There is a mixed feel to markets today as the risk positive intent of recent sessions has begun to ebb away. With US pharma giant Johnson & Johnson pausing its COVID-19 vaccination trial there is a jolt to recent bullishness. Pausing trials are common practice (the Astra Zeneca trial saw a similar pause for a few days about a month ago), but this has just given the bulls an excuse to pullback slightly. As US Treasuries resume trading after a Columbus Day break, yields are ticking lower and the dollar is feeling the benefit once more. Markets have been viewing the US fiscal support negotiations with a glass half full mentality, however, with a lack of traction there could also be some fatigue setting in. We are seeing this today, with US index futures rolling back from a strong recent run higher. With Q3 earnings season starting in earnest today too, this adds another factor into the mix too. A stronger dollar has weighed on the precious metals, whilst for oil, increasing second waves of COVID are a threat to demand at a time where supply is also looks to be increasing in Libya. UK unemployment levels are now beginning to increase, although they are still at artificially low levels in light of the government furlough scheme. Sterling is relatively unmoved, with Cable focused more on dollar price action today.
Wall Street closed decisively higher with the S&P 500 at +1.6% to 3534. This is being tempered slightly today with E-mini S&P futures -0.4%, which has just pulled the reins on an Asia rally (Nikkei +0.2%, Shanghai Composite +0.1%). European markets are also mixed, with FTSE futures +0.1% and DAX futures -0.1%. In forex, there is a basis of USD strength this morning across the majors. The big underperformer is AUD whilst NZD is bucking the trend with mild outperformance. In commodities, the dollar gains are weighing on gold (-0.3%) and silver (-0.9%). After two days of declines, there is a slight rebound on oil today, but is it enough to turn a tide of correction?
There are a couple of important data points to watch out for on the economic calendar today. The German ZEW Economic Sentiment is at 1000BST is expected to decline to 73.0 in October (down from 77.4 in September). This would be driven by a deterioration in the current conditions to -60.0 (from -66.2 in September). Then into the US session, US CPI inflation for September is at 1330BST, with headline CPI expected to see an increase to +1.8% (up from +1.7% in August), whilst core CPI is expected to also tick higher to +1.4% (from +1.3% in August).
Chart of the Day – AUD/USD
We see the dollar has been under pressure recently but the greenback managed to claw back some lost ground yesterday, and this has continued today. This move lower on AUD/USD leaves the market intriguingly poised. Friday’s bull move stopped around 0.7240 which was not only an old breakout level from August, but also now strengthens a six week downtrend. How the bulls react to the disappointment of this renewed decline will be key. There is now a developing uptrend of the past couple of weeks, forming higher lows and higher highs. We have seen momentum improving, with Stochastics rising at five week highs, but MACD lines are still struggling slightly under neutral, whilst the RSI has again rolled over under 60. There are big question marks over the outlook still. The bulls need a strong reaction to this decline to really suggest they are developing again. A pick up from an early low at 0.7165 is encouraging (the tentative uptrend comes in at 0.7130 today). Continuing to close above 0.7190 would add confidence for a market that needs to closing decisively above 0.7240 to open the upside once more.
Even though the pair is trading clear above 1.1750 again, the outlook is still not decisively positive. A new uptrend formation is in place (today at 1.1780) but a negative close yesterday and another early slip lower today is testing the trendline. The improvement in momentum indicators is also being tested as MACD lines just tail off around neutral and RSI slips back towards 50. Resistance is in place at Friday’s high of 1.1830 now and the bulls will be mindful that this needs to be broken to continue the run higher. First and foremost though, is holding the trendline. A failure below 1.1750 would again seriously question bull control, whilst below 1.1725 (the first real higher low) would neutralise the outlook again.
A second positive candlestick clear above 1.3000 is building on the improving outlook on Cable. Where 1.3000 was once a ceiling, this resistance has now turned into a basis of support. The market has also closed above 1.3050, meaning that the old August lows (which have been a basis of overhead supply) are now being overcome. A continued improvement in momentum is coming, with Stochastics above 80, RSI hovering around multi-week highs, whilst MACD lines continue to advance. It points towards using weakness as a chance to buy. A mild early turn lower today could be such an opportunity, with 1.3000 now a basis of support. The market is now edging higher in a mini trend channel, but the more interesting upside target is still the +330 pips from the breakout of a month long range/base pattern. This implies 1.3330 in the coming weeks. It is likely that a positive outcome from the Brexit trade deal negotiations will be needed for this though. Below 1.3000 would be a disappointment now, but further support arrives at 1.2970 and 1.2920.