Market Overview
Rising inflation expectations has pulled longer dated US yields higher in 2018. However, the move on the US 10 year Treasury yield had stopped short of breaking out above its December 2013 high of 3.04%. That was, until yesterday. A strong set of US retail sales in addition to a much higher than expected New York Fed manufacturing saw the 10 year yield jump 9 basis points on the day. This came as market expectations of a fourth rate hike in December have reached 54% (i.e. more likely than not) according to CME Group’s Fed Funds futures.
The impact of this jump in yields and the market shifting in this way is rippling through financial markets. The gold price fell sharply through a $1300 floor that had held throughout 2018; whilst Dollar/Yen, a market where interest rate differentials are now closely correlated, also broke above 110 to levels not seen since January. Equities tend not to react well to tighter rates and subsequently Wall Street slipped back.
All these moves have another factor to contend with today though, with geopolitical risk rising again as North Korea pull out of planned talks with South Korea and threaten to do the same with Donald Trump. Kim Jong Un is apparently unhappy over the denuclearisation programme. As yet, there has only been a minor safe haven move with a small rebound on the safe haven of gold, and it will be interesting to see how this geopolitical situation develops in the coming days. For now though this spike in US yields is the key factor impacting on markets.
Wall Street closed lower on the session with the S&P 500 -0.7% lower at 2711 whilst Asian markets have also reacted lower overnight with the Nikkei -0.4%. European markets are though relatively stable this morning and are mixed to slightly higher.
In forex majors, there is a bit of a consolidation coming into the European session with a very slight unwind of yesterday’s big dollar gains. Could it also be that the mild outperformance of sterling versus other majors yesterday is set to continue today?
In commodities, gold has bounced by $4 (c. 0.3%) whilst oil is slightly lower as the consolidation on the recent breakout continues.
It is another day packed with data releases, albeit mostly lower tier announcements. Eurozone inflation is the final reading of April data with no changes expected to either the headline CPI of +1.2% or the disappointing drop of the core CPI to +0.7% in the prelim reading.
The US Building Permits are at 13:30 BST which is expected to stay at 1.35m with Housing Starts slightly lower at 1.31m (from 1.32m). The US Industrial Production is at 14:15 BST and is expected to grow by +0.5% on the month with Capacity Utilization expected to improve to 78.4% from 78.0% which would be the highest since February 2015. The EIA oil inventories are expected to show a drawdown in crude stocks by -2.0m barrels (-2.2m barrels last week), with distillates in drawdown by -1.9m barrels (3.8m barrels last week), whilst gasoline stocks are expected to reduce by -1.0m (-2.2m last week).
Chart of the Day – NZD/USD
The Kiwi remains an underperformer across the major crosses and this comes with a big downtrend that remains intact on NZD/USD. It is interesting to see therefore that the downside target from the big top pattern that completed below $0.7150 at the end of April was achieved yesterday. The parlous state of the momentum indicators does not suggest that this is likely to be the end of the sell-off either. The RSI into the low 20s reflects the strength of the selling within the trend, whilst the MACD lines are accelerating lower again. Intraday rallies remain a chance to sell with the four week downtrend at $0.6930 today, but there is now a very real prospect of a test of the huge November 2017 low at $0.6780. The hourly chart shows there is a resistance band $0.6890/$0.6925 and any rally that unwinds the hourly RSI into 45/60 is now a chance to sell.
An incredible strengthening on the dollar (on the back of a sharp rise in yields) pulled EUR/USD right back to the key near term support around $1.1820, which in effect held firm (only having been breached by a handful of pips). This test continues today and as yet again is hanging on, however the sharp deterioration in yesterday’s session which resulted in a huge bear candle shows that downside pressure is growing once more. This is reflected in the momentum indicators which have all swung lower again. A closing breach of $1.1820 would open further weakness with the next support at $1.1715 and then what is the significant November 2017 support at $1.1550. The hourly chart shows that the market has had a couple of goes at the support around $1.1820 both yesterday and then overnight, both times the market has broadly held up. The mini reaction high at $1.1875 will be watched as an initial resistance with a near term pivot at $1.1890 and then $1.1940. Rallies are still likely to be seen as a chance to sell.
