Market Overview
The “first shot” has been fired in this so called trade war as at 0001EST the US initiated a 25% import tariff on 200 products from China amounting to around $34bn. The response from China is reciprocal with tariffs on 545 items of US imports including soybeans, and whiskey, although as I write, this is yet to be confirmed. The US is expected to implement the remaining $16bn (of the $50bn previously suggested) in the coming weeks.
Markets have been building up for today’s confirmation of the implementation of initial trade tariffs over recent days and the impact on sentiment appears to have been minimal and priced in. There is no safe haven bias to market flows, with the yen weaker, Treasury yields higher, the dollar slipping a touch and equity markets supported (US futures are pointing marginally higher). With the moves telegraphed, traders are already positioned. Previously is has been the surprise announcements that has caused the market fear to be elevated. However, it will be how the US now responds to China’s instant retaliation that will be key to market reaction in the coming weeks. A capricious escalation would certainly not be good, so in that sense we await the US response.
Aside from trade disputes, it is also Non-farm Payrolls today (which could also be playing into the muted tariffs reaction to an extent). Headline jobs are not expected to cause too great shakes, but more the average hourly earnings growth. A pick up above 2.8% would reflect the somewhat hawkish (but anticipated) message in last night’s FOMC minutes which worried about rising inflation and growth running too hot.
Wall Street closed with a strong bounce as traders returned after Independence Day, with the S&P 500 +0.9% at 2736 whilst US futures are mildly higher again today. Asian markets were strong across the board with Nikkei +1.1%. European indices are set for solid gains in early moves.
In forex, there is a degree of risk positive reaction despite the tariffs announcement, with the yen being the main underperformer, whilst the dollar (which has been acting more of a safe haven recently) is broadly weaker too, whilst the commodity currencies (Aussie and Kiwi dollars) are showing decent gains.
In commodities, the struggle on gold to drive a near term breakout continues, conflicted between a mildly weaker dollar (gold positive) and seemingly positive risk appetite (gold negative). There has also been a degree of support coming in for oil today after yesterday’s negative close began to question the recent bull run.
Aside to traders reacting to the trade dispute, with regards to the economic calendar, today is all about Non-farm Payrolls. The US Employment Situation report is at 13:30 BST and even though perhaps its impact has been reduced lately, it is still a key data point for market reaction.
The headline Nonfarm Payrolls growth is expected to be +195,000 which would be marginally below the 6 month average which is around 200,000 but realistically remains pretty decent wage growth for this stage in the cycle (and level of unemployment). Unemployment is expected to remain at 3.8% for a second month, but there would be little more than an eyebrow raise should it drop further towards the (constantly reduced) Fed expectation of 3.6% for 2018.
The key volatility could therefore come from the Average Hourly Earnings growth which is expected to be +0.3% for the month which would pull the yearly data up to 2.8% growth (from +2.7% last month). This would be back around the highs of the past couple of years, but if it were to be an upside surprise to wages then this would be the highest level since mid-2009 and pull back above CPI (which recent increased to +2.8%). Participation rate is also worth keeping an eye on as this has fallen for the past couple of months to 62.7 (which is around the lows of the past two years). Furthermore, the U6 underemployment falling further below last month’s 7.6% suggests that people continue to be dragged into the labour force and true unemployment falling.
Aside from the payroll report the US Trade Balance is also at 13:30 BST and is expected to show a slight improvement to -$43.7bn (from -$46.2bn last month).
Chart of the Day – AUD/JPY
A couple of weeks ago, I talked about the fact that Aussie/Yen was again pulling to the bottom of the medium term trading range and the market has since formed support above the 80.50 range low. The support has been tested and held a couple of times in the past three weeks, whilst the market is seemingly building now for a recovery. Momentum indicators are now looking to decisively improve, with the Stochastics accelerating higher from a confirmed bull cross and the RSI also pulling higher. A bull cross on the MACD lines has also formed now. Yesterday’s bull candle is positioning the market to test near term resistance (this week’s high) at 82.10 above which would complete a small base pattern to imply 125 pips from 81.95 towards 83.20. This would also initially bring the market back towards a test of the mid-range pivot at 82.60. With the market again this morning making gains, yesterday’s higher low at 81.25 is now initial support.
