Market Overview
There is still a huge cloud of uncertainty around the Brexit process which is hampering risk appetite on financial markets. Add in a mixed set of economic data from China and this leaves traders somewhat betwixt and between. With just 15 days to go until the UK is legislated to leave the EU, there is utter chaos in the UK Parliament surrounding Brexit.
Prime Minister May cannot get her deal through (after two spectacular failed attempts) and now in a vote last night to reject a “no deal” Brexit, her splintered government has lost control of the process. There is a vote today whether to ask the EU for an extension of Article 50 which would delay the exit beyond 29th March. But for what? The EU has elections at the end of May and this massively complicates things.
The EU-27 need to unanimously agree to an extension and this is by no means a given. Financial markets are pricing that there will be Mrs May’s deal or something even softer (perhaps even no Brexit at all). Sterling has elevate levels of volatility and broader market sentiment is cautious. Overnight, China data has also been a mixed bag.
China Industrial Production fell to lower than expected at +5.3% (+5.5% exp, +5.7% last), but China Retail Sales which account for around half of the economy now came in a shade above expectation at +8.2% (+8.1% exp, +8.2% last). There was also an increase in Fixed Asset Investment to 6.1% (+6.0% exp, +5.9% last). This paints a mixed picture and Asian assets have been cautiously lower overnight, with the yuan weakening.
Wall Street closed solidly higher last night with the S&P 500 +0.7% at 2810 and testing multi-month highs, whilst US futures are a shade lower today -0.2%. The reaction has been cautious to negative on Asian markets with the Nikkei all but flat, whilst the Shanghai Composite was -1.4% whilst European futures are mildly lower early today..
In forex markets, after coming under increasing pressure recently, the dollar has clawed back some losses this morning, making gains across the majors, but interestingly the euro is holding up relatively well. The wild ride on sterling continues, with Cable back -0.7% lower today.
In commodities, the dollar gains and cautious sentiment is meaning gold has slipped back and silver is underperforming. Oil is though supported in the wake of a surprise drawdown in EIA inventories and surprise reduction in US production.
It is a light economic calendar for the European morning and little to really impact on markets until the US Weekly Jobless Claims at 12:30 GMT which are expected to again remain recent levels at 225,000 (223,000 last week). US New Home Sales at 14:00 GMT are expected to show a mild increase to 622,000 in January (from 621,000 in December).
The main volatility event will once more come with the UK Parliamentary vote on whether to apply for an extension of Article 50, with the vote expected to be around 19)00 GMT.
Chart of the Day – EUR/CHF
There is an interesting improvement in the outlook in the past few sessions and Euro/Swiss is beginning to position for renewed upside. There has been a pivot band over the past seven months between 1.1300/1.1350 which is a basis of support and the bulls are now looking to use this range as a chance to buy. Since the beginning of February there has been a descending triangle formation of a downtrend whilst holding on to the near term support at 113.05. An upside breakout of the downtrend was seen on Tuesday taking the market to a one week high and begins to develop a better outlook once more. This comes with the unwinding move of the positive configuration on momentum indicators. The RSI has consistently held up above 45 with a positive bias during this unwind, whilst the MACD lines have unwound back to neutral and the Stochastics have crossed higher and are now looking to accelerate. The bulls will be looking for a close above 1.1390 which would generate momentum.
The fact that the euro bulls have reacted so positively in the past four sessions since the breach of $1.1215 reflects that the market is still very much in a multi-month range phase and there is little decisive direction. Four consecutive positive candles have pulled the market back above $1.1300 which was an old key floor and classic area of overhead supply that should have limited the recovery if this was a dollar bull phase. It is not. The momentum indicators have swung near term positive again. There is still a negative bias to the medium term configuration (RSI under 50, MACD lines consistently under neutral) which points to a broad drift lower rather than an impending precipitous sell off. Any weakness will be truncated, such as how we have seen the move in the past few weeks. The hourly chart shows a recovery in decent health where intraday slips are a chance to buy. Positive configuration on hourly MACD and RSI reflects this. A move above $1.1320 (another near term pivot) opens $1.1350 area, whilst holding above $1.1300 suggests a bias towards $1.1420 again. A move below a higher reaction low at $1.1275 loses the impetus of the recovery.
