There has been a shift in market sentiment once more across major markets as a positive mood has just soured. Firstly, risk appetite has taken a hit amid rising geopolitical tensions between Pakistan and India which are two potentially volatile nuclear powers. Donald Trump has seemingly been unable to reach any agreement with North Korean leader Kim Jong Un over denuclearization. The absence of a joint signing ceremony will certainly raise an eyebrow or two, but there is no suggestion at this stage that the meeting ended acrimoniously. Furthermore, on the trade negotiations, US Trade Representative Robert Lighthizer has suggested that whilst there would not be an escalation of US tariffs on China, the threat would need to be maintained even in the event of a deal. Lighthizer also suggested that “much still needs to be done” to reach a deal. Despite Trump’s positivity on the negotiations which has helped market sentiment in recent weeks, Lighthizer’s comments add a dose of reality surrounding the deal prospects. The US dollar has previously been a safe haven play on the trade negotiations stumbling, and once more this is threatening to be the case today. Risk appetite has been further hit on news of the Chinese economy overnight which reflected continued economic slowdown. The official China PMIs are falling, but most concerning is that the Manufacturing PMI has fallen further into contraction territory, to a level of 49.2 which missed estimates of 49.5. This looks to be a risk negative session ahead.
Wall Street closed lower for a second session yesterday, with the S&P 500 -0.3% to 2785, with US futures similarly lower again early today. This has helped to drag Asian markets lower, with the Nikkei -0.8% and Shanghai Composite -0.5%. European markets are also looking weaker today, with FTSE futures -0.1% and the underperformance of the DAX futures -0.5%. In forex, there is little significant direction yet and notably the Aussie is holding up well, but there is still an outperformance of the yen, whilst sterling is just shading lower after two days of considerable gains. In commodities, the correction on gold has rebounded off $1316 and is trading a touch higher now. The rebound on oil in the wake of the unexpected crude oil inventories drawdown has been pared slightly this morning.
The key focus on the economic calendar is the announcement of how US growth performed in the final quarter of 2018 having been delayed for several weeks due to the US Government shutdown. However, first up throughout the morning the major Eurozone economies provide inflation data with the key German flash inflation for February announced at 1300GMT which is expected to grow by +0.5% on the month. US Advance Q4 2018 GDP is at 1330GMT which is expected on consensus to be +2.4% (down from +3.4% final reading in Q3) however, the prospect of a surprise is elevated, given the Atlanta Fed’s GDPNow suggests it may be closer to +2.0%. Weekly jobless Claims at 1330GMT are expected to tick slightly higher to 221,000 (from 216,000 last week). Vice FOMC chair Richard Clarida (voter, centrist) is speaking at 1300GMT.
Chart of the Day – EUR/GBP
It is one thing forming a huge bear candle, but to confirm it in the cold light of day in the subsequent session with another big bear candle is a really significant move. The breakdown of Euro/Sterling below the support at £0.8615 is a major move which has now taken sterling to a new 21 month high and taken it into a new phase of trading. This breakdown has threatened in recent months, but there is a significant bearish configuration now with the RSI back below 30 again having failed at 50 a couple of weeks ago. The MACD lines are accelerating lower with downside potential and Stochastics bearishly configured. This key break now opens the market for a move towards £0.8300 which is the next key support and 2017 lows. Initial support is £0.8510 and then £0.8380. However, for now the market is stretched and this dould induce a near term technical rally. Rallies are now a chance to sell with the resistance at £0.8620 a key breakdown of overhead supply, whilst the hourly chart shows £0.8600 is initial resistance.
A negative candlestick which cut around 15 pips on the day from the euro is questioning the recovery, but so far the rebound higher is on track. The mini uptrend of the past two weeks comes in at $1.1365 today and is being tested. However, there is still a sense that corrections are a chance to buy whilst the market remains supported above the $1.1345 pivot. Momentum indicators have been shaken by the slip back, but the position is not too bad still for the bulls, with the RSI above 50 and Stochastics still rising (albeit at a slower pace). There is resistance now with yesterday’s high of $1.1405 which is just under the mid-range pivot around $1.1420. Looking at the hourly chart should help to settle the nerves a touch for the bulls as momentum indicators remain positive (RSI finding support above 40, MACD lines above neutral) and $1.1360 is a basis of support initially. The bulls would lose control of the recovery on a close below $1.1345 and then the market looks far more negative again below $1.1300.
