Market Overview
Yield differentials have been playing a key role in how currency pairs have fluctuated recently. Subsequently, the focus remains on how Treasury yields are moving near term to drive market sentiment across asset classes, but also the moves of yields on Italian BTPs and even UK Gilts.
With 10-Year Treasury yields dipping back from yesterday’s high of 3.26%, some of the momentum has been lost from the dollar. The sharp move higher on yields of Italian government debt had the reins pulled yesterday as Italian Finance Minister Tria tried his best Mario Draghi impression, saying that they would do whatever is necessary to regain control, a move that has helped to stabilise the euro.
With UK Gilts, it is interesting to see yield differentials on the 10s over US Treasuries have been sterling positive this past week and this is helping a sterling rally. Brexit factors have played positively, with encouraging comments from the EU’s Junker and Tusk last week, whilst moves towards an agreement on the all-important Northern Irish border apparently continue. However, data on US inflation will gain focus in the next couple of days and any upside surprises to the PPI and more importantly the CPI could find Treasury yields spiking higher again and thus renewing dollar strength. This would be risk negative as fears over growing US inflation will subsequently take hold and impact again across asset classes.
Wall Street slipped a touch into the close last night, with the S&P 500 -0.1% at 2880, with S&P 500 futures a tick higher this morning. Asian markets have been suitably mixed with the Nikkei +0.1% and Shanghai Composite -0.1%. In Europe, markets are a shade lower in early moves, but with little conviction.
In forex, there is a move towards a dollar correction forming, with a more positive appetite for risk. The yen is the main underperformer in this, with the dollar weaker across the other majors. The Aussie seems to be the main outperformer as signs of a technical rally continue.
In commodities, the weaker dollar is helping to maintain support for gold, whilst oil is consolidating ahead of this week’s EIA inventories.
After a quiet couple of days on the economic calendar a raft of UK data and the beginnings of US inflation data is the focus today. UK monthly GDP for August is released at 0930BST and is expected to show growth of +0.1% (after a gain of +0.3% in July). The UK Industrial Production is expected to grow by +0.1% on the month and mean a yearly growth of +1.0% (+0.9% last month). There is also the UK Trade Balance for August which is expected to show a deterioration to -£10.9bn from -£10.0bn in July.
The factory gate inflation in the US, the US PPI is released at 1330BST which is expected to show headline PPI stable at +2.8% (+2.8% in August) whilst core PPI is expected to tick higher to +2.5% (+2.3% last month). There are also a number of central bankers speaking today, with the Bank of England’s chief economist Andy Haldane (leans hawkish) at 10:00 BST and the FOMC’s Raphael Bostic (voter, mild dove) at 23:00 BST.
Chart of the Day – FTSE 100
After three solid and strong bear candles as the markets sold sharply lower, has there been an exhaustion in the move on the Footsie that could now be the precursor to a recovery. The key support of the September low at 7220 was breached on an intraday basis yesterday but this could well have turned out to be a false downside break after the rebound of 50 ticks to close higher on the session. This has also now completed what is now a bullish hammer candlestick and the prospect of a recovery. Momentum indicators are still corrective (especially the MACD lines) which means that the bulls will have to continue to pull the rebound otherwise the overriding momentum will pull the market lower again. The hourly chart is interesting though as there are hourly buy signals across the RSI, MACD and Stochastics indicators. One of the benefits of such a sharp sell-off is that it reduces the significance of immediate resistance, and once clear of 7300 there is minor resistance around 7360/7382 but little real overhead supply until 7450. A positive session today would be needed to confirm the appetite for a reversal, however a drop back again with a close below 7220 would be a disappointment now and reopen potential downside towards 7000 again.
