Market Overview
The fear with Donald Trump’s form of foreign policy or trade policy, is that if someone or a country does not back down to his bullyboy tactics, then where does it end? This is the question that traders will now be asking themselves as Trump’s administration has ramped up the stakes in this trade dispute with China.
As the situation escalates, risk appetite has suffered and financial markets have taken a turn for the worse this morning. With China moving in lock step with the US tariffs and refusing to back down, the US has threatened to impose a 10% tariff on $200bn of Chinese goods. The problem is that this is not a small country that will be cowed by the US strength, this is China, the world’s second (and over the course of the coming years, soon to be first) largest economy. Furthermore, China does not back down in the face of US perceived aggression.
How the Chinese react to this latest escalation will be key as for how long this risk aversion lasts for. For now though, financial markets are seeing elevated risk aversion, with a flood into safe haven assets again. Major bond yields are lower, the yen is outperforming and equities are selling off, and even gold is higher.
The US dollar is under pressure as there is still a perception that the US economy suffers in a trade war, whilst the comments from the FOMC’s Raphael Bostic (Atlanta Fed FOMC member, leans dovish) is that trade disputes could hit the US economic growth. Could this mean the Fed ultimately will need to back away from a fourth rate hike this year? That is what moves on Treasury markets have positing since the FOMC too. Aside from trade wars, it will be interesting to see the sort of speech that Mario Draghi gives at the ECB’s central bankers forum in Sintra today. Following the ECB’s dovish taper last week, any comments that Draghi makes on inflation will be key.
Wall Street closed lower again, with the S&P 500 -0.2% at 2774, but the concern is that Wall Street futures are around 1% lower currently. This has hit Asian equities hard, with the Nikkei -1.5% and European markets are following suit. The general rule would be that the DAX tends to underperform during these risk-off moments, so its performance will be interesting today, especially given German political risk is suddenly elevated.
In forex, the yen is the big outperformer, whilst the riskier commodity currencies (Aussie, Kiwi and Canadian dollar) are all under pressure, with the Aussie making a key breakdown of support against the dollar.
In commodities, the safe haven bias is helping gold to find support, whilst the oil price is back lower again amid the negative prospects for global growth of an escalated trade dispute.
Aside from Mario Draghi speaking in Sintra at 09:00 BST, once more it is a fairly light economic calendar for today. The level of the Eurozone Current Account surplus for April will be announced at 09:00 BST which has been consistently around or above €30bn in recent months and is expected to be €30.3bn (down from €32.0bn in March).
The US Building Permits are at 13:30 BST and are expected to remain at 1.35m (1.35m previously) whilst the Housing Starts are expected to improve marginally to 1.31m (from 1.29m last month).
Chart of the Day – AUD/USD
The Australian dollar has been under more pressure than most in recent sessions as risk appetite has been hit on the escalation of trade tariffs and the dollar strength has taken another leg up. This accelerated selling pressure of the past few sessions has pulled the Aussie back to now break key support. The May low at $0.7410 came just prior to a strong rally, but yet another lower high formed a couple of weeks ago at the resistance of a four month downtrend and downside pressure has resumed. For the past two sessions the market has now closed at 12 month lows and today is breaking below $0.7410. There has been a series of sell signals across the momentum indicators, with the RSI failing at 60, Stochastics accelerating lower and most worryingly a recent bear cross on the MACD lines. The indicators also show that there is further downside potential in the latest moves. A confirmed breach of $0.7410 opens the $0.7325 May 2016 low as the next key support. The old support at $0.7410 now becomes new resistance, whilst the hourly chart shows there is overhead supply between $0.7445/$0.7480 with any intraday unwinding rally seen as a chance to sell.