In spite of a significant bout of dollar strengthening yesterday, Cable effectively continues to range sideways. There has been historic support at $1.3455 which was breached by a handful of pips (very similar to EUR/USD) only for the support to broadly hold. The market has since rebounded and the bulls are actually coming into this session in a reasonable position still. Yesterday’s bear candle clearly puts a negative bias into this 8 day range that is now 165 pips but if the bulls can survive yesterday’s sharp move then confidence will increase in the development of support. Clearly there is more that needs to be done in order for this to be considered a recovery though. The resistance at $1.3615 is sizeable and only a close above would convince the bulls were truly making ground. Momentum indicators have mellowed a touch but also still remain in negative configuration. The hourly chart indicators are ticking higher coming into the European session today but there is a minor pivot around $1.3530 that needs to be overcome if the buyers are to position for recovery today. Initial support at $1.3480.
A closing breakout above 110.00 on a strong bull candle is certainly a positive signal on USD/JPY. This continues the recovery trend on the dollar and shows that consolidations continue to be bought into. Momentum indicators are ticking higher, although perhaps there is a less effusive response than maybe could have been seen, however there is still further upside potential within this move. The initial resistance of the February high of 110.47 has just limited the move higher initially, but the bulls will be looking to take out this resistance which would help to further break the shackles. This would then open the next resistance between 111.50/112.00. The hourly chart shows strong momentum and that intraday weakness is a chance to buy. There is breakout support now 109.80/110.00 as an initial buffer to the downside, with 109.15 now a higher low above the key reaction low at 108.60.
Gold
The trading range of the first few months of 2018 has finally been broken to the downside as gold has breached the key long term pivot support at $1300. This is a support that has been tested on several occasions and it should be seen as no coincidence that the breakdown came in the wake of the sharp upside breakout on the US 10 year yield above 3.04% (its own long term barrier). The inference of gold breaking below $1300 is that it now completes a $65 top pattern and implies a correction in the coming months back to $1235. The key support of the December low is at $1236. The concern is that the momentum indicators have all swung lower to give negative configuration signals. The RSI is now pushing down into the mid-30s (for much of the range it has held above 40), the MACD lines have just “bear kissed” and the Stochastics have crossed back lower. There will now be an area of overhead supply for any rebound back towards $1300 where old support turns into new resistance. The long term pivot band has been $1300/$1310 and this is now a “sell zone”. Today’s rebound from $1288 could be just that unwinding move.
WTI Oil
Renewed dollar strength pulled WTI lower from a test of last week’s multi-year high at $71.90 but there is clearly still an appetite for the bulls to buy into any corrective moves. Breakout support at $69.55/$70.00 remains a key near term floor, whilst even yesterday during the intraday slide, the market found a floor above this week’s low at $70.25. Momentum indicators remain strongly configured to show the continued strength of momentum. Consolidations continue to be used as a chance to buy for further moves above $71.90 and towards the next minor resistance band $73.25/$77.85 from November 2014. The 5 week uptrend is supportive at $69.50 today.
The move above 24,859 to an 8 week high saw a correction yesterday as the bulls have just slipped back to end an eight day winning streak. Such has been the steepness of the run higher in the past eight sessions, the bulls were always going to struggle to sustain such a drive, however the reaction to yesterday’s negative candle will now be crucial. There is a good band of old breakout support now between 24,500/24,580 which will be seen as important near term. The concern would be whether one corrective candle starts a run lower as the Stochastics now threaten to turn lower. However for now, the MACD lines remain positive and this is just a slip in the recovery from which the bulls should be looking to build a new higher low support. The hourly momentum indicators are dropping back and it will be important for the hourly RSI to hold above 30/40 and the hourly MACD lines above neutral. There is a gap resistance open at 24,862 which needs to be filled still and a close back above this gap would help to re-engage the bulls.
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