There is negative pressure moving through EUR/USD but the dollar bulls have not been able to strike the crucial blow that would decisively turn the outlook negative for a test of $1.1300. The past five sessions since the breakdown below $1.1500 have all been a case of “will they, won’t they” as a consolidation has set in. Yesterday’s doji candle reflects this case in point well. An intraday breach of support for a seven week low only for a rebound into the close, leaving support at $1.1430 and the market rebounding this morning back above $1.1500. There needs to be more for this to be considered a rebound that can be backed, as the daily momentum indicators are all still negatively configured, but the euro bulls are fighting back. The hourly chart shows a move needs to break above resistance at $1.1550 to find traction and a move above a lower high for a recovery. A positive candle today would also help.
It has been a choppy few sessions on Cable, but the sterling bulls seem to be coming out on top for now as the market closed with a bullish one day candlestick yesterday and continues higher today. Since finding support at $1.2920 a week ago the market has rebounded over 250 pips and is now beginning to find traction. The fact that this is coming despite dollar strength in that time is all the more impressive for the performance of sterling. Now that the dollar shows signs of losing traction, we find that sterling is beginning to make headway. Technically, Cable is increasingly positive again, building well off the support of the seven week uptrend, trading above all moving averages again and momentum indicators ticking positively. A move above $1.3110 has opened $1.3215 as the next basis of resistance, whilst momentum on the hourly chart is increasingly positive. Intraday corrections are now being bought into as the market has picked up off support in the band $1.3000/$1.3050 again. A move towards the recent high at $1.3297 cannot be ruled out at this rate. As ever though, Brexit politics are the key caveat.
The corrective move on Dollar/Yen completed a fourth consecutive negative session yesterday and the technical outlook has become corrective near term. However, this is still a corrective move within the bullish medium to longer term outlook. The six and a half month uptrend comes in at 111.50 today. However, there is good breakout support and underlying demand now between 112.15/113.15 which will be housing plenty of bulls to regenerate the uptrend once more. The hourly chart does show an outlook correctively configured, with hourly RSI struggling latterly around 50/60 and MACD lines under neutral. However the bulls will be looking for this to improve and when it does it would be a positive signal. Initial resistance at 113.40 (yesterday’s high) would also be a level to watch as a potential trigger. Support is initially at 112.80.
Gold
Gold spent much of yesterday’s session holding the sellers at bay and preventing a continued move lower than would be expected to come with continued dollar strength. However, the support maintained (as the dollar has lost some traction) and the bulls fight on, but holding on to the support at $1180 is key in this move. Two successive daily lows around $1183 show the continued pressure the market is under and there is still this bear bias that is dragging gold towards the support at $1180. A close below would be a key near to medium term change in outlook. It would open the key August low at $1160 once more. The daily momentum indicators are still leaning that way, with the recent bear cross on the Stochastics increasing the downward pressure. However, yesterday’s doji candle is being followed by a tick higher early today. The run of lower highs continues to suggest these near term rebounds are still a chance to sell, but the bulls are not giving up quite yet.
WTI Oil
After three sessions of corrective move, the bulls seemed to regain confidence once more yesterday, forming a solid positive candlestick. The slip lower in the past week has always had the look of a bull market correction and this seems to have been the case as the market bounced from $73.05. The unwinding of momentum indicators has not damaged the bullish outlook in any real fashion, merely looking to renew upside potential, with the RSI holding firmly above 60, MACD lines still positively configured and the Stochastics looking to turn up once more. The hourly chart shows the need for a degree of caution though, trading around flat moving averages with neutral configuration on momentum. Resistance at $75.20 needs to be breached decisively to find traction for a retest of recent highs at $76.90.
After Monday’s bull hammer candlestick it was important not to lose the impetus of the rebound. Posting a mild loss yesterday has not helped the prospects of renewed upside but has also not yet decisively broken the key near term support at 26,349. The longer the support holds and the uptrend channel the positive outlook will be sustained. It was also important that for a third consecutive session the market tested below 26,349 but failed to close below the neckline of what would have been a top. This means that the bulls are still tempted to buy into corrections within the channel. Momentum indicators have been corrective for the past few sessions, but the benign look to the RSI (still above 50) and MACD lines (just a mild negative drift) help to promote the outlook of buying into weakness. Monday’s low at 26,223 is growing as support.
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