Market Overview
Flash PMIs can act as a window to future growth trends. The big takeaway from yesterday’s data is that the protracted dispute between the US and China is taking a serious toll. Manufacturing PMIs are already suffering, with new order pipelines taking a hit. But this now could be bleeding into the services sector too. A global economic slowdown seems to be looming.
An aggressive deterioration in the US flash PMIs came as a sharp warning that the global economy is still teetering and protectionist measures of the US administration could push it over the edge. PMIs for Japan, the Eurozone are weak, but also the US is not immune. The reaction has been for safe haven asset flows to grow.
Strengthening of the yen, Swiss franc and gold. Bond yields to move sharply lower. The US 10 year yield has fallen below 2.34% to levels not seen since December 2017. However, the big move has come on the dollar. Having earlier hit levels not seen since May 2017, the Dollar Index sharply retracted. This is still likely to be a knee jerk move, but near term momentum has certainly turned against the dollar. The question is for how long though. The Federal Reserve remains patient on monetary policy and it is still likely that the dollar will remain the best of a bad bunch in this scenario of a global slowdown. However, another real concern comes with major equity markets which are seriously threatening multi-month top patterns now. How the bulls react in the coming days will be crucial. Those quick to dismiss “sell in May and go away” could well be thinking twice.
Wall Street closed sharply lower with the S&P 500 was -1.2% at 2822. However, with US futures rebounding this morning by +0.3% there is a degree of stability on Asian markets (Nikkei -0.3% and Shanghai Composite +0.1%). European markets are also showing signs of support initially with FTSE futures +0.3% and DAX futures +0.5%).
In forex, USD is under growing corrective pressure as yesterday’s decline is continuing. This is playing primarily through EUR and GBP this morning. The commodity currencies are less positive given the risk negative implications of the global slowdown.
In commodities the rebound in gold from yesterday is holding ground, whilst oil has found support after falling almost 6% in the previous session.
There are a couple of key releases on the economic calendar today. UK Retail Sales ex-fuel for April are at 09:30 BST and are expected to drop by -0.5% on the month after a very strong +1.2% March. This would pull the year on year number back to +4.2% (from +6.2% in March).
Focus in the afternoon turns to US Durable Goods Orders for April which are expected to see core ex-transport growth of +0.2% on the month (+0.3% in March).
Chart of the Day – EUR/JPY
The outlook remains under pressure as a rally earlier this week failed once more in the 123.40/123.75 band of resistance. Old support from throughout the first four months of the year is now new resistance. Rallies for the euro are still being seen as a chance to sell. Having failed at the resistance, two solid bearish candles have renewed downside momentum. There is a continued negative configuration across momentum indicators with the RSI failing again in the low 40s and MACD lines set up for a bear kiss, both of which have further downside potential. The move lower is now eyeing a test of last week’s low at 122.05 and a closing breach would open further weakness into the low 120s. The first pivot support coincides with 122.05 but a breach opens 121.30 and then 120.60 as subsequent pivot supports and targets. Initial resistance is at 122.70/122.80.
An incredible intraday turnaround (in the wake of the very disappointing US flash PMIs) has seen EUR/USD find some support. Forming a big bullish one day candle after the previous consistent selling pressure suggests a degree of short covering, so it will be interesting to see how the market reacts from here. Momentum indicators have swung positive on this turnaround, with the Stochastics crossing back higher and RSI back into the mid-40s. Although there may still be an element of near term recovery, this may not last long. Rallies and rebounds remain a chance to sell. However, for now momentum is with the rebound. The bounce is through initial resistance around $1.1185, and is eyeing further resistance at $1.1220 overhead. The big barrier remains $1.1265 which is around where the multi-month channel resistance is falling now. Once the dust settles on this rebound, expect the selling pressure to resume to retest $1.1130 and the key floor at $11105/10.
