Market Overview
Is October the new January? That is what equity traders will be asking as selling pressure swept across Wall Street yesterday to spook the markets again. In January, the fear was that a sharp rise in earnings growth was a signal of rising inflation, and risk appetite plunged. With the recent rise in Treasury yields that fear has been renewed and now a similar sell-off could be seen in October (which is historically a bad month for equities too).
Yesterday’s plummet on Wall Street may have begun with a rout in the US tech giants (Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) especially hit) but is spreading through global markets now after the Dow and S&P 500 both fell over 3%. The VIX Index of S&P 500 options volatility spiked to its highest level since April towards 23. However the VIX has plenty of room to run higher to hit January levels, especially if the liquidity constraints are felt once again. Traders increasingly risk averse means move out of higher risk equities and looking for a move towards safer havens with US Treasury yields falling, and the yen performing well. One of the interesting features of this move is that the dollar is also corrective, as yield differentials continue to drive recent performance of the greenback. Donald Trump labelling the Fed “crazy” for its tightening certainly which he viewed as being “wrong” does not help to support the dollar near term either. With US earnings season just about the kick off, there are now serious questions over whether this sell-off on Wall Street will metastasize into something more concerning. The bulls need to respond well in the coming days.
Wall Street markets sold sharply lower last night with the NASDAQ off -4.1%, the S&P 500 -3.3% and the Dow off 3.2%. Futures are under further pressure early today, around -0.7% lower. Asian markets followed suit with the Nikkei -4.0% and Shanghai down -4.9%. European markets are also sharply lower early today.
In forex, the only real impact is one of dollar weakness, for now, with major currencies fairly settles aside.
In commodities there is are is a strong sense of consolidation on the precious metals, but the oil price is under significant pressure as it is a higher risk commodity.
On the data front, the big focus for today will be on US inflation from September with US CPI announced at 13:30 BST. The headline CPI is expected to grow by +0.2% on the month but drop back to +2.4% (from +2.7% in August) due to comparatives of a sharp spike of +0.5% in September 2017.
The EIA oil inventories are a day late this week (due to Columbus Day on Monday) and are released at 1600BST, with crude stocks expected to build once more by +2.8m barrels (although down form a build of +8.0m barrels last week), whilst distillates are expected to drawdown by -2.0m barrels (-1.8m last week) and gasoline stocks expected to drawdown by -0.2m.
Other than the data releases, the Bank of England continues to roll out the speakers with Governor Mark Carney (centrist) this morning at 10:00 BST (having already spoken earlier today) and Gertjan Vlieghe (centrist).
Chart of the Day – S&P 500
After a run higher within the uptrend channel of the past six months, the aggression of the selling pressure in the past week has culminated in the biggest one day sell-off since January. Such was the magnitude of the move lower yesterday that two really significant support areas were destroyed. The second, at 2800 is a hugely significant medium term pivot which now puts a negative outlook on the market. After such a strong sell-off, the subsequent reaction is all important. If it is an aberration then the bulls will quickly react to buy into the weakness. However, if it is a situation similar to January’s fear driven move, then any intraday rebound will be sold into and the market will continue lower. The futures do not look promising at this stage. There is also now a corrective outlook across momentum indicators This comes with the RSI falling below 30 to a three year low, whilst Stochastics take on a bearish configuration and MACD lines are also corrective. The old pivot range around 2800 is now a key gauge and a basis of resistance for a recovery and how the market reacts to an unwinding move will be key. Initial support at 2770 with 2700 the next key reaction low.
The consolidation on EUR/USD which has developed over the past week has now looked to turn more positive. A mild recovery candle yesterday added just 30 pips, but has continued in similar vein today and the market is threatening now to form a mini recovery. The momentum indicators are looking to now tick higher, with the Stochastics tentatively rising being the main move. The rebound has left support at $1.1430 now as a marker, but it is on the hourly chart where you see the more considerable improvement. A move above $1.1550 shows a small base pattern has formed (of 120 pips) to imply $1.1670, whilst the hourly momentum indicators are far more positively configured now and the market is trading above all hourly moving averages which are turning up in bullish sequence. This means that the old pivot around $1.1500 is again a basis of support, with $1.1500/$1.1550 now a support area to be bought into. It also adds importance for the bulls to hold above $1.1500 again. Next resistance is $1.1595 and then the old near term pivot band around $1.1650.
With the dollar slipping back yesterday and the outperformance of sterling holding firm, Cable continues to make ground higher. Another positive candle has completed and with further gains today there is a move above $1.3215 which has re-opened the $1.3297 key near to medium term resistance of the September high (this was the level seen just prior to the previous EU summit). Momentum indicators are increasingly encouraging again as the MACD lines cross back higher above neutral, and the Stochastics and RSI both track decisively higher. Intraday corrections continue to be bought into. The hourly chart shows $1.3135 is a near term pivot now whilst holding above $1.3100 maintains the improvement, with $1.3020 as a key near term higher low now.
So a fifth decisive negative candle in a row on Dollar/Yen has come as the correction continues to gather steam. Broad market fear over rising bond yields trumped (no pun…) dollar strength in the past week, but now with yields falling away again entirely due to these market fears, the dollar has moved into correction mode, hence a sharper move lower on Dollar/Yen. Suddenly with breakout supports being breached, a realistic test of the six and a half month uptrend could be seen. A close below 112.15 would open this as a test, with the uptrend coming in at 111.55 today. This near term correction is at risk of turning into something far more considerable. The hourly chart shows corrective near term configuration on momentum, with 50/60 on hourly RSI being a selling opportunity, with MACD lines struggling under neutral. Initial resistance is 112.80 now.
Gold
Increased market fear and a dollar correction adds up to a rebound on gold again. This means that once more the concerns that the bottom of the near to medium term range will be broken at $1180 have alleviated. A positive candle yesterday has added $5 and the market is ticking higher to leave further support around $1183. However, this is hardly a decisive rally on gold and the bulls still seem reluctant to back any real move higher. The psychological pivot around $1200 is overhead resistance below the run of lower highs, initially at $1208. Momentum has ticked notionally higher but in reality this is still playing out as a range play that retains a mild negative bias.
WTI Oil
With risk appetite suffering again yesterday the oil price resumed its corrective move. This move which resulted in a breach of the previous session’s bull candle and having continued lower today, is decisively below Monday’s low at $73.05. There is also now a near term downtrend formation over the past week which is pulling the market back towards the support of an eight week uptrend (which comes in at $71.15 today). The immediate pressure is now on the key support of the breakout band between $71.65/$72.80 which should be a source of underlying demand. So a breach of this band today would be a significant blow. With the strong decline yesterday there is now a deterioration in momentum across the indicators, with the RSI below 50 for the first time in four weeks this morning, whilst Stochastics are tracking lower and the MACD lines have bear crossed. A breach of the eight week downtrend would begin to ask serious questions of whether the bulls have lost control of the market again. Resistance around $77 this morning.
US equities have been smashed. The uptrend channels on Wall Street markets have been completely blown out of the water and the Dow has turned decisively corrective. Yesterday’s huge strong bear candle lost over 830 ticks on the day and has now breached the support of a three and a half uptrend channel. The move has also broken below the higher reaction low at 25,754. Supports tend to count for little during days like yesterday as it becomes just a case of how far, how fast. Given that the momentum indicators are now sharply corrective (RSI decisively below 40 and a three month low), whilst Stochastics and MACD lines accelerate lower, the near term outlook remains bleak (especially with futures pointing to another 150/200 ticks off today. The next support is 24,965/24,985, whilst the resistance is initially now around 25,750. Can the shell shocked bulls respond today?
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