The positive sentiment that was starting to build through major markets has taken a hit again in the wake of the first Presidential debate. President Trump was never going to go easy on his opponent Joe Biden, but the way that the debate panned out points towards a significant increase in political risk in the weeks and potentially months ahead. An acrimonious exchange between the candidates ensued, where it is clear that the incumbent, President Trump, could look to win at all costs, even if that means challenging to result in the Supreme Court. Early suggestions are that the uncertainty over a potential winner in the election could rumble on well beyond 3rd November (where a winner would be declared). Political risk means market sentiment falters. Treasury yields are falling this morning, whilst the US dollar in its role as a safe haven is outperforming. Equities are under pressure, with the risk positive mood across forex majors having turned sour again. The Japanese yen seems to also be a winner if this trend continues. Early this morning, the final reading to UK GDP for Q2 showed a slight positive revision to -19.8% (from -20.4%), whilst the UK Current Account for Q2 came in a -£2.8bn which was a marked improvement on the -£21.1bn of Q1 but slightly worse than the expected -£0.4bn. Traders will be watching out for ECB President Lagarde this morning and the ADP jobs number later.
Wall Street closed lower last night as the S&P 500 dropped -0.5% to 3301, whilst US futures are continuing to struggle today (E-mini S&Ps -1.0%). Asian markets broadly fell, with the Nikkei -1.5% and Shanghai Composite -0.1%. In Europe the outlook is under pressure too, with FTSE futures -0.7% and DAX futures -0.7%. Commodities show the stronger dollar hitting across precious metals, with gold -0.5% and silver -1.7%. Oil is also lower by -1.0%.
There are several US data points on the economic calendar today. The ADP Employment change is at 1315BST and is expected to show an increase to +650,000 jobs in September (up from +428,000 in August). The US final Q2 GDP is at 1330BST and is not expected to show any revision from the -31.7% annualised prelim reading (aft er fall of -5.0% in Q1). US Pending Home Sales are at 1500BST and are expected to show monthly growth of +3.4% in August (after +5.9% growth in July). The EIA crude oil inventories are at 1530BST and are expected to show a build of +1.4m barrels (after a drawdown of -1.6m barrels last week).
There one notable central bank governor and a couple of Fed speakers to watch out for today. ECB President Christine Lagarde speaks early at 0820BST, where her comments on faltering inflation will be watched for. Later in the day, the FOMC’s Neel Kashkari (voter, dovish) speaks at 1600BST, whilst the FOMC’s Michelle Bowman (voter, leans hawkish) speaks 1840BST.
Chart of the Day – EUR/JPY
Sentiment on major forex has swung round a corner in the past couple of sessions, but is it about to swing back again? What had previously been a phase of risk negative trading has seen an improvement in the past couple of sessions, meaning the Japanese yen falling out of favour whilst the euro (amongst others) has picked up. This has meant that the move lower on EUR/JPY has turned back higher once more. The question is, for how long? Two decisive positive candles have strengthened support at 122.50 (which is also an old key level from the beginning of 2020). However, the rebound is already beginning to falter, that the fact that this is coming around the key pivot at 124.40 increases the importance of this move. 124.40 was an important breakdown level and is key overhead supply now. How the market reacts around this key pivot will determine whether this is just a technical rebound within a bigger correction, or whether the bulls can regain control once more. The hourly chart shows the importance of initial support now at 123.15/123.35. Under 123.15 re-opens the 122.50 support again. Today’s reaction suggests rallies will fade around 124.40 resistance.
A strong rebound in yesterday’s session leaves the market testing a crucial resistance around 1.1750. We have discussed the importance of 1.1695/1.1750 resistance as the band of old support has become overhead supply. Yesterday’s rally is testing this band, but as the market rolls over slightly this morning, it is still intact as a basis of resistance. The corrective outlook across momentum indicators remains in place on a medium term basis and having broken so decisively below 1.1695 last week, we look to use near term rebounds as a chance to sell. This still looks to be an opportunity to sell rather than the start of a big EUR recovery. A four week downtrend falls around 1.1795 today, whilst RSI is into the mid-40s. If the market begins to form negative candles once more on the daily chart, we would be looking to sell for a retest of 1.1610. Moving decisively above 1.1750 would hamper the corrective outlook, but the selling pressure of lower highs and lower lows remains viable whilst under the four week downtrend.
