After weeks of steady assumptions that the US and China would come to an agreement on trade, suddenly we see massive uncertainty hitting markets. With Donald Trump as US President, nothing should ever really be taken for granted. Nothing ever goes smoothly for too long. It would appear that in any negotiation, there is always room to bully your counterpart to get what you want in a deal. The ends justify the means, right? Well, we shall see. With the trade negotiations between the US and China dragging on, Trump has decided that enough’s enough. He has decided to go all in, to ramp up the threat of tariffs, and soon. However, the prospect that the US will increase tariffs on $200bn of Chinese imports from 10% to 25% on Friday (and do the same on an additional $325bn of imports “soon”) has rocked market sentiment. Safe haven assets are benefitting (yen higher, bond yields lower), whilst the dollar is under pressure. Despite these blatant bullyboy tactics, the talks will still progress this week in an attempt to avert the worst case scenario, an all-out trade war. Will this act of brinkmanship from Trump work? Markets had priced for some sort of positive outcome on trade. We continue to believe that US trade negotiator Robert Lighthizer is the one to watch for an indication of progress, as he is so hawkish on China. If the chances of agreement are scuppered, there could be an all mighty fallout across financial markets. Yesterday’s wild ride on Wall Street could be a sign of things to come this week. Aside from the US, the big move overnight has come from the Australian dollar. After uncertain expectation, the Reserve Bank of Australia held rates at +1.50% (no change expected at +1.50% exp, +1.50% last). There had been an increasing call for a rate cut recently following on from weakening inflation data, but the RBA held firm. Whilst there is still potential in future meetings for a cut, this stay of execution has boosted sentiment for the Aussie overnight.
Wall Street staged a remarkable intraday rebound but still closed solidly lower on the day. The S&P 500 closed -0.4% lower at 2932, but futures are back -0.6% lower again early today. The Asian markets have been on an equally wild ride, with the Nikkei -1.6% and Shanghai Composite -0.2%. European markets look weaker this morning albeit relatively well contained with the FTSE futures -0.3% and DAX futures -0.1%. In forex, there is USD weakness taking hold now across the majors. AUD is in focus following the RBA standing pat, whilst GBP also needs watching from Brexit progress. In commodities, the weaker dollar is helping to support gold and silver, although strangely lack positive traction. Oil is mixed.
It is a light day on the economic calendar today. The European morning is very quiet and the US data kicks off with the US JOLTS jobs openings at 1500BST. Consensus expectation is for an increase to 7.23m in March (from 7.09m in February). It will also be worth keeping an eye out for the comments of the FOMC’s Randall Quarles (permanent voter, leans mildly hawkish) at 1635BST.
Chart of the Day – German DAX
After a slow and steady move higher in the past few weeks, the first real sign of stress in the bull run now poses a few questions. Although breaking the support of a five week uptrend is a warning, this is still a very uncertain move. In yesterday’s session, an early sharp gap lower was actually bought into to leave a bull candle (close above the open). There is still a downside gap open at 12,344 and how the market responds to this gap today will be key. The momentum indicators are already threatening to post a string of near term profit-taking signals. A failure to “close” this gap will make the bulls increasingly nervous. An unwinding retreat to the breakout support 11,865/12,029 could easily be seen (although this would be a healthy move for the long term bull market prospects. The big pullbacks of February and March unwound the RSI into the low 40s and helped to renew upside potential. Resistance is key at 12,435/12,458. A move back below yesterday’s low 12,135 would open the corrective move.
This choppy phase of trading could turn out to be particularly important from a technical perspective. The turn lower from $1.1265 looked to be renewing the bearish medium term outlook, but the bearish shooting star candle has been countered by an equally bullish hammer candle. This has swung the buyers back into the market and they are looking to pull higher once more today. This turnaround has pulled a bull cross on MACD and Stochastics and suddenly the buyers are looking at challenging higher again. A decisive close clear above $1.1220 would begin to drive more positive traction. The key near term test would still be $1.1265, but there is an improving outlook now threatening. The hourly chart shows a bit more of a cautious move, but higher lows are now forming, with $1.1135, $1.1160 and $1.1175.
Following on from the strong bull candle on Friday, there is still a basis of support for Cable. Helped by the weakness for the dollar, speculation of a Brexit deal is still underpinning the market. We talked last week about the breakout above $1.3000 and the bulls again looking to defend that level. This seems to have been the case again with Friday’s intraday low at $1.2990, so $1.3000 needs to once more bee perceived as a floor of support. A pullback in yesterday’s session means that $1.3095 is initially supportive as the bulls again look to prop up the market today. Momentum indicators are looking fairly mixed but with the RSI above 50 and Stochastics positively set up, there is a far more positive configuration now on Cable. A move above $1.3175 resistance would continue the recovery, however, this is likely to need further Brexit newsflow to be achieved on a decisive basis. Further resistance at $1.3200 and $1.3270.
For a while the market has been negatively drifting lower, but the recent acceleration in this move has caused a shift in outlook. The support of a four month uptrend has now been decisively broken as the first key higher low of 110.85 has been breached. Momentum indicators are increasingly corrective now with the RSI below 40 to a level not seen since January. The MACD and Stochastics lines are also finding downside traction too. Although a gap lower from 111.05 is still open, any attempt to unwind looks likely to be a selling opportunity now. How the market responds to this gap could be crucial. There is resistance 110.85/111.05 now which is a sell zone of overhead supply. A failure to “close” this gap would suggest further bull failure and a likely new formation of a corrective trend. Initial support at 110.25, with the next key reaction low support at 109.70.
The price action of the past two and a half weeks shows that gold is sitting on the brink. A range between $1266/$1289 has been formed and the decisive break of this range could be the next crucial move. A consolidation above the 8 month uptrend means the long term bulls are still hanging on by their fingernails. A negative bias is certainly in place on a medium term basis, suggesting that rallies are a chance to sell. This is backed by the breakdown below $1276 a few weeks ago which formed a multi month top pattern. However, the bulls are admirably still holding their ground. The problem is that the lack of recovery traction will be grinding them down. Following on from Friday’s strong bull candle recovery, a failure to breakout above $1289 would again run the risk of another lower high under the resistance of a 10 week downtrend (today at $1293). The hourly chart shows $1278 is a pivot within the near term range.
The support of the breakout at $60.40 and 50% Fibonacci retracement at $59.60 has come in and the market has bounced strongly. The key will now be how the bulls respond today. With the previous breakdown, a top pattern formation implied a $4.30 downside target to $58.00. This target has yet to be achieved. Despite this, if the bulls can break above resistance in the band between $62.30/$63.00 with a second straight positive candle, then the outlook becomes far more positive for the bulls again. However, given the lower high at $64.75 which begins to build a prospective new downtrend, this is the key resistance that needs to be overcome. Momentum has picked up with this rebound, with the RSI back towards 50 and Stochastics bottoming. So this looks to have the potential to be an important turning point. Initial support at $60.00, with resistance at $63.95.
Dow Jones Industrial Average
A remarkable session saw the Dow only closing 66 ticks lower, having at one stage been 471 ticks down earlier in the session. This rebound has prevented what looked to have been an increasingly corrective looking market from taking hold. The key is now how the bulls respond today. There is a significant degree of concern in the market and a failure of this rebound would run the risk of the formation of lower highs and a new negative outlook. The rising 55 day moving average (at 26,071) seemed to provide support yesterday. This was the first time the medium term trend indicator had been tested since January. Given the momentum indicators are rolling over. Tis is an important gauge for the market now. Resistance at 26,535 needs to be broken to prevent lower high formation, with 26,695 now key.