There is an increasing sense of an ebb in risk appetite forming. With equity markets just beginning to pull back from their recent highs, volatility as measured by the VIX index has just run up to a two week high. This comes as the Japanese yen is starting to perform better, as is gold. Treasury yields have also hit the buffers slightly in their recovery. The IMF added to this sense yesterday with their latest downgrade of the global economic outlook. Coming a day after the US looked to ramp up a second trade dispute, this time with the EU over subsidies to Airbus, it looks like a time to be cautious. Brexit remains on a knife-edge, although it is widely expected that the EU will grant a probable 12 month “flextension” at tonight’s emergency EU Council (much to the grumblings of President Macron). However, as things stand this morning there is a degree of consolidation across major markets. The ECB is in mind, along with US inflation and the Fed minutes. All have the potential to shift sentiment and require consideration. The ECB is not expected to do much but the risk is a dovish surprise in setting out plans for the TLTRO and a tiering of the deposit rate.
Wall Street closed back lower, with the S&P 500 -0.6% at 2878, although US futures look relatively stable at +0.1%. Asian markets were cautiously lower overnight with the Nikkei -0.6% and Shanghai Composite -0.4%. In Europe, there is a mixed look to the early moves, with FTSE futures a tick or two lower and DAX futures a tick or two higher. In forex, there is very little move across the G4 majors with euro, sterling, yen and dollar all but flat. The Aussie is the only real mover, outperforming after a speech by RBA deputy governor Debelle discussed the policy impact of balancing of a strong labour market with slowing growth. In commodities, there is little direction on gold after the break above $1300, whilst oil is looking to stabilise after yesterday’s drop.
It is a big day of announcements on the calendar today. A UK data deluge kicks off the European morning. UK monthly GDP is at 0930BST which is expected to show +0.0% in the month of February (+0.5% in January) with the year on year at +1.7% (+1.4% last) whilst UK Industrial Production is expected to decline by -0.9% in February (-0.9% in January). The UK Trade Balance is expected to have improved marginally to -£12.7bn (from -£13.1bn in January). The ECB monetary policy decision will be at 1245BST with no change expected to the deposit rate at -0.4% or the main refinancing rate at 0.0%. Mario Draghi’s press conference is at 1330BST. US CPI inflation is at 1330BST and is expected to show a drop in the headline CPI to +1.5% (from +1.7% in February), whilst the core CPI is expected to have remained steady at +2.1% in March (+2.1% in February). The EIA oil inventories are at 1530BST and are expected to show crude stocks building by +2.5m barrels (+7.2m barrels last week). Distillates are expected to be in drawdown by -1.4m (-2.0m last week) and gasoline also drawdown by -2.1m (-1.8m barrels last week). Finally, the FOMC minutes for the March meeting are at 1900BST and will put more meat on the bones over the dovish shift in the dots and also the balance sheet reduction which will end in September.
Chart of the Day – French CAC
For the past few sessions we have been talking about the prospect of near term profit-taking hitting across equity markets. Yesterday morning, it looked as though the French CAC was holding up well, but an intraday sell-off into the close threatens the immediate outlook. A bearish shooting star candlestick (also a bearish key one day reversal) has left resistance at 5492. Leaving a multi-month high, the market closed at a five day low. It was a also a close at the low of the session. This is a significant signal that if confirmed by another negative session today could see the corrective momentum develop. The Stochastics have crossed lower (although not yet a confirmed sell signal). However, more importantly, the RSI is not only turning lower from 70 (a basic sell signal) but has also posted a negative divergence. This leaves the momentum open for a corrective move within the medium term positive configuration, with the RSI holding above 50 in the past three months. A close below the support of the breakout at 5435 opens a move towards the next support at 5350. The uptrend channel of the past three and a half months comes in at 5345 today.
The near term breakout above $1.1260 is just about holding as the market has unwound back to the breakout. Yesterday’s negative candle would have been a disappointment, but the bulls will continue to hold for recovery whilst above $1.1260. With momentum indicators ticking higher there is a good prospect of continued gains. The key for this near term recovery is how the bulls react at this neckline support. A 75 pip recovery target suggests that the $1.1320/$1.1340 resistance band on the hourly chart would be the target area. The hourly chart shows how important this neckline area is this morning, with the RSI unwinding to 40 and MACD lines to neutral. This is an area where if the market was in recovery mode, the bulls would respond. Subsequent support is at $1.1210. A break above $1.1285 re-opens the upside.
A convergence of trendlines suggests there is a consolidation on Cable. Volatility is certainly settling down as a four month uptrend ((today at $1.3010) and a four week downtrend (at $1.3150) close in. As the bulls continue to fail at lower levels the risk is for continued attraction towards $1.3000. Momentum indicators are fairly benign but also reflect the near term corrective outlook that seems to be weighing on the market. Yesterday’s failure at $1.3120 adds to overhead resistance at $1.3200. However, until there is a decisive close below $1.3000 there is a sense that there is a key floor under the price. The hourly chart shows a fairly quiet ranging period as the market ticks back higher again today. The reaction to the EU Council meeting tonight could be key for sterling.
A second solid negative candle puts the dollar bulls under pressure again. Leaving resistance at 111.80 the corrective momentum is threatening to take hold now. If we see confirmation of the bear cross on Stochastics, RSI below 50 and MACD lines crossing back lower, this would be a signal to suggest that 109.70 would be back in play. For now the key resistance is 111.20/111.60 on the hourly chart. Breaching 111.20 yesterday effectively topped the market out and implies 60 pips lower towards 110.60. This breakdown has been resistance initially this morning. However a lower high under 111.60 also continues this corrective momentum. Added to this, the hourly indicators that are more correctively configured too. Another lower high between 111.20/111.60 maintains the move lower. Initial support is at 110.80.
Another positive session with a close above $1300 suggests the bulls are beginning to look more confident in a rally.