Tumultuous, volatile, uncertain, and that is just the UK Parliament. Cable has been highly charged in the past four sessions which have contained incredible swings in sentiment. Ultimately, politics will decide the direction of sterling and the calamitous events in Parliament opens for a move towards a softer Brexit which means sterling is higher. A gain of 265 pips on the day yesterday was the highest close since June 2018 and shows the mood for sterling is positive. However, do not expect the wild ride to calm down today, as MPs vote on an extension to Article 50. Logic would suggest this would pass and sterling would again be supported, but anything could happen in this Parliament. Technicals (which matter very little right now) are strong and point towards buying into weakness, but this is a highly uncertain period of trading and anything could happen. For that, sterling has dropped back by 90 pips again today. The hourly chart shows the support of a pivot around $1.3200 and $1.3150. Resistance again around $1.3300 and yesterday’s high at $1.3383.
After a few sessions of building a new basis of a higher low, the bulls are starting to pull higher once more today. This period has been one of consolidation above the 110.75 support from last week, but now the market is looking to pull higher again as risk appetite seems to have improved again. It is interesting to see the daily momentum indicators, which had been corrective recently are now positive bullish signals again, with the Stochastics crossing higher around 50 (where the February rally kicked off), whilst RSI is again finding traction. The hourly chart show a test of the 111.60 pivot this morning and an upside break would open the recent highs around 112.10 and then the old resistance at 112.25. The support is also growing around 111.00.
Gold
The bulls have been gathering momentum for renewed recovery once more in the past week. A move back above the pivot at $1300 has also broken a corrective downtrend, whilst momentum indicators are decisively improving. The RSI is pulling higher above 50, whilst the Stochastics have posted a bull cross buy signal and the MACD lines are close to also crossing higher around neutral. There just now needs to be a decisive closing breakout above $1310 which would be back through the top of the $1300/$1310 long term pivot band and would send a key signal that the bulls are back in control. However, this morning’s slip back within the $1300/$1310 pivot suggests the bulls are not quite ready. The hourly chart shows support around $1280 is strengthening, whilst $1290 and subsequently $1300 are now successive higher lows and supportive. There is now a positive configuration on hourly momentum indicators which suggest intraday corrections are a chance to buy. A move above $1310 opens an old pivot at $1316 whilst the resistance at $1326.
WTI Oil
Another positive close and a solid bullish candlestick has seen WTI closing above the $58.00 medium term pivot for the first time since early November. After a couple of weeks of consolidation and drift forming on momentum indicators, there is now signs of life and this finally looks like it is a breakout. Momentum indicators confirm the move with the RSI pulling above 60 is a two week high, whilst the Stochastics have crossed higher and are accelerating. A second closing breakout above $58.00 would confirm an upside break of the consolidation between $54.50/$58.00 which would imply $3.50 of additional upside in the coming weeks towards $61.80. The positive bias to the medium term momentum configuration has been pointing towards an upside break and this now seems to be coming. There is a pullback buy zone of support now between $57.50/$58.00.
After a bit of a stutter during Tuesday’s session, the bulls are having another go at the 76.4% Fib level again. A positive session and decent looking candle posted yesterday but 76.4% Fibonacci retracement at 25,715 still needs to be cleared for the bulls to be back in control once more. Looking at the daily momentum indicators there has certainly been an improvement seen with a bull cross on Stochastics, RSI ticking back above 50 and MACD lines set to bottom above neutral. The hourly chart reflects this improvement with the hourly RSI pushing above 60 and hourly MACD lines above neutral. It looks now as though 25,208 is forming as a higher low, whilst the initial support is at 25.530. A decisive close above 25,715 is the next test whilst the lower high at 25,870 then needs clearing as the intraday corrections are now seen as a chance to buy.
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