The outlook for Cable has become rather uncertain in the past couple of weeks. Breaking down below 1.3000 lost the bulls their control. However, the support subsequently formed at 1.2670 suggested that there was no decisive drive to turn Cable bearish yet though. As the market has fluctuated between 1.2670/1.3000 we see a neutralised outlook. Failure to hold back above 1.2860 in the last two sessions leaves the market in balance. Improving momentum signals are just beginning to tail off again as Cable has ticked lower today. The hourly chart shows initial support at 1.2820 and a move back under opens 1.2775 initially, but would then develop into 1.2670 again. With so much politics to swing both sterling and the dollar in the coming weeks, now wonder the outlook for Cable is looking so uncertain. Initial resistance at 1.2900/1.2925.
The rally on USD/JPY has turned far more tentative in the past few sessions, although so far remains intact. Once more we see early session weakness. Repeatedly we have seen weakness consistently bought into as the US session has taken over. In the wake of the first Presidential debate, the risk aversion that seems to have taken over has dragged USD/JPY lower. If this is seen into the close then it could mark a turning point in the outlook for Dollar/Yen. We see this near term rally as being an unwinding move within a bigger medium term corrective phase. As such with the RSI beginning to falter around 50 (around where previous rallies have faltered), are we beginning to see the bulls struggle? The three month downtrend and falling 55 day moving average both come in around 105.90, whilst the 106.00 pivot resistance area is just overhead, all of this is key resistance. This morning’s early high of 105.80 came in the middle of the debate, before turning lower. A close below 105.20 would now suggest the bulls are struggling.
Two decisive positive candlesticks have moved the outlook for gold back to a crucial crossroads. The old August/September lows between $1902/$1926 have left key medium term resistance. The rebound in the last couple of sessions has hit $1899 and begun to slip back. The configuration on momentum indicators suggests that near term rallies will struggle. As such we still prefer pressure towards the newly formed six month uptrend (today at $1856). Closing back under $1875 (yesterday’s low) would play into this outlook. The rally continuing to fade around the $1900 area suggests that the bulls are not ready to regain control. There needs to be a move back above $1926 at least (the 23.6% Fibonacci retracement of $1451/$2072) to even suggest momentum for a test of the now six week downtrend. The risk is still for a retest of $1848 in due course.
Brent Crude Oil
A lurch lower yesterday has shifted the near term outlook towards a negative bias. What had previously looked to be a constructive outlook above the $41.30 pivot has turned a little sour with a decisive negative candle and close under $41.30. With momentum indicators rolling over, the bias towards a test of $39.30 is growing. It will also be interesting to see if the $41.30 pivot now becomes a basis of resistance. We still see a broad neutral outlook between $39.30/$43.80 and these moves still lack real conviction of trend. For now though, following yesterday’s negative reaction, our focus turns back towards $39.30. Above $41.30 the resistance is initially $42.60.
Dow Jones Industrial Average
A three day rally stalled yesterday as Wall Street investors took a step back after three days of gains. The Dow fell around half a percent yesterday and futures are pointing to further downside today in the wake of a fractious and acrimonious first Presidential debate. Technically we see the resistance band 27,445/27,580 still a factor as the market has slipped back. This will remain a key line in the sand as it is the neckline of the six week top and is a basis of resistance. The market recently rebounded from 26,535 but the top pattern still implies around -1750 ticks of downside towards 25,700. So if the market down continue to turn lower there is a real possibility of at least testing 26,535 once more. Momentum remains correctively configured on a medium term basis and would suggest near term rallies are a chance to sell. There is an initial gap to fill at 27,240 still. Resistance at 27,580 on a closing basis, whilst Monday’s intraday high around 27,720 adds to resistance.