The rollercoaster for sentiment has again swung back higher to start the new trading week, and yes, you guessed it, thee trade dispute has been the trigger. A focus has been 15th December as a date where the US is set to impose the next round of tariffs. However, could “phase one” of a deal be signed and reduce the risk of tariffs? In a move seen as looking to address US concerns, over the weekend China announced measures aimed at improving protection for intellectual property rights. A US official (albeit not top ranking in the trade negotiations), national security advisor, Robert O’Brien noted that a deal could be done for phase one by the end of the year. So we see a swing towards for risk positive positioning this morning. As tradition dictates, that means JPY underperformance, gold weaker and yields higher. Risk on also means equity markets pulling decisively higher too, with the VIX Index of volatility falling back towards recent lows again. The bulls are seen to be starting the week on the front foot.
Wall Street closed with decent gains on Friday with S&P 500 +0.2% at 3110 whilst US futures are +0.3% higher early today. Asian markets are taking the risk positive moves well today with the Nikkei +0.8% and Shanghai Composite +0.7%. In Europe the theme continues, with FTSE futures +0.4% and the relative outperformance of the DAX futures +0.6%. In forex, the risk positive outlook is clear, with JPY underperforming, whilst the higher risk commodity currencies AUD, NZD and CAD performing well. GBP is also higher as the Conservatives lead in the polls and Prime Minister Johnson promises to get Brexit moving before Christmas is returned as a government. In commodities, with risk appetite picking up, gold is slipping back further by -$3 (-0.2%) , whilst oil is supported today, higher by +0.5%.
There is a key Eurozone focus on the economic calendar today with the German Ifo Business Climate at 0900GMT. With the Ifo just showing signs of stabilisation in the past couple of months, an expectation of improvement to 95.0 (from 94.6 last month) would further play into this narrative. Also of interest is the fact that the Expectations component is forecast to improve to 92.5 (from 91.5 in October) which would be a second month of improvement, whilst Current Conditions are also expected to tick higher to 97.9 (from 97.8 in October).
Chart of the Day – AUD/JPY
We consider Aussie/Yen to be one of the key indicators of risk appetite. Recent yen strengthening has reflected a retreat in broad sentiment which has dragged AUD/JPY back to a key crossroads early this week. With a run of lower daily highs in ten of the past eleven sessions, the market has retreated back to a 13 week uptrend (today at 73.55) whilst a pivot of the past two months is at 73.35. However, an early tick higher today is an interesting reaction. It comes as momentum indicators are sitting at a crossroads. The RSI moving below 40 and MACD lines moving below neutral would be bearish signals. As would the Stochastics falling decisively below 20. There are two levels to watch now. A close under 73.35 would take the market below all the moving averages confirming a trend breach and open further weakness towards 71.75 in due course. However, with the tick higher today, the bulls will also be eyeing the key pivot resistance at 74.30. Given that rallies have recently consistently been a chance to sell, reaction to this morning’s tick higher could be telling as to which level is threatened.
We come into the new week and the euro bulls need to respond. There was a steady acceleration lower on EUR/USD which really took off on Friday in the wake of strong US data. Technically, this has been a rather neutrally configured market recently, and we have been waiting for a catalyst. Friday’s move was strong and is beginning to impact across momentum indicators. Although the market has ticked higher today, if this move is sold into, to form another negative candle, then pressure would really mount on the key near term support at $1.0990. The RSI has slipped back and a move below 40 would be a key signal. The Stochastics are also turning lower, along with the MACD lines. The hourly chart shows a tick higher today, but this move has resistance at $1.1050 to contend with, whilst hourly RSI needs to move through 50/60 to suggest rallies are not being simply seen as another chance to sell. There is initial support at $1.1015. Below $1.0990 opens $1.0875/$1.0900.
Cable suffered on Friday amid a strengthening dollar and election uncertainty for sterling. A strong negative candle saw another retreat back to the 23.6% Fib level (of the October rally $1.2193/$1.3012) at $1.2820. There is a good band of support around $1.2760/$1.2820 over recent weeks and the market continues to play out what we see as an ongoing range in front of the UK election (on 12th December). Unless there is a material shift in the election prospects we do not expect Cable to trade decisively outside this range. Momentum indicators continue to moderate and it is notable that Cable has again steadied itself this morning. The hourly chart shows a slight negative bias has developed in the wake of Friday’s decline, but not enough yet to drive significant direction. There is resistance $1.2885/$1.2900 to contend with initially.
There has been an ongoing consolidation of the past week but in recent sessions, there is a sense that the sellers are struggling to generate downside momentum. The support at 108.25 remained intact throughout last week and three sessions of marginal gains to end last week bring the bulls into Monday in a decent position. An early tick higher (more of a positive risk sentiment across the market) is now breaking a new two week downtrend (today at 108.70). However, for the bulls to make this into a sustainable test higher, a break back above resistance at 109.05 (lower high) is needed. We are subsequently starting to see an edge of slightly more positive outlook. For this to be confirmed the bulls need above 109.05.
We see near term rallies on gold struggling to sustain traction as the corrective medium term outlook weighs. Subsequently, in the past week, the failure to break through the resistance band $1474/$1480 seems to now be weighing on gold. The technical rally has rolled over and in posting three negative candles in a row, the sellers are gaining control again. A mild unwind on indicators such as RSI and Stochastics seems to be a chance to sell. The RSI faltering below 40 along with the failure for the MACD lines to make any sustainable recovery, leaves the sellers on the brink of decisive control again. As the market has formed lower highs and lower lows in recent days, intraday rallies are already struggling, with Friday’s high of $1472 another barrier to gains now. A move below initial support at $1456 opens $1445 again, whilst the medium term retreat towards $1400 is still possible in due course.
Although it has been difficult to take a view on oil as the technical signals have been so mixed recently, there is still a recovery configuration that is developing the market higher. Given WTI moved to multi-week highs on Thursday, the bulls are broadly in control. There has been a lack of conviction on RSI (between 45/60 in the past month) but with MACD and Stochastics reflecting a mild positive bias, it lends to buying into weakness. And as such, Friday’s negative candle is seen as a retracement back into a support band $57.50/$57.75, whilst the 50% Fibonacci retracement (of $63.40/$51.00) at $57.20 is also a key near term gauge. Holding these levels will be important now. Resistance is in place at 61.8% Fib (around $58.65) before $59.40. As the run of higher lows and higher highs continues, we see buying into weakness as the strategy.
Dow Jones Industrial Average
After a few days of corrective slip back on the Dow, the bulls are looking to find their feet again. Friday’s close higher of just over +100 ticks may not sound a lot but the composition of the candlestick (a close near the high of the session) looks to be showing a far more stable market forming. Momentum indicators on the daily chart took a mild knock with the recent dip, but there seems to have been no lasting damage and in fact, look ready to take on renewed upside potential. Last week’s low is not assured yet, but there seems to be a band of support which is taking on between 27,675/27,775. The hourly chart shows that there has been an impact from the three session decline, but it is important that the bulls now begin to build from this new band of support. Another positive candle today and the bulls will be eyeing the all-time high of 28,090 again. We see corrections on the Dow as a chance to buy still.