Market Overview
There will be mixed feelings coming into today’s meeting of the Federal Reserve. There will be some traders out there, bags pack and ready for the beach, hoping for a complete non-event so that they can leave for their holidays seeing this consolidation continues. But then there will be those still trading in the coming weeks, just hoping for a bit of something to trade from in order to generate some direction.
In the past week or so, Treasuries, forex and gold markets have become increasingly stagnant and there is a feeling that traders are looking for a catalyst and the Fed is being eyed today to end the consolidation.
The BoJ drove some weakness to the yen yesterday, but aside from that, majors have been very much in wait and see mode. Will the Fed change this today? It is unlikely. The August meeting is likely to be a continuity meeting, with little excitement and perhaps little more than a nod towards acknowledging trade tensions (but even this is unlikely). Treasury yields have barely budged as the 10-Year yield has consolidated under 3% in the past week. Perhaps the Fed tonight, perhaps Non-farm Payrolls on Friday, but markets are very muted at the moment. It is though interesting to see Japanese yields bouncing back this morning after yesterday’s relatively sharp move lower on the back of the BoJ. The 10-Year JGB has bounced back above 0.1% and it will be interesting to see if this begins to impact positively on the performance of the yen, so far it has remained an underperformer on the majors.
Trade tariff developments are also worth keeping an eye on as the US threatens a higher tariffs of 25% on $200bn of Chinese goods, rather than the original potential for 10%. This could be a negotiating tactic, but it will be interesting to see how China responds, historically they have not been too welcoming of such news. The China Caixin Manufacturing PMI came bang in line with expectations at 50.8 (50.8 exp, 51.0 last) and has done little to help direction.
Wall Street closed higher last night with the S&P 500 +0.5% at 2816, with futures a shade higher today (boosted no doubt by strong results from Apple (NASDAQ:AAPL) after hours). Asian markets have gained overnight with the Nikkei +0.9%, but European indices are looking a touch cautious initially, perhaps with a view to trade tariffs beginning to creep back into the headlines again.
In forex, there is a slight degree of dollar strength which is running through major markets today in front of the Fed, although decisive direction has been hard to sustain in recent sessions.
In commodities, the stronger dollar is pulling gold lower by $2 but again little real direction yet, whilst oil is ticking lower again.
There is a hectic day ahead on the economic calendar for traders to keep aware of. The first trading day of the month is always a day packed with manufacturing PMIs and the final Eurozone Manufacturing PMI at 09:00 BST is expected to remain at 55.1 (55.1 last). UK Manufacturing PMI at 09:30 BST is expected to slip a touch to 54.2 (from 54.4 last month).
The US ISM Manufacturing is at 15:00 BST and is expected to slip a touch to a still very strong 59.4 (from 60.2 last month). The EIA Oil Inventories at 15:30 BST are expected to show crude stocks -3.2m (-6.1m barrels last week), with distillates +0.4m (-0.1m last week) and gasoline stocks -1.3m (-2.3m last week).
The main event of the day is the FOMC monetary policy decision at 19:00 BST which is expected to show the Fed holding fire on its rate hikes this month to maintain the Fed Funds target range at 1.75% to 2.00%. Whilst the September meeting is highly likely to be where the next hike comes into play, this time is not a meeting with a press conference or updated economic projections, so the FOMC statement is all we get. Potential shifts in language on trade tariffs may cause a stir but with inflation indicators broadly stable and a decent (albeit expected) GDP print, there is little need to change anything. This time could be a rather dull FOMC meeting.
Chart of the Day – FTSE 100
Although the underperformance of sterling may not have been the only driving factor yesterday, there was finally an upside breakout on the FTSE 100. For weeks, the resistance band around 7715 had been holding the market back. An intraday breakout failed to make the close last week, but the warning signs have been building with a run of higher lows and momentum indicators edging higher. Then yesterday we finally saw a bull candle closing decisively above 7715 and completing the near to medium term breakout. Momentum indicators are increasingly encouraging, with the RSI above 60 for the first time since late May, whilst the Stochastics are positively configured and MACD lines are rising above neutral. The tendency of the FTSE in recent weeks has been for the upside moves to be somewhat truncated, so another opportunity to buy could easily be seen. The configuration of momentum now suggests that weakness is a chance to buy, with the old resistance around 7715 now becoming a basis of support. The next hurdle for the market to encounter is at the lower high of 7793 from June, but if that can be overcome then the bulls will be eyeing all-time high territory and 7903 once more. The hourly chart shows weakness being increasingly bought into and the rising 144 hour moving average (c. 7670) now a basis of near term support, whilst a two week uptrend comes in at 7680.
