Market Overview
Safe haven trades are performing well with geopolitics having become the driver of markets, as tensions between the US and North Korea have been ratcheted up several notches overnight. Perhaps coming in the face of disappointing domestic approval ratings, President Trump announced that he would hit North Korea with “fire and fury” and with “power, the likes of which the word has never seen before”. However, within hours of Trump dramatically raising the bar on rhetoric, North Korea has come back by suggesting that they would hit the US island of Guam in the Pacific.
The reaction in financial markets has been for safe haven plays to increase, with Treasury yields lower, whilst gold and the yen have strengthened. Equity markets have also come under pressure with the geopolitics bringing the run into record highs on Wall Street to an end. However, geopolitically driven moves tend not to be long lasting in markets and moves are often quickly retraced. Prior to the safe haven flow, the dollar was performing strongly in the wake of record job openings in the JOLTS data. Unless there is a further significant escalation in geopolitical tensions, it is likely that the prior moves will re-engage once more. The reaction today will be interesting, but it is tempting to not trust the initial knee-jerk moves. In other news overnight, China inflation dipped slightly with CPI down from +1.5% to +1.4% (+1.5% exp), although the PPI was in line at +5.5% (+5.5% exp).
Wall Street closed marginally lower ending the Dow’s hugely strong run of closing highs, with the S&P 500 -0.2% at 2475. Asian markets have been strongly lower overnight with the Nikkei -1.3%, whilst European markets are also weaker in early moves.
In forex there is a definite safe haven theme amidst the geopolitical tensions, with the yen and Swissy outperforming, whilst the commodity currencies are all weaker. There is little real direction on the euro against the dollar whilst sterling is slightly higher.
In commodity markets, the precious metals are performing well with gold up $5, whilst oil continues to trade in its recent range.
Another quiet day of economic data with the EIA oil inventories at 15:30 BST the only significant data point. Crude is expected to drawdown by -2.5m barrels, distillates is expected to be flat, whilst gasoline is expected to drawdown by -1.5m barrels.
The day finishes with the Reserve Bank of New Zealand updating monetary policy at 22:00 BST. There is no expectation of a hike (with a hold at +1.75%), whilst Governor Wheeler has been somewhat dovish recently amidst the strength of the Kiwi and subdued inflation, leaving expectations is that the RBNZ will give off a note of caution.
Chart of the Day – GBP/JPY
Sterling is under pressure and with the yen holding relative strength yesterday this was a recipe for a strong bear candle on GBP/JPY. Having failed to breakout above 148.10 key long term resistance in July, the market posted a high at 147.75 and has been under increasing corrective pressure in the past few weeks. Yesterday’s decisive breach of support at 144.00 completed the latest breakdown and begins to form a new downtrend of lower highs and lower lows.
This deterioration is reflected in the RSI which has dropped below 40, the MACD lines which are accelerating back to neutral, and negative configuration on the Stochastics. There is a broad trading range between 135.60/148.10 in the past 9 months and the RSI at 40 suggests there is still downside potential in the current move. With today’s continued decline, intraday rallies need to be seen as a chance to sell. The hourly chart shows key near term resistance between 144.00/144.70 whilst any rallies into 143.50/144.00 seem to be a selling opportunity. The next support of 142.55/142.75 is already being tested whilst taking the breakdown as a top pattern derives an implied target of 141.20.
The dollar strengthened on yesterday’s JOLTS jobs openings, pulling the pair lower and continuing a corrective slide. This slide is now beginning to gain traction on the momentum indicators with the both MACD and Stochastics lines posting bear cross sell signals, whilst this morning the RSI has dropped below 60 for the first time since late June. There is a real potential for a continued correction now. The key is the support of the old key breakout at $1.1711. This is the first real support for the euro and it held yesterday and continues to hold today. With the development of the corrective look to the momentum, a closing breach of $1.1711 would open up the downside, with $1.1614 next support. The hourly chart is taking on a more corrective outlook too and continued failure of the hourly RSI under 60 and the hourly MACD lines around neutral will add momentum. Near term resistance is $1.1770/$1.1780 with $1.1825 now a lower high.
