Market Overview
Risk appetite has been hit and safe haven assets such as gold and the yen have been boosted once more as the geopolitical tensions between the US and North Korea have escalated further. With provocative suggestions from Donald Trump that the North Korean leadership may not be around too much longer, the North Korean foreign minister has responded by saying that the US had declared war and that North Korea had the right to shoot down US bombers.
Although the US administration flatly denies the declaration, now is the time for diplomacy from the US President otherwise the Korean Peninsula could stumble into a war that nobody benefits from, but many have much to lose. Financial markets took on a safe haven bid last night, with gold pulling sharply back above $1300, the yen strengthening and US Treasury yields lower. The dollar strengthened overnight to pull the euro and sterling back to test key near term levels. However, markets appear already to be consolidating as the European traders take over today, with gold initially trading lower. The dollar has also stuttered early today as EUR/USD has held on to $1.1820 and GBP/USD has pulled back above $1.3480. Higher risk equities are though on the back foot, with the VIX pulling higher yesterday.
Wall Street closed down for a third session in a row with the S&P 500 -0.2 at 2496, with Asian markets all weaker across the board (Nikkei -0.3%). European indices are slightly weaker in early moves.
In forex, the initial knee-jerk moves of last night have just consolidated early today, with the yen only mildly stronger, whilst sterling has rebounded as the dollar has pared some of its gains. Only really the New Zealand dollar is a significant underperformer once more.
In commodities, gold is actually trading lower with the $1300/$1310 pivot still a key level to watch. Oil is holding on to its sharp gains from yesterday.
It is a quiet European morning for economic data, but into the afternoon markets will be looking at some key US data to drive sentiment. The S&P Case Shiller House Prices Index is at 14:00 BST and is expected to show an improvement to 5.8% (from 5.7% last month). US Consumer Confidence is then at 15:00 BST and is expected to drop back to 120.0 (from 122.9) which would, remain a strong number. The New Home Sales at 1500BST are expected to improve to 591,000 (from 571,000 last month, whilst the Richmond Fed Composite index is expected to remain strong at 13 (down from 14).
Chart of the Day – DAX Xetra
It was a fairly decent reaction on the DAX to the German election result by the bulls. They have been in control for over two weeks, ever since the breakout above 12,340 ended the sequence of lower high, but now the market is looking to form higher lows as a rising wedge formation has taken hold recently. The outlook on the momentum remains positive with the RSI in the high 60s, MACD lines rising and the Stochastics strongly above 80, all of which suggests the strategy of buying into weakness remains in play. However, yesterday’s candle did not end as strongly as it may have done amid fears over geopolitical tensions in North Korea. This has left a questionable candle and with an early dip today, the recent rising wedge will come under threat. The hourly momentum are positively configured with the hourly RSI supported on moves back towards 45/50, whilst the MACD lines are consistently holding above neutral. However this could also come under threat today and needs to be watched. A higher low at 12,528 is initial support but the support around the 12,490 old pivot is key and as long as this level remains intact he bulls will still be OK near term. Initial resistance is 12,646 under the 12,655 key July high.
EUR/USD
Having lost bullish momentum over the past few weeks, the euro has been in consolidation mode. However, this consolidation is now at risk of moving into correction mode. The negative candle in yesterday’s session lost over 100 pips and now a five month uptrend channel is being seriously tested. The market closed all but bang on the channel support yesterday and is showing signs of weakness again today to suggest a confirmed channel breach could be seen today. However the important support to watch today is $1.1820. This is the floor of the past month and a confirmed breakdown would complete a head and shoulders top that would imply 260 pips of further correction. The momentum indicators are increasingly concerning with the RSI falling below 50, MACD lines now beginning to accelerate lower and the Stochastics at a three month low. The hurly chart shows the market beginning to take a far more corrective configuration. Breaching $1.1865 support now leaves this as initial resistance, with $1.1895 and $1.1935 as subsequent overhead barriers today.