The bulls could not quite make the near term breakout yesterday as the intraday move higher hit resistance at $1.1720 to the pip before turning back lower. However, a week long uptrend continues with a run of higher daily lows and the improvement in the outlook remains on track. The improvement comes with the RSI closing yesterday above 50 for the first time since mid-April, whilst the MACD and Stochastics lines both accelerate higher in their recovery. Despite the technicals calling for a near term break above $1.1720 and a positive bias, until that upside break is seen then the bulls will be wary, certainly coming into Non-farm Payrolls today. A closing break above $1.1720 would open the medium term range high at $1.1850. The hourly chart shows a run of higher lows, with $1.1670 from yesterday now above $1.1630, whilst hourly momentum indicators retain their positive configuration of hourly RSI above 40/50 and hourly MACD lines above neutral. Expect increased volatility around payrolls, but the outlook continues to improve.
The recovery in sterling against the dollar continues to build, but is not at the extent at which we see in the euro. There are just a few more question marks that sterling is facing. Yesterday’s doji candle is a case in point, where initial gains made way for a slip back and the market closed a handful of pips lower. The mini uptrend of the past week is still intact but the recovery in momentum indicators is less pronounced than on the euro, with the RSI in the mid 402 (albeit scraping the highest since April) and MACD lines only just ticking higher. The improvement in the Stochastics is a positive though, as is the market finding support above the old support at $1.3200. If this can continue then the prospect of a pull above $1.3315 key near term resistance will grow. On the hourly chart, positive momentum configuration is in place but being tested, whilst the importance of $1.3200 and then $1.3170 as initial supports is growing. Initial resistance is at $1.3275 from yesterday’s high.
Dollar/Yen retains a positive bias within the trading range, as the market has again ticked higher. Finding support to trade above all the moving averages reflects a positive outlook and the bulls will be eyeing another go at this week’s high of 111.15 before the key medium term range high at 111.40 comes into play. However there is still a slightly subdued nature to the momentum indicators, with the RSI under 60 and MACD lines showing little interest in this move higher. There is support near term at 110.26 and coming above the 110.00 which has been a basis of a pivot then this adds to a positive outlook still. However until the range is decisively broken above 111.40 then the bulls cannot claim to be fully in control and there is a risk of profit-taking again within the range. The hourly chart reflects an improving if mixed outlook forming ahead of this afternoon’s payrolls.
Gold
The bulls continue to toy with the prospect of gathering themselves for a near term recovery but seem unable to make their move. The resistance at $1260 (overhead supply from old support) is building and on each of the past two sessions the market has had a look but been unable to make their move. Momentum indicators have been ticking higher, but again are arguably beginning to struggle as the RSI fails under 40. The main source of hope though comes with a potential bull cross on the MACD lines which is ever closer. The hourly chart also shows this slipping of recovery momentum in the past day and hourly momentum indicators are increasingly neutrally configured. Perhaps consolidating is coming ahead of payrolls today, but a close below $1250 initial support would not be positive. The bulls will be hoping for a disappointing payrolls, dollar negative reaction and subsequent gold rally to close above $1260. This would then open for continued recovery towards the next resistance at $1282.
WTI Oil
The bull run has begun to look a little uncertain after a run of consolidation earlier in the week saw the US traders return from public holiday to form a solid bear candle yesterday. Support is holding for now but the question is whether this is a pause for breath within the bull run or the precursor to a near term correction/retracement. An unexpected inventory build in the EIA crude oil stocks certainly did not help the bull case for oil yesterday, and if a decisive corrective candle is followed by another negative candle today then momentum for a correction will build. The concern is that momentum indicators which had become stretched are now beginning to tail off and whilst this could simply be a reflection of the loss of impetus in the bull run, if it continues, it could give rise to an excuse to take profits and draw in a correction. The Stochastics are the more sensitive momentum indicator and are likely to be the first to signal. A confirmed bear cross on the stochastics (falling below 80) would be concern, as would the RSI now tracking below 60. Initial support remains at $72.50/$72.85. Resistance at $75.20 is building under the 61.8% Fib retracement of the big bear market at $76.50.
The Dow continues to trade with a degree of uncertainty as the run of alternating bull and bear candles continues. The market subsequently continues to lay out a small symmetrical triangle consolidation formation. There is a real lack of direction that is now forming, with the momentum indicators on the daily chart now ticking mildly higher. However this improvement is more a testament to the fact that the market is no longer selling off and is to an extent stabilising. The hourly chart shows this with hourly momentum indicators increasingly trading around a neutral position (MACD lines hovering around the zero line, RSI oscillating between 40/60. The hourly chart also shows the converging support and resistance lines, with 24,445 capping initial upside and 24,150 being supportive. The main support of note remains 23,997 whilst key resistance remains at 24,570 just under the 38.2% Fib level
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