Market Overview
There is a strange air of positivity that is surrounding financial markets today and this is helping to turn sentiment. First of all, could it really be true that the UK and the EU are really closing in on a deal for Brexit? The UK’s Brexit minister, Dominic Raab seems to think that a deal is possible by the 21st November, whilst there was a report in the UK press that negotiators had come to a tentative agreement on financial services for a post-Brexit relationship. This positive Brexit news began to pull sterling higher yesterday (even if the yield differentials are barely registering) and this has continued into today’s session, whilst the euro is benefitting too. UK equities have gained ground (along with a notable rebound on Wall Street too) but be careful that there is a negative correlation still to play out between sterling and FTSE 100 which could drive some underperformance should this sterling rally continue. Despite this, the positive sentiment is also being helped as the China Manufacturing PMI surprised to the upside overnight (at 50.1 versus an expected move into contraction at 49.9). This is all helping improved market sentiment and pulling the dollar lower across the majors, whilst the Chinese yuan is also strengthening to pull USDCNY back from a test of 7.00. For the dollar, a period of consolidation/unwind is perfectly possible near term, especially given the Non-farm Payrolls report tomorrow, which will begin to garner the attention. In the meantime though, markets are welcoming the good news.
Wall Street bounced around 1% yesterday with the S&P 500 +1.1% at 2711, whilst futures are consolidating around flat initially today. This rebound of the past couple of sessions has helped some Asian markets to build some support (China Shanghai Composite +0.2% but the Nikkei was -1.1%). European equities are mildly lower with FTSE 100 underperforming. In forex there is a strong rebound for both sterling but also the euro amidst reports of a breakthrough in the Brexit negotiations. With positive risk appetite surrounding the China PMI, there is also a rebound on the Kiwi and Aussie too. In commodities, with the move against the dollar, there is also a rebound on Gold of $9 (or +0.7%), whilst oil remains under pressure as the market continues to slip.
The first trading day of the month is always packed with economic data, with the PMIs, but also the Bank of England updates on monetary policy. With several Eurozone countries on public holiday for All Saints Day, the Eurozone data is not until tomorrow, so the first key data point is UK Manufacturing PMI at 0930GMT, with consensus expecting the October PMI to drop back to 53.0 (from 53.8 in September). The Bank of England has Super Thursday today, with the interest rate decision at 1200BST expected to be unanimously held at +0.75% (as it was last month), which given the proximity to the uncertainty of the Brexit deal (or no deal) this is no real surprise. The Quarterly Inflation Report will also contain data of the impact on growth and inflation expectations. The US ISM Manufacturing is at 1400BST and is expected to drop back slightly to a still very strong 59.0 (from 59.8 last month).
Chart of the Day – FTSE 100
After consistent negative pressure and very little respite for the bulls there has been a significant improvement in sentiment on the FTSE in the past few days. With Monday’s rally and decisive bull candle leaving a key low now in place at 6851, the market has bounced strongly this week to close yesterday at a near three week high and through resistance at 7114. This turnaround in sentiment has come with a decisive swing higher on the Stochastics and a bull cross buy signal on the MACD lines. The last bull cross on the MACD lines (in September) came as the market subsequently added around 250 ticks in the next week. A recovery on FTSE towards the next band of overhead supply 7220/7300 now seems likely in this recovery. The hourly chart shows a band of breakout support 7085/7114 the bulls would look to use as a base now, whilst 6984 is now a near term higher low.
The euro has been under corrective pressure over the past couple of weeks, trending lower and finding pivot lines as resistance. However the retreat tested but held on to the key support at $1.1300, which was the August low, but seemingly the support looks set to hold (at least for now) as the market has rebounded this morning. At the moment, this is showing as a solid 30 pip positive candle, but there is plenty that needs to be seen in order for this to be a sustainable move. There is a two week downtrend that comes in at $1.1380 today which needs to be breached. There is also little sign on the momentum indicators that this is anything more than a bear rally for now. Daily Stochastics and MACD remain negatively configured, whilst the RSI is barely ticking higher. Furthermore this is being confirmed on the hourly chart too as just a move to unwind recent selling pressure. In effect, the pivot at $1.1430 really needs to be broken for there to any realistic suggestion of a sustainable rebound taking hold.
After two and a half weeks of almost consistent selling pressure, there are signs of life from the Cable bulls once more. The key support of the August low at $1.2660 remained intact yesterday as a bounce from $1.2695 formed a positive candle. This rebound has followed into today’s session which currently has the market now around 150 pips from the low and making solid ground in a recovery. This move is being reflected in the Stochastics ticking higher (still needs confirmation for a bull cross buy signal) and RSI above 40. A close above $1.2850 would be a near term positive signal being a minor lower high breached. The market would then focus on the overhead supply of the early October low at $1.2920. These improvements are reflected on the hourly chart with a more positive configuration on momentum whilst leaving a minor support band $1.2740/$1.2780.
The medium to longer term dollar bulls still hold the control of the market but are as yet unable to really drive the market higher. A period of consolidation in recent weeks appeared to be coming to a positive conclusion for the bulls earlier in the week, but Wednesday’s mild negative candle and another follow up slip lower today once more adds doubt again. Leaving a high at 113.40 the bulls will be looking at the support of the breakout around 112.80/90 as a gauge today. A failure back below would suggest the breakout was definitely a false start and consolidation is back on. The momentum indicators also need to be watched as the MACD lines are looking to cross higher but are struggling, whilst the Stochastics are also beginning to lose impetus. The hourly chart shows support at 112.20 above 111.80 and the now key 111.35.
Gold
The outlook has taken a corrective turn in recent days with three consecutive negative candles which have taken the market below the initial support at $1218 and a three week low. So the reaction in European and US trading today to the initial rebound will be really telling. This comes with a deterioration in the momentum indicators with near term sell signals on the MACD and Stochastics pointing to a near term correction. This now means that the support band $1208/$1217 is now being tested and the medium term bulls will have their positive outlook questioned. A failure of this early rebound today would put increasing pressure on the support band. A breach of $1207 would then be a concern and again a move below $1200 would really be a shift back into negative configuration again. The hourly chart shows initial resistance at $1225. The market has never managed to make a decisive breach of $1237 as the pivot resistance and the recent high at $1243 is now a key barrier.
WTI Oil
The decline in oil is continuing, with the formation of a well-defined three week downtrend now. This comes amidst a sequence of lower highs and lower lows where key supports have been breached, the latest being at $67. This now means that with this week’s early high at $67.95 there is now a band of resistance at $67.00/$67.95, whilst the three week downtrend adds a barrier to gains at $66.60 today. This is all pointing towards a test of the August low at $64.50 but more importantly is the key June low at $63.60 which would mark a key confirmation of an outlook changer should it be broken. Momentum is clearly negatively configured now to sell into strength.
After a significant increase in volatility (Average True Range is at six month highs just under 500 ticks now) in the past couple of weeks, two positive sessions now means that the Dow has pulled almost 1000 ticks from Monday’s low. This move has subsequently broken a four week downtrend and also included the market closing at a four session high. It is too early to suggest that the end of the selling pressure has been seen (intraday volatility remains huge) but there is an improvement in momentum with the Stochastics and RSI swinging higher, perhaps also with signs of a tick higher on the MACD lines, a confirmed buy signal would increase confidence. The hourly chart shows a pivot band around 24,770/24,900 and how the bulls respond here will be interesting now. With hourly momentum more positively configured, if this is seen as a support area then the outlook will be set to improve more sustainably.
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