GBP/USD
The euro is threatening to complete a top pattern and Cable is also looking set to break lower too. Cable has been in a 200 pip consolidation now for over a week, but the floor of that consolidation is beginning to look increasingly unstable. Intraday support of the range at $1.3450 was breached yesterday, whilst the market also closed at a one week low below $1.3480. The momentum indicators are beginning to tail off but are in more of a drift mode for now and the downside pressure seems to be mounting. The support of the breakout from the old long term uptrend channel is being tested, but a close below $1.3450 would now not only complete a topping out of the recent range but also breach the channel support. This would open 200 pips of correction towards $1.3250 which on a medium to longer term basis would simply be considered an unwinding move towards the key August breakout of $1.3265 and the 50% Fibonacci retracement of the Brexit sell-off at $1.3247. The hourly chart shows the momentum is beginning to look a touch more corrective but nothing is yet confirmed. Resistance at $1.3570 is a lower high that needs to be breached for the bulls to be more confident again.
The increased geopolitical tensions has driven safe haven plays higher and this means yen strength. This has pulled the pair lower for a second session and looks to be building for a third. The key support remains in place at 111.00 which is not only a medium term pivot but also around where the support of the first real higher reaction low in the recovery comes in (from the low of FOMC day last week). The market has taken on more of a corrective feel now near term, but on a medium term basis the bulls will be eying the support band 110.60/111.00 as the key area to watch. If they can muster another higher low around or above here then this more will be seen as an outlook confirming move. The near term decline in the momentum indicators is taking hold with the RSI back under 60 and Stochastics turning lower. However nothing has yet been decisively broken for the bulls and trading above the moving averages still has the outlook positive. Support needs to form quickly though otherwise momentum could build in the correction.
Of the various factors that move the gold price, the supportive safe haven status during times of geopolitical unrest has taken hold as a key driving force once more. With this in mind we need to be careful. Everything was pointing towards an ongoing correction on gold, however yesterday’s sharp move has changed that for the near term. A rally through resistance at $1300, through the two week downtrend and seemingly above $1310 (the upper part of the $1300/$1310 pivot) means that the bulls are fighting back. The resistance at $1316 from the lower high of last week (on FOMC day) is now a key near term level to watch. An upside breach today will confirm a near term change in outlook. With the momentum indicators ticking higher the signs are improving. The Stochastics are rising now and the RSI up to around 50. The early move today is move is broadly flat (around $1310) and it will be interesting to see how long this rebound continues. $1304 and $1300 now become near term supportive but a close back below $1300 would re-open the downside.
WTI Oil
After stuttering for the past couple of sessions the bulls have retaken to the driving seat at the beginning of this week. A strong bullish candle has closed decisively clear of the resistance of the August high and now through the $52.00 May high. This move now opens the key April high at $53.75. With the strength of the momentum indicators there is little reason not to expect a significant test of the resistance. The RSI is in the 70s, MACD lines are rising above neutral and Stochastics are rising above 80. The old resistance at $50.50 is now a basis for support for weakness, whilst the uptrend of the past few weeks comes in to support at $50.10 today. The RSI shows the initial move is a touch stretched but any intraday weakness to unwind the hourly RSI into the 40/50 area is a buying opportunity.
The medium term uptrend channel continues to be a guiding hand higher for the Dow. However, within the trend channel there will be occasional near term corrections that will be a chance to buy. The latest breakout above 22,179 is the basis of old resistance that has become new support. The market seems to just have entered into another minor negative drift for the near term, after Thursday’s negative candle halted the run of bullish candles. This has just subdued the market as the momentum indicators look to renew upside momentum with the RSI unwinding into the low 60s again. However, backing against the bulls for any sustained period has not been a profitable trade on the Dow. Another negative candle yesterday suggests there is a correction now underway. Another higher low in the breakout support band 20,039/22,179 would be ideal for the buyers. Resistance of the all-time high is now at 22,420, with initial resistance now at yesterday’s high at 22,360.
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