Once more we see that a potentially outlook defining move has been scuppered. Yesterday’s session had the EUR/USD buyer straining at the leash, however the market lost traction into the afternoon and again the resistance at $1.1740/$1.1750 has prevented a breakout. The slip back subsequently formed a negative candle which has continued to an extent into today’s session to once more all but neutralise the outlook. Momentum indicators are very neutrally configured, with the RSI at 50, MACD lines almost entirely dead flat and the market all but in the middle of the converging trendlines again (which are 120 pips apart now. The Bollinger Bands are very tight now (just around 150 pips wide) which will often be seen before a key breakout, but for now the consolidation continues. The Fed tonight could provide some direction, if not perhaps payrolls on Friday, but the market is very much in wait and see now.
A very tight range of around 90 pips has developed in the past three completed sessions and has continued early today as the consolidation continues. There is a significant lack of intent for anyone to take a view ahead of the Fed tonight and more likely, the Bank of England tomorrow. The outlook remains negatively biased on a medium term basis within the downtrend channel of the past six weeks, but near term the outlook has neutralised. Momentum confirms a negative medium term bear bias, but has plateaued near term. The hourly chart shows key near term resistance at $1.3070, a closing break of which opens the psychological $1.3000 and the key low at $1.2955. Resistance initially at $1.3170, with $1.3215 a near term barrier to break to open a recovery. For now we wait.
The market has responded to the BoJ by a resumption of selling pressure on the yen, which has ended a period of consolidation to pull Dollar/Yen higher. The uptrend of the past four months that has been strained over the past few sessions has held firm (never closing below) and the bulls are ready now to push on. The outlook has certainly improved again with the RSI picking back decisively above 50, the MACD lines bottoming above neutral and importantly, the Stochastics giving a bull cross buy signal. The decisive bull candle from yesterday has seen continued buying today and the market is eyeing a test of the initial overhead supply at 112.20. If the market can break through this barrier then a move towards the key 113.15 high could be seen again. The old pivot around 111.40 now becomes a basis of support again.
Gold
Aside from some intraday chop during yesterday’s session, once more we find gold having very little direction as the consolidation of the past few sessions continues. In fact, the market has closed for the past four sessions, all within $1, forming a variety of neutral candles. Interestingly, this consolidation is now looking to break the upper band of the downtrend channel of the past six weeks. However, this does not look to be a move to get overly excited about. Momentum is very neutrally configured with nothing to go from on the RSI (stuck between 30/40), MACD and Stochastics lines (both plateaued). Support tends to come in as gold drops below $1220 but there is little buying pressure to push the market higher. Perhaps the Fed will give direction tonight, or (more likely) the payrolls report on Friday. Key support at $1211, with $1236 still key resistance.
WTI Oil
The highs and lows of being a bull in the oil market was laid bare again yesterday with a remarkable bearish candle that has completely unwound the positive implications of Monday’s bullish session. In the past week there have been intermittent threats of the bulls grasping control for renewed upside, however, they have been thwarted each time. The threatened improvements in momentum have spluttered and how the market reacts to Friday’s low at $68.25 could be a key development. Yesterday’s intraday breach of $68.25 reacted higher into the close, but another early drop back today continues to threaten the market lower. A close below $68.25 would seriously question the recovery prospects, threatening the key pivot around $67 once more and also leaving key resistance at Monday’s high of $70.45. Can the bulls respond again today?
The four week uptrend has survived by the skin of its teeth and lives to fight another day. However, the bulls have been warned! Also with the market closing below the mid-point of the candlestick, the bulls lost impetus towards the end of the session and this could be a concern going into today’s trading. The reaction back above the 61.8% Fib level at 25,367 is a positive, but the bullish configuration of the momentum indicators is creaking now as the Stochastics continue to threaten a completed sell signal. The importance of the support of Monday’s low is increased at 25,287 as a break below would now begin to form lower highs and lower lows. There is now a run of three consecutive lower daily highs meaning initial resistance is at 25,490.
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