Given the sharp retracement of the dollar across major currency pairs yesterday there has been a limited reaction on Cable. The market closed lower yesterday shows that fear and expectation of sterling weakness remains a driving factor on the pair. There is a degree of buying pressure today, but there is plenty of key resistance overhead to overcome. Given how stretched and oversold Cable has become, a tick higher is not a surprise, but can this turn into a more considerable recovery? There is a tick higher on daily RSI and Stochastics, but nothing yet that would give any confidence in a recovery. Old support is still intact as resistance, with initial levels to watch around $1.2690/$1.2700. Although a move into the $1.2700s could engender a rebound to $1.2815 there is so much overhead supply now, that rallies will find it really tough going. Yesterday’s low at $1.2603 is initially supportive.
A market moving towards safety was pulling the pair lower, and then a sharp disappointment on the US flash PMIs saw the dollar sold off. A strong bear candle resulted. A move that has broken below the key pivot support band 109.70/110.00 and which scuppers the near term prospects of recovery. There has been a sharp deterioration in momentum. The MACD lines are now wavering, whilst the Stochastics are crossing lower. How the dollar bulls respond around 109.70/110.00 is key. The hourly chart shows this pivot band is a basis of resistance again today. Hourly momentum is also now negatively configured. The bulls need to respond quickly and maintain 109.45 as the support from yesterday’s low. For now, this is a market in transition, but nothing is confirmed either way. Closing consistently under 109.70 opens the low at 109.00 again.
Gold
Another positive reaction from the bulls at the crucial 9 month uptrend. Twice now in May, the primary uptrend has been tested and held. Although technical indicators are still in negative configuration on a medium term basis, yesterday’s solid positive candle has breathed life into the bulls again. This has also seen momentum ticking higher again. This move needs to be built upon now. On the hourly chart, the move through the pivot at $1278 needs to be held as support now. Furthermore, positive configuration on hourly momentum (RSI above 40 and MACD lines above neutral) needs to be maintained. The move needs to be continued and not allowed to fizzle out again. The last strong positive candle a couple of weeks ago instantly hit the buffers. Yesterday’s high at $1287 needs to be overcome, whilst the hourly chart shows resistance around $1289/$1290 is a barrier that needs dealing with. The run of lower highs in recent months sits at $1324, $1310 and $1303. This needs to be broken for the bulls to feel in control again. The size of the challenge overhead is still considerable and the bulls have a tough task to overcome. How they respond in the next session or two could be crucial.
WTI Oil
Rising risk aversion, and a clutch of negative data through PMIs and perhaps signs of constructive dialogue to ease Middle East tensions has seen the oil price smashed lower. WTI has decisively broken the key near term support at $60.00which was a key floor through early May. This move signals a decisive shift in sentiment on oil. It now means that a lower high at $63.80 has been followed by a lower low to turn the market corrective. WTI bounced from $57.35 yesterday but how the bulls respond in the coming days will be key. Old support at $60.00 now turns into a new resistance and is a key benchmark for the outlook. Failure under here will drive a more sustainable corrective outlook and open further pressure on the old pivot support around $58 but also potentially open $54.50. Momentum has turned decisively lower on RSI, with a bear cross on Stochastics and MACD lines negative for the first time in four months. Once the dust settles unless $60 can be reclaimed, the outlook is now one to sell into strength.
A decisive swing lower has ramped up the pressure on the bulls again. The breach of initial support at 25,560 has opened the hugely important support at 25,210 once more. Given the nature of the aggressive move lower yesterday, it seems highly likely that this will be tested now. A gap lower from 25,755 is still open (and ideally needs filling) but closing below 25,560 means that the bears are now on a run. Momentum indicators are a real concern now. The RSI failed around 50 and is back below 40, the MACD lines are “bear kissing” lower, whilst the Stochastics are also rolling over. The prospect that 25,958 could now be the right hand shoulder of a big head and shoulders top pattern is now significant. Yesterday’s low at 25,328 is initially supportive, with 25,560 resistance and the gap still to be filled at 25,755.
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