a bearish legacy but only towards the bottom of what is an ongoing trading range. Support has tended to be found around $1.1300 and once more this seems to be the case with yesterday’s low at $1.1307. This seems to now be a 200 pip range play, to buy around $1.1300 and take profit around $1.1500. Momentum indicators are fluctuating around a neutral configuration and reflects this consolidation. The hourly chart shows the unwind into the middle of the range with initial resistance around $1.1400/$1.1430.
Yesterday’s early flash crash has now been entirely unwound and the market is back towards where it was trading late on Wednesday. There is a legacy still of Wednesday’s strong sell-off which broke a recovery uptrend and it will be interesting to sell how the rebound copes with the overhead supply band $1.2660/$1.2695 (old August and October key supports respectively). Momentum has also tailed off in its medium term recovery now too. The hourly chart shows the flash rebound has just begun to stall now, having unwound momentum. The key resistance remains $1.2815. Non-farm Payrolls will likely give the market a bit of a nudge, but as the dust is settling again, Cable is likely to become more of a Brexit play once more.
The dust is still settling on the flash crash from yesterday morning but the overhead supply of the old key low of 108.10 from May 2018 remains an issue. Technical momentum remains deeply negative, with the MACD lines accelerating lower and RSI below 30. However, with the sharp rebound from 104.95 in the flash crash, the more sensitive technicals are beginning to tick higher. Just prior to Wednesday’s crash, the market had already been falling below 110 and using this as a basis of resistance whilst intraday technical rallies had been a chance to sell. There is little to suggest that this will not continue to be the case once the dust has settled. There is initial resistance on the hourly chart at 108.70/109.50, whilst the hourly RSI has unwound to 60 and MACD lines back to neutral, areas where previous struggles have been seen. The payrolls report will add in further volatility today.
Gold
The momentum in the run higher continues as gold posted another positive candlestick yesterday. The market is on a run back towards the old long term pivot band around $1300/$1310 which will be a key test for the longevity of the bull run. Momentum is very strong with the RSI holding firm in the mid-70s whilst the MACD lines continue to accelerate higher. The market has accelerated higher through a four month uptrend channel and is now tracking the upper limit of a sharper six week trend channel. Corrections within this channel (which is supportive at $1259 today) should be seen as a chance to buy. Near term support at $1278/$1281 whilst the breakout at $1266 is another support. This positive configuration is all reflected in the hourly chart which shows unwinding moves on hourly RSI finding a low around 40. How the market reacts around the $1300/$1310 pivot will be key to the continuation of this run higher.
WTI Oil
WTI continues to put pressure on what is now a 12 week downtrend as the bulls refuse to allow further selling early into 2019. In recent sessions, the buyers come in around $44.35 so a closing breach of this support would be a disappointment now. But, this is not being seen currently though as the market has opened positively today above the 12 week downtrend. Quite what the bulls can muster though remains to be seen, but there are now a couple of positive candles in a row and there is a seeming a notable improvement in the momentum indicators. Can the RSI begin to push and hold above 42? If so, this would be a ten week high, whilst the MACD lines are also looking to position far more positively. However, there is resistance around $47.80/48.00 which is restricting the recovery, whilst an attempted rally yesterday fell over into the close to leave a slightly negative legacy. Reaction to the payrolls report but also EIA inventories could be key today.
With a decisive bear candle the Dow is back under pressure again. In a market that opened at the high of the session, to fall 660 ticks to close towards the low of the session is never a positive sign. Momentum indicators reflect this as the RSI, Stochastics and MACD lines all roll over. How the market responds to the early gains that are likely according to the futures will be key. The resistance has been built now at the bttom of the old overhead supply 23,345/24,000 which is a very big concern for the medium to longer term outlook now. Any failure to reclaim this, along with a posting of a lower high under 23,413 (this week’s high) would be another bearish development. Initial support will be yesterday’s low at 22,638.
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