It is very interesting to see the price action on the euro in the wake of the huge sell-off, as the market does seem to be stabilising. Friday’s recovery candle was followed by an initial test lower yesterday, only for a rebound into the close for another positive session. The bulls are now looking to form support above the key May low at $1.1505 with Friday’s low at $.1540. Momentum indicators are still impacted by the moves of last week, but also they are not hugely negative either and it will be interesting to see how the more stable MACD lines react in the coming days. The hourly chart shows resistance around $1.1640 is being tested this morning and this is the first real area of overhead supply in the recovery. A consistent move above $1.1640 re-opens the resistance around $1.1725 once more. These are still very early days of a potential recovery for the euro, but whilst the support at $1.1540 remains intact then the bulls will build confidence
Sterling remains under pressure following the sharp sell-off from last Thursday. Another drop back yesterday (with a negative one day candlestick) again has the market eyeing a test of the key May low at $1.3203. Momentum indicators are still hovering around bearish configuration positions. This is reflected on the hourly chart too, whilst the resistance around $1.3300 is growing. There has been an uncertain open to today’s session but unless the bulls can mount some sort of recovery through $1.3300 then the prospects of holding the key support around $1.3200 will be very thin. A closing break below $1.3200 opens $1.3025. Even if a move above $1.3300 can be mustered, there is still plenty of overhead supply around $1.3345 to tackle. For now, sterling remains under considerable strain.
A safe haven bias has currency traders flocking into the Japanese yen. I discussed yesterday about the uncertain moves within the mini trend higher on Dollar/Yen which made me question the strength of the move. This uncertainty of Friday and Monday’s sessions has now developed into a sharp downside move initially today. The market has dropped almost 90 pips in the Asian session and this is now breaking a series of near term key technical levels. This includes a decisive move below the pivot at 110.00, a breach of the higher reaction low at 109.90, a decline that has broken the support of the three week uptrend, and (if confirmed today) what looks to be a deterioration in momentum indicators. The key support is now the support of the early June reaction low at 109.15, as a breach would confirm the market now in correction mode once more within the range 108.10/111.40. The Stochastics need to be watched as they are now close to a confirmed sell signal, whilst the RSI dropping below 50 is also corrective. The 110.00 pivot becomes a basis of resistance now and 109.90/110.25 is now a near term sell zone.
Gold
Gold will be a very interesting mover today. The weaker dollar and safe haven bias in the market has all the ingredients for a recovery on gold following the decisive downside break on Friday. How the market reacts in the coming hours and days will be an interesting gauge, as technically gold is negatively configured to sell into strength. However geopolitics sometimes takes over the price and can mean sharp moves on gold. Moving back above $1282 this morning, there is resistance around $1289/$1290 from the early June lows, whilst the main pivot resistance will remain at $1300 to $1310. If the bulls can only muster a minor recovery then once the dust settles, the most likely course is for the market to sell into strength for a retest of Friday’s low at $1275 and then further downside.
WTI Oil
Although the support at $64.25 was breached during yesterday’s session, WTI managed to stage a strong intraday rebound that has prevented a significantly corrective outlook from confirming. With a bullish candle on the session (and a decent gain on the day of over 1%) the bulls are fighting to hang on. However, they must build on this move. This is likely to be a week where the oil price is increasingly volatile on an intraday basis, with the newsflow surrounding the OPEC meeting, likely to result in significant intraday fluctuations. Despite this, with the corrective momentum configuration still prevalent (RSI habitually below 50, MACD lines turning back lower again) and a run of lower highs (latest at $67.15), rallies will still be seen as a chance to sell. To begin to change the outlook, yesterday’s high at $66.00 needs to be breached.
Despite the market rallying into the close on Friday, another negative close was seen yesterday. There is a degree of uncertainty that needs to be noted though, seeing as the market actually closed above the open of the session and this is a potential hammer candle. However, futures are sharply lower again today and the concern is that this run lower seems to be accelerating. The market closed almost bang on the support of the 50% Fibonacci (which is at 24,980) however having traded for much of yesterday below the support band 24,980/25,086, and likely to again be below today, this now opens 38.2% Fib as a potential next target zone at 24,595. Concern increases with a look at the momentum indicators, with the RSI now falling strongly, whilst sell signals are forming on the MACD and Stochastics lines. Intraday rallies are now being seen as a chance to sell, with the Dow forming lower highs and lower lows on each of the past five sessions now. There is a pivot around the 38.2% Fib level too, around 24,600 as a gauge whilst the key May low is the next significant support at 24,248.
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