The outlook for sterling is increasingly corrective now. Tuesday’s minor positive candle looks to have just been a brief pause as another strong negative candle was posted yesterday. This has confirmed the breach of the psychological $1.3000 support and puts pressure on the next support at $1.2930. The momentum is gathering downside momentum with traction on a slide on the MACD and Stochastics, whilst the RSI is falling decisively below 50 for the first time since the previous uptrend began. Intraday rallies are now being sold into and it was interesting to see $1.3050 being around yesterday’s high and subsequently seems to be seen as a basis of resistance again. The hourly chart reflects all of this with the sequence of lower highs. Also, the momentum is negatively configured with the hourly RSI failing between 50/60 and the MACD lines failing under neutral now. There is now a sell zone $1.3000/$1.3050 as the sellers look to test yesterday’s low at $1.2950 and then $1.2930. A breach of $1.2930 opens $1.2830.
There was a moment yesterday afternoon, in the wake of the strong JOLTS number, where the dollar strength looked ready for another test of 111.00. However the drive into safe havens has scrapped that idea and the market subsequently has fallen below the 109.82 support instead this morning. It will be interesting to see how far this safe haven flow takes Dollar/Yen as usually geopolitically driven moves are fairly fleeting before retracements kick in. Today’s close could be key to the outlook. The momentum indicators are still reflecting a near term bottoming as the RSI consolidates and the MACD lines look to plateau. The hourly chart shows the market has picked up off the lows today and there is resistance at 110.20 and 110.60 initially. How the bulls respond today will be intriguing to the outlook, but beware going too short on this geopolitical decline. Support is now at 109.70.
In a similar move to the yen, gold was under pressure until geopolitics took over late yesterday afternoon. The market has subsequently rallied from a low at $1251 back through the $1260 pivot. The rally has continued today but interestingly the underside of the old uptrend is providing resistance. Momentum indicators are still uncertain as to how to take this recent phase of trading, but a lower high under $1274 could continue the move lower. As with the yen, it will be interesting to see how far the gold bulls take the price as prior to the geopolitics, the market was beginning to look decidedly corrective. Technically there is a near term pivot band $1258/$1260 on the hourly chart, which also shows momentum as ranging. Initial resistance is the overnight high at $1267.
WTI Oil
The mixed candles of the recent consolidation continue to be posted. The market has been in a range between $48.37/$50.43 for the past 8 sessions as traders continue to mull over the next move. The concern is that this reaction high at $50.43 becomes a third key lower high as the 6 month downtrend from the February high continues to drag (currently around $50.60) . There is a feeling that this is a consolidation that could begin to be seen as key for the next medium term direction. There is a 7 week uptrend that comes in at $46.90 and although a breakdown below $48.37 implies $46.30 the key pivot at $47.00 is supportive. The hourly chart reflects a range play for now though with moves to 30 and 70 on the RSI an opportunity to trade the range. Until there is a breakout, this remains the case. Support is $48.25/$48.50 with resistance at $49.95 and $50.43.
The persistent run of closing all-time highs has come to an end as the market closed lower for the first time in 11 sessions yesterday. Now the bulls have an interesting test. Will this begin to trigger a profit-taking correction? Momentum has been so consistently strong but there has been a reaction lower ont he RSI. No sell signal has been posted but the RSI has dropped back. Having initially moved to another intraday all time high of 22,179, a bearish outside day for the session yesterday poses some questions for the bulls. Every time it looks as though momentum is beginning to wane, the market simply continues to pull higher, however hourly momentum is beginning to look more corrective, suggesting that the bulls could be losing impetus. Initial support is now at 22,078 and then 21,990.
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