Market Overview
Treasury yields spiked higher yesterday as significantly impressive US services sector data from the ISM reflected a strength in the economy and the ongoing positive impact of the tax reform from President Trump.
The ISM Non-Manufacturing hit 61.6 which was its highest level since 1997 yesterday, buoyed by a strong employment component. Instead of being withheld amid caution of the economic reaction to FOMC rate hikes, bond yields have suddenly had the shackles released.
An ISM reading of such strength may prove to be short-lived (on the shot in the arm of tax reform), but this was a significant moment in bond markets. Having spent much of the week following the FOMC decision somewhat subdued, the United States 10-Year Treasury yield shot higher by over 10 basis points yesterday and a further 5 basis points early today. The yield is now at its highest since May 2011. This has significantly steepened the yield curve and with such a strong move on the US rate differentials the dollar gained significant ground yesterday.
The focus has been on Italian debt recently, but this has now switched, with a solid dose of US economic strength driving the move. If backed up by continued traction in earnings growth in tomorrow’s payrolls report, this could really begin to free up renewed dollar strength.
Wall Street closed marginally higher with gains for the Dow +0.2%, whilst the S&P 500 added a couple of ticks, +0.2% at 2925. This move has slipped back with the futures around half a percent weaker today, which has weighed on Asian markets (Nikkei-0.5%, whilst China remains on holiday for Golden Week). European markets are seen mixed in early moves, whilst the DAX is playing catch-up on a previous decent session in Europe having been on public holiday yesterday.
In forex, there is a pause for breath on the dollar strength as it is giving back some of yesterday’s considerable gains, however, it is interesting to see the Aussie and the Kiwi still pressured.
Commodity markets show a consolidation on gold and silver, whilst oil has slipped back a shade after another strong session yesterday.
It is a quiet day for the economic calendar today with only the US Factory Orders at 15:00BST which are expected to grow by an impressive +2.1% on the month in August (after a -0.9% decline last month).
Chart of the Day – EUR/GBP
The euro has been pressured in the past week and although sterling has hardly been surging, it has managed to gain ground versus the euro. This move has pulled EUR/GB back to a test of what is a key support at £0.8850 which is actually a neckline support of what could be an 11 week head and shoulders top pattern. The momentum indicators are now far more negatively configured, with the MACD lines failing under neutral whilst the RSI and Stochastics both swinging lower. A close below £0.8850 would be complete a 250 pip top pattern and imply a drop back towards the key supports coming in around £0.8685. However more importantly it would be a decisive change in the medium term outlook which on this pair has been euro positive for months and consistent trading below the moving averages would add to the corrective outlook on EUR/GBP. Initial resistance comes in at £0.8920 from yesterday’s high with the key resistance at £0.9000. Below £0.8850 the support is then at £0.8800/£0.8810.
It was a significant session for the near to medium term outlook yesterday, as EUR/USD failed in an intraday rally, forming a decisive bear candle which closed below key support at $1.1505. The strength of the US ISM Non-Manufacturing data meant that the pair fell well over 100 pips from the day high and complete a sixth consecutive negative candlestick. This has confirmed a change in what had previously been a range, but is now far more of a corrective market. The flat moving averages are now swinging lower, whilst the momentum indicators are becoming increasingly negatively configured. Having breached the support at $1.1500 now means there is little support until a test of the key August low at $1.1300. The old support at $1.1505/$1.1525 now becomes overhead supply and the bulls now have a big task to turn this corrective outlook around now. The hourly chart shows intraday rallies being sold into and resistance at $1.1595.
The strong dollar position regained the ascendancy once more yesterday as another early intraday rally lost traction into the close and Cable continues to drop back. The prospects of the market holding on to the shallow recovery uptrend of the past seven weeks is teetering already and momentum indicators are increasingly correctively configured again. There is an ongoing negative configuration on the hourly chart momentum indicators too, with the hourly RSI failing at 60 and MACD failing under neutral. This suggests that intraday rallies remain a chance to sell. There is considerable resistance building up at $1.3000/$1.3055 now but a retreat to $1.2800 is likely in due course.
Once more, the strength of the trend higher re-engages and a decisive bullish candle has formed. Adding over 100 pips on the day, the dollar bulls continue to control the market which is now within touching distance of the key November high of 114.70. The market is now testing the key highs formed through 2017 where following the January/March 2017 highs around 115.60 the subsequent market highs came in at 114.70 in November. The strength of this trend remains impressive and when Dollar/Yen goes on a run it can often be difficult to stop. The momentum indicators retain their bullish configuration and any intraday weakness is seen as a chance to buy. The near four week uptrend comes in at 113.25 today, with this week’s low at 113.50 initially supportive now. The hourly chart suggests the breakout around 114.00 should also act as a support on any unwinding moves.
Gold
Considering the huge breakout on Treasury yields and a decisive dollar strengthening, the drop back on oil was remarkably controlled yesterday. The choppy trading range continues with gold falling back again but with little real conviction. A loss of under $6 on the day would have been seen as a fairly positive result by the gold bulls yesterday. Falling below the $1200 psychological level will give the range a slightly negative bias again and also leave initial resistance at $1208 now. There is still little real conviction in any move within this range. The hourly chart shows support of a minor pivot around $1195 with $1180/$1183 the main range support.
WTI Oil
Traders looked past a surprisingly large crude inventory build from the EIA to post another decisive bull candle through to further multi-year highs. Closing above $76 the market remains on course for a move towards $80. Momentum is stretched but strong and to shun the opportunity to take profits yesterday on the inventory build is an impressive sign. The market has also left $74.30 as a higher low. A near term retreat would still be healthy for the trend higher and help to unwind stretched positioning, with a two week uptrend support in at $73.60 today. It would still be seen that any move to unwind momentum would be a chance to buy again.
Facilitating the latest boast from President Trump, the Dow moved to renewed all-time highs yesterday, with another close higher. However, the candlestick posted was not bullish and although the close was higher, there is a concern now that pulling back 120 ticks into the close perhaps implies exhaustion or leaves the market open to some near term profit-taking. Momentum indicators remain positive and any unwinding move should still be seen as a chance to buy for the medium term, however a near term slip could be seen now. The initial support of the breakout at 26,769 is likely to be broken (if the futures are anything to go buy) meaning initial support is now around 26,600,26740. However, the trend channel is still very strong and there is little to suggest that any slip will be significant, whilst the upper bound of the channel today comes in at 27,060 as a realistic initial target once an initial slip is contained. Support at 26,350 is now a key higher low.
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