Sterling remains strong after the Brexit related rally that has driven Cable through the September resistance of $1.3300. Although the market slipped a touch into the close, this has been an impressive rally. We discussed yesterday whether this move could be sustained and this will still be an issue today as the market has added over 250 pips in a few sessions. The question is still whether some traders will see the opportunity to lock in some profits on long positions. Although momentum is clearly strong, the RSI is bumping up against 70, as the market looks to consolidate this morning. There is a slight hint of a negative divergence on the hourly momentum indicators which could also suggest a slowing of the run higher. The issue would be as the market has digested the latest Brexit developments, how much upside potential could there still be. There is breakout support around $1.3215, whilst $1.3350 is resistance of yesterday’s high.
Consolidation has set in on Dollar/Yen. Normally consolidation on this pair would take the form of small candlesticks lacking conviction, but the moves in recent sessions have been more considerable. However, the daily moves are swinging around from one session to the next. The support has developed above 110.25 and this has been bolstered by yesterday’s rebound from 110.35, however the resistance has formed above 111.00 in each of the past four sessions where the bulls just cannot hold the traction. There is subsequently a near term resistance band 111.00/111.25 which comes under the medium term pivot at 111.35. Momentum is starting to lose its positive bias too, with the Stochastics beginning to track lower, although this is more a reflection of a consolidation rather than a corrective move. A close below 110.00 or above 111.35 would drive direction now.
The bulls have been unable to break the shackles of consolidation and a slip back to the support of the 14 week uptrend has set in. Yesterday’s negative candle is increasing the pressure a bit more now and it will be interesting to see how the bulls respond today. The hourly chart shows a pivot support at $1316 whilst this is also around where the support of the 14 week uptrend comes in (around $1315 today). There is also a slide seen in on momentum indicators which needs to be monitored. For now this drop back is in context of continued positive medium term configuration and corrections are still a chance to buy. However, there is a corrective near term bias on the hourly chart which is in process and support around $1316 ideally needs to hold. The long term pivot band $1300/$1310 is the ultimate basis of support now. Gold is a wait and see play as to how this correction plays out, but all medium to longer term technicals still point to an upside break in due course.
The bulls have managed to claw back much of Monday’s corrective move as a pick up from support around $55.00 has been the springboard for another push higher. The unexpected EIA crude oil drawdown has certainly helped but corrections on WTI remain a chance to buy. As a strong bull candle formed yesterday, a move to test the recent high at $57.80 is once more back in focus today. This comes just under the key medium term pivot at $58.00 which stands as a barrier for the recovery, so this would be an important test. Above $58.00 the way is open for the 50% Fibonacci retracement at $59.60 is on. Momentum indicators are strongly configured with the RSI pulling back above 60 again, with the MACD lines rising above neutral and Stochastics edging to swing higher again. The hourly chart shows initial support at $56.00/$56.30.
Dow Jones Industrial Average
Another session of slip and uncertainty means that the market is questioning the recovery now. An uptrend of the past eight weeks is being tested as the market closed lower for the second consecutive session with a doji candlestick on the daily chart. This reflects a concern that now exists in the market. For now the medium term technical indicators are still holding up, but with the uptrend set to come under further scrutiny today (futures are pointing to a mildly lower open), a closing breach of the trend (comes in at 26,035 so just needs a lower close on the session) would be a worry for the bulls. It would put pressure on the 76.4% Fibonacci retracement again (comes in at 25,715) with a first higher reaction low at 25,762. Momentum is just beginning to roll over a touch but this is within the context of a broader positive medium term configuration still. For now these near term corrections will still be seen to be a chance to buy, as long as the technicals do not deteriorate too much.