Market Overview
Risk appetite has deteriorated once more as a series of factors have come at the same time to dent investor confidence. However, not all has been taken negatively. From last night, questions over the viability of US equity valuations have pulled growth stocks lower in the US, leading to sharp falls on Wall Street. This suggests that blindly buying the dip may not be the correct strategy.
European political risks remain a factor, with Brexit woes hitting sterling and concerns over the Italian budget plan also having taken a further leap forward. The initial response from the European Commission being that Italy was in “particularly serious non-compliance” with the EU’s budget rules. Italy now has until Monday to justify its significant deviation from the rules. This is driving yields on Italian BTPs higher, which are stretching further in their spread over German Bund yields, putting pressure on the euro.
Furthermore, overnight Chinese GDP growth disappointed and fell to +6.5% in Q3 (+6.6% exp, +6.7% in Q2) which is the lowest in ten years. However, this is backward looking data and the market knows that China is slowing its economy within the scope of economic re-structuring.
The other key data out of China reflects the economic rebalancing of the two (nigh on) halves of the economy with the (old economy) Industrial Production missing estimates at +5.8% (+6.0% exp, +6.1% last) but (new economy) Retail Sales beat at +9.2% (+9.0% exp, +9.0% last). It is interesting to see a mixed reaction on Asian markets overnight, with the Nikkei -0.6% but China’s Shanghai Composite (arguably an indicator for risk appetite) is +1.9% higher. It is interesting to see that after the strong risk negative moves from yesterday there is a mild unwinding of this. The inference for all of this is that the risks out there remain high and the volatility of recent weeks may have settled quite yet.
Wall Street closed strongly lower (S&P 500 -1.4% at 2767) but the futures have ticked back higher again today by +0.3%. With a mixed Asian session, European markets are also looking a mixed in early moves today.
In forex, after the risk negative moves yesterday (a stronger dollar and yen outperformance), there is a mild reversal of this today, but will it last?
In commodities, the support for gold continues to build, whilst oil is also ticking a shade higher today.
It is a relatively quiet end to the week, with UK Public Sector Net Borrowing at 09:30 BST (+£4.5bn exp, which is down on the +£5.3bn borrowed in September 2017).
Canadian inflation at 1330BST is expected to be flat in September after falling -0.1% in August, with a drop to +2.7% YoY (+2.8% in August). US data is restricted to the Existing Home Sales at 1500BST which are expected to fall by -0.7% to 5.30m (from 5.34 in August).
There are a couple of central bankers speaking today too, with the FOMC’s Raphael Bostic at 1700BST (voter, leans dovish) and the Bank of England Governor Carney (centrist) at 1710BST.
Chart of the Day – EUR/NZD
In the past couple of weeks the Kiwi has been performing relatively well on the major currency pairs. This move is now making significant ground in pulling Euro/Kiwi decisively lower (a weaker euro has certainly helped too) and back to a key medium term crossroads. Six consecutive bearish candles in a row have broken a two month uptrend as the market has corrected back for a serious test of a key long term breakout at 1.7480, which now looks to be breaking today. This support held back in late September but after a series of bear divergences on the RSI and MACD lines the momentum in a correction has grown. A closing break below 1.7480 would complete a top pattern and imply around 350 pips of further correction, a move that would bring it back towards the July/August lows. If the MACD lines were to close negative on a medium term basis (below neutral) and RSI close below 40, it would be a confirmation of a real shift towards an increasingly corrective outlook. The bulls have to fight hard now to quell the selling pressure now, as intraday rallies are already being sold into, something that hourly momentum also reflects. There is resistance now around 1.7530/1.7550 with 1.7600 a reaction high.
The euro is under increasing pressure now . Two decisive negative candlesticks in a row have come as sentiment has turned sour on EUR/USD and this has pulled the pair below $1.1500 again. Momentum indicators are deteriorating, with the “bear kiss” on the MACD lines and Stochastics having crossed lower. The support of the October low at $1.1430 is now key as a closing breach would mark a decisive change in outlook that would signal a test of the crucial August low at $1.1300 again. Trading under all the falling moving averages and with momentum so negative configured, rallies are a chance to sell. If $1.1430 breaks then the $1.1500 range will be an area of overhead supply that will be housing a lot of worried old bulls now, whilst $1.1610 is growing as a key lower high.
With yield differentials so against sterling versus the dollar, it is not a surprise to have seen Cable under pressure. In the wake of the September EU summit there was a brief respite rally before Cable fell for the next couple of weeks. The support of the nine week uptrend is being tested today but the pressure for a corrective move is growing. The momentum indicators have swung lower and whilst the RSI and MACD lines are not negative, they are at a key crossroads. However, the Stochastics (which are the most sensitive momentum indicator of the three) are now accelerating lower. A $1.29 handle on the price today would be a real concern now, especially on a closing break. Initial support is now $1.2920 as the October low, but a break of there would open $1.2800. The hourly chart shows a basis of resistance now $1.3050/$1.3080 and with the negative configuration on hourly momentum, the bulls will struggle to sustain any rallies.
Yesterday’s bearish outside day has questioned again who is in control of this market. It looked as though the dollar bulls were reclaiming the upper hand and were ready to pull higher once more, but perhaps the selling pressure is not quite done yet. However, an early morning rebound today again poses even more questions and means that an increasingly mixed and neutral configuration is forming. Is yesterday’s low at 111.95 now a higher low above 111.60, or simply part of a range play? The support of a six and a half month uptrend comes in around 111.80 today, whilst momentum indicators are beginning to look a touch mixed. The next move, either above 112.70 (yesterday’s high) or below 111.95 could be key in determining the direction of the new near term trend.
Gold
As we know over recent weeks, gold loves a range. Perhaps it should come as little surprise then that the market is settling and now forming a consolidation. The breakout above $1217 was key and now means there is a batch of underlying demand between $1208/$1217 to prop up any slip. However there is also key resistance overhead at $1236. And so the market has spent the past few sessions consolidating, with yesterday’s session forming a mild positive candle that held little conviction. Momentum indicators are bullishly biased now but until $1236 is broken there is a degree of wait and see to the market.
WTI Oil
The negative pressure through WTI continues as another negative candle formed yesterday. This is reflected in the corrective configuration on momentum where MACD lines accelerate lower and Stochastics remain firmly in bearish territory. An intraday rally from $68.55 could not ultimately be held and the hourly chart shows the market now failing under $70. It shows that the old support between $70.00/$70.50 is now a basis of resistance overhead and a failure in or under here is a signal to suggest further weakness to test $67.00 is likely. Given the corrective momentum now in place, it would need a move above the resistance at $72.70 in order to regain positive traction. Intraday rallies are a chance to sell, whilst the two week downtrend comes in at $72.30 today.
The doji candlestick on Wednesday was a warning and we have been considering whether the bulls would regain the traction in the recovery, but yesterday’s sharp decline would suggest not. The run of higher daily lows has now been decisively broken, along with the prospect of a recovery uptrend. The Dow continues to struggle under the resistance around 25,900 and the sell-off yesterday now risks a renewed downside pressure instead back towards the October low at 24,900. Initial support is yesterday’s low at 25,236 but with the deterioration in momentum, this is now a market struggling and the hourly chart shows resistance at 25,480 as a pivot. Unless the bulls can fight back today there is a real risk of this near term bounce falling hard once more.
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