Market Overview
The two big drivers of market moves of recent months are in focus toady. The US/China trade talks continue in Beijing and there is the latest FOMC meeting that should give us further clues for the path of US monetary policy. Trade talks are into their tenth round and confidence is fairly high that there will be some kind of conclusion in the coming weeks.
President Trump’s Chief of Staff Nick Mulvaney has suggested that there would be a resolution in the next two weeks. This leaves the prospect of a final signing ceremony in the early summer. Issues over cyber security and compliance with the agreement are as yet unresolved. Although there is little new in this, there is a mild risk positive theme to sentiment through markets today.
The Fed meeting tonight will also be interesting traders. US data continues to hold up well, although inflation falling has been a quandary seeing as wage growth and oil prices are growing. With consumer confidence improving sharply again, how will the Fed respond given Q1 growth seems to have been surprisingly positive? After the Fed took a cautious line in March, the market now sees a 65% probability of a rate cut in December. A shift to a more sanguine Fed could begin to guide that market away from any cuts, thus supporting yields and the dollar.
Wall Street closed again higher last night with the S&P 500 +0.1% at 2946. US futures (+0.3%) are guiding a more positive sentiment today. With many Asian markets closed for public holiday, also in Europe, FTSE futures are +0.4% early today.
In forex, there is limited direction ahead of the FOMC, although there is a slight underperformance of both JPY on a mild improvement in risk. Furthermore, NZD is slipping after disappointing employment data overnight.
In commodities, the better risk appetite has hit gold this morning, whilst oil is back under pressure with an early 1% decline.
It is May Day today (or Labour Day depending upon what part of the world you are from) with a whole swathe of Asian and European countries on public holiday. However, this is still a very important day of data on the economic calendar, with the FOMC in focus.
The UK Manufacturing PMI is at 09:30 BST and is expected to slip back to 53.0. That comes after last month’s big jump to 55.1 on mass stockpiling ahead of a supposed Brexit.
The ADP-Employment Change is at 1315BST and is expected to improve to 181,000 up from 129,000 in March. The ISM Manufacturing is at 1500BST and is expected to slip slightly to 55.0 (from 55.3 in March). The EIA Oil inventories are at 15:30 BST and are expected to show crude oil stocks building by +1.3m barrels (+5.5m barrels last week). The FOMC monetary policy decision is at 19:00 BST which is expected to show no change on the Fed Fund interest rate at a range of 2.25% to 2.50%. With this being a meeting without changes to the economic projections or dot plots, the press conference for Fed Chair Powell at 1930BST will be key.
Chart of the Day – GBP/AUD
Brexit related newsflow drove a sterling rally across forex major crosses yesterday. With weak China PMIs hitting the Aussie, has driven a significant upside breakout on Sterling/Aussie. It will be interesting to see if it can now be maintained. GBP/USD has now broken a six week downtrend but also taken the market decisively through the pivot band 1.840/1.8460. The move has been confirmed across momentum indicators with the RSI at a six week high, whilst MACD and Stochastics rise. So, today’s session will be key for the development of the outlook. Can the sterling bulls hang on against the Aussie which has been consistently strengthening in recent weeks? The bulls will now need to defend 1.8400/1.8460 as a support band. Furthermore, 1.8300 will be seen as a higher low and supportive. A move above resistance at 1.8610 would confirm the bull move as this is the next lower high.
A third consecutive positive candle on EUR/USD has improved the near term outlook. However, these rallies have been frequently followed by renewed downside in recent months. Whilst the momentum of the recovery has certainly picked up, this rally is once more likely to be limited before further selling takes hold. There is further upside potential in the rebound though, with the RSI, MACD and Stochastics still in recovery mode. Between 54/60 on the RSI has limited the last four rallies of recent months. Initial resistance is at $1.1265 before the $1.1325 April high. However, the hourly chart also shows that $1.1230 (an old near term pivot) was again resistance yesterday. The old floor at $1.1175 acted as a pivot support yesterday above what is now key support at $1.1110.
GBP/USD
The rally came from almost nowhere yesterday. A pick up in newsflow on Brexit (possible positive traction on talks between the Government and the opposition Labour, after a couple of weeks of almost nothing) and sterling shot higher. The result was a decisive strong bull candle that has taken the market through a couple of key technical resistances around $1.3000. Breaking the overhead supply of the old floor, but also breaking the six week downtrend. Signs of life on momentum indicators too. The question is whether this move can be trusted. I am sceptical at this stage. Brexit progress has a tendency to disappoint across the board and I see little that is likely to change this. However, Cable holding back above $1.3000 would be a positive signal from the market. The bulls re looking for a break above $1.3130 to make real progress in a recovery.
The negative drift on Dollar/Yen continues. A move back towards what is close to a four month uptrend is underway, an uptrend that comes in at 110.80 today. This still has the look of an unwinding drift that will be supported, but the reaction low at 110.85 will be eyed as a gauge now. There is a drift lower on momentum that is not turning into sustained selling pressure but a decisive breach of 110.85 would be a concerning move now. The hourly chart shows initial support at 111.20 is holding, and the bulls are now struggling in the 111.60/111.90 area. The ongoing Japanese public holiday is not helping the market find traction, but the FOMC tonight could be one to breathe life back into Dollar/Yen. The main resistance remains around the medium term pivot at 112.20.
Gold
A recovery on gold is wavering. The bears have been controlling the price action this week. Forming a decisive negative candle from Monday, a bull failure yesterday is turning into a negative early move today. This loss of traction in the recovery is increasing the risk that the rally is already running out of stream. Resistance at $1289/$1290 is building. Furthermore, momentum indicators are struggling just at a point where renewed selling pressure could be building. The RSI is faltering at 47, another lower peak, whilst the Stochastics are threatening to roll over and MACD lines threatening a bear kiss. The key will be how the market responds to what is a growing pivot band $1276/$1280. A close under $1276 will increase the selling pressure once more. The hourly chart shows the rally failing again yesterday whilst the momentum recovery has also faltered. A move below initial support at $1277 would be a big red light warning for the bulls now.
WTI Oil
The support around $63.00 is holding, for now. Having contained the recent retreat (which hit an intraday low at $62.30), two days of closing still above the four month uptrend is maintaining the positive outlook. However, the pressure is still on for $63.00 support and the market edging lower this morning means the uptrend is creaking again. This period of trading is turning into a bigger consolidation and something that could easily turn into a top pattern now. The initial gauge to watch is a close below $63.00, which would confirm the broken uptrend. A close below $62.30 would confirm the market has formed a multi-week top. Momentum indicators are mixed but continue to reflect corrective traits. The MACD lines are in decline, whilst the Stochastics are moving sharply lower. Furthermore, if the RSI moves below 50 this would also be confirmation. The intraday high at $64.75 from yesterday is an initial level to watch as continued failure under here will only see negative pressure mount.
Another session lacking conviction for the Dow, but the bulls remain in the driving seat. Adding points to again close with a positive session, whilst buying into intraday weakness. There is a continued positive configuration on momentum as the Stochastics look to pull higher once more and the RSI holds above 60. Although the going is slow, this is still a market looking to push on resistance. Last week’s high of 26,695 is initially the barrier to test before the all-time high of 26,952. Yesterday’s candle is not a classic bull candle, but long lower shadow suggests the buyers are still willing to support weakness. Initial support at 26,419 now protects 26,310.
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