Market Overview
Markets are likely to become increasingly cautious as the US mid-term elections come this week.
Right now there is still a legacy of Treasury yields positive/dollar strength playing out from the solid Non-farm Payrolls report that was announced on Friday, but this will not last long as the fallout from the mid-terms come ever sharper into focus. Jobs growth in the US remains strong, unemployment low and falling (at least on U6) and, most importantly, wage growth jumping to 3.1% which is a nine year high. Subsequently, we see Treasury yields back higher again (back over 3.2% on the 10-Year yield) which is dollar supportive.
All things remaining equal this should drive continued dollar strength, but there are two key factors preventing this more. One is short term, in the uncertainty of the US mid-terms, whilst the other is the ongoing uncertainty over US trade policy with China. Rhetoric over trade seems to ebb and flow, with a mildly less positive tone over the weekend pulling the reins slightly on the enthusiasm of a potential agreement.
The big mover of the day so far is sterling which has again jumped after a weekend where more press reports suggested increased potential for a Brexit deal in the offing.
As US sanctions on Iran come into force today there seems to be little real impact seen on the oil price. Oil has been falling back in recent weeks as the Iran sanctions have approached and the waivers have started to come through. Perhaps an interesting feature to watch being the WTI/Brent spread which has widened out to around $10 again.
Wall Street closed lower on Friday with the feeling that the earnings growth in the payrolls report would give the Fed a little nudge more towards a more hawkish stance, something that would be equities negative. The S&P 500 closed -0.6% lower at 2723. With US futures lower early today by around -0.2% this has pulled Asian markets lower (Nikkei -1.5%, Shanghai Composite -0.5%). European markets are mixed in early moves today.
In forex, there is very little direction on dollar pairs, whilst there has been a positive start to the week for sterling (usually Brexit related to some degree) as positive reports over a deal continue to surface.
In commodities there is a slightly negative position that has formed on gold and silver today, whilst oil is lower once more as the Iranian sanctions kick in today and eight countries are set to get a waiver.
The big focus on the economic calendar today is on the services PMI for the UK and US (Eurozone data is a day delayed due to last week’s public holidays). The UK Services PMI is at 09:30 GMT and after the big negative surprise on manufacturing data there will be added emphasis on the services data picking up the slack. The market consensus is forecasting a slip to 53.4 (from 53.9 in September).
US data announcements are back in sync again with Europe after the Daylight Saving Time shift over the weekend, meaning that the US ISM Non-Manufacturing is at 15:00 GMT. Consensus is forecasting a mild drop back to 59.3 (from a huge 61.6).
Chart of the Day – EUR/JPY
The yen suffers when risk appetite improves. If the US administration does indeed push on with an agreement with China over trade then this should certainly help to settle many nerves that have jangled over the prospect of a US/China trade war. This would be a drag on the yen. And so it was interesting to see on Friday the chart of EUR/JPY breaking a corrective downtrend of the past month and starting to take on an improved outlook on momentum configuration. This comes with the Stochastics tracking higher and MACD lines close to a bull cross. The RSI and Stochastics are now back around neutral medium term configuration and need to push through in order for this outlook of recovery to really take hold. There could be a choppy road to recovery for EUR/JPY in the meantime but the higher low at 127.60 above the 126.60 October low will now be seen as a near term gauge. The bulls need to push through 130.20/130.50 resistance to regain decisive upside momentum.
The dollar regained some poise on Friday in the wake of the solid payrolls report, however there is now more of a mixed near term outlook in play. This comes as the two week downtrend was broken yet the rebound has found resistance now in the band $1.1430/$1.1455, which also meant that a bigger six week downtrend is now in formation.. There may have been a marginal uptick across momentum indicators, with the Stochastics pulling higher and the RSI above 40, to give the euro bulls hope of a recovery, but this near term resistance $1.1430/$1.1455 is now a barrier to the gains. The market is interestingly poised now as the US mid-terms approach and the dollar at least is likely to begin to consolidate. Selling into strength remains the strategy for now, but the mid-terms could shift this.
Since the huge bull candle last Thursday, the sterling bulls have been stuttering. A marginal correction on Friday cut 40 pips back off the rebound again, but the market has been somewhat more uncertain early today. Brexit (always) and US mid-terms (until tomorrow) will mean that the outlook is tricky to ascertain now in the near term, so the improvement in momentum indicators is difficult to judge. There is a medium term historic pivot around $1.3050/$1.3060 which is worth considering, also providing the early high today. For support, there is $1.2920/$1.2950 as an initial floor as the market gravitates around $1.3000 this morning. A consolidation for the next couple of days would not be a surprise.
There is still an appetite to buy into weakness which underlies on this pair. Momentum indicators remain positively configured on a medium term basis and after Friday’s positive candlestick the near term moves are beginning to tick higher. The market formed a bullish outside day session on Friday to leave support at 112.55 whilst getting positioned for a potential upside break again. The caveat is that Dollar/Yen seems to have a few false starts for the run higher and although a test of 114.55 is still likely, it would seem, so are a few bumps along the way. Support at 111.35 remains key now. Above 113.40 on a closing basis opens 114.55.
Gold
With the rebound momentum of Thursday’s strong bull candle dissipating in the wake of the dollar positive payrolls report on Friday there is an increasing likelihood of a range formation on gold in the near term. The failure to break decisively above $1236 on both Thursday and Friday now means that the long term pivot is building ever further as a basis of resistance. The bulls will point to the underlying demand in the range $1208/$1217 which meant that the buyers returned in force at $1211 on Thursday, but the failure to breakout suggests a consolidation phase is building. Momentum is positively biased but without there being decisive strength in place yet. A close above $1236 would be a bullish development that would open the upside, with a move above $1243 being confirmation of a move towards $1266 which is the next rally high of the old sell-off.
WTI Oil
Although the pace of the selling pressure slowed to an extent on Friday, there is still an increasing concern that the market has now broken below the support of both the August and June lows (the latter at $63.60). Momentum indicators are increasingly negatively configured and this really suggests that the bulls are going to struggle to put together a recovery. The old support breach also means that $63.60/$64.50 is now a resistance zone for intraday technical rallies, but even rallies that do survive this overhead supply will find even more at $66/$67. The resistance of the three week downtrend comes in at $65.40 today. With early losses again today, a two day close below $63.60 opens the downside for next support at $61.80 and $60.00. For now there is little suggestion of a recovery.
Intraday volatility remains elevated on the Dow, with Friday’s high/low range and the Average True Range both bang on 500 ticks. After three positive closes there has been a slight dip back again to put the brakes on the recovery. With mid-terms looming on Tuesday this will be a very difficult period to call and it could mean that little real direction is seen in the next couple of sessions. However, taking a step back, as long as the bottom does not fall out of the market, there is a near term recovery still looking to build on momentum indicators. Friday’s resistance at 25,579 comes under the pivot around 25,800. There is initial support around 25,000/25,100 but until the mid-terms are out of the way, calling direction comes with a significant caveat.
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