Major markets are responding this morning with risk appetite shifting negative as geopolitical tensions have ratcheted up several notches in the Middle East. The US has killed a key Iranian General as a result of attacks on the US Embassy in Baghdad, Iraq. Quite how this ultimately plays out in the region is yet to be seen, but the rhetoric is likely to be strong along with the prospect of retaliatory action. A risk premium is being priced into assets such as oil, but also we see safe havens benefitting. The US 10 year Treasury yield is -5bps at three week lows, whilst gold has accelerated its rally, and the yen is the outperformer of the major forex. The key movers could come through equity markets. Ahead of the geopolitical news, Wall Street had pulled sharply into all-time high territory. There have been suggestions of a stretched market and could this now be a catalyst for a correction? Last January there was a big sell-off on low liquidity. The reaction on markets today to this key newsflow could go a long way to determining whether there will be a repeat this year.
Wall Street closed strongly higher with the S&P 500 +0.8% at 3258, but US futures are currently giving all of this back at -0.8%. Asian markets closed mixed (Shanghai Composite -0.1%) with the Nikkei still shut, whilst European markets are showing a reaction lower in early moves (FTSE futures -0.5%, DAX futures -0.5%). In forex, there is decisive risk negative feel, with AUD and NZD key underperformers, whilst GBP is also weaker again. The big outperformer is JPY whilst USD is also benefitting to an extent from the safe haven flow. In commodities there are some key moves too, with gold and silver just under +1% higher, whilst oil is around +3%.
The December PMIs continue to be a theme on the economic calendar today. First up we have the UK Construction PMI at 0930GMT which is expected to show only marginal improvement to 45.9 and still in significant contraction territory (from 45.3 in November). The German inflation for December is throughout the morning with the national data at 1300GMT which is expected to show HICP improving to +1.4% (from +1.2% in November). The crucial data point for the day is the ISM Manufacturing data at 1500GMT which is expected to improve slightly to 49.0 (from 48.1 in November) but still in contraction. The EIA Crude Oil Inventories at 1600GMT are expected to show a drawdown of -3.1m barrels (from -5.5m barrels last week). Late in the session, there will also be the FOMC minutes for the December meeting at 1900GMT where the focus will be on any comments on inflation.
There will also be a couple of Fed speakers to keep an eye out for, with Lael Brainard (voter, now a centrist) at 1815GMT and Robert Kaplan (voter, centrist) at 2030GMT.
Chart of the Day – EUR/JPY
It is interesting to see that there has been a shift back into safe haven forex in the opening moves of 2020. This comes significantly to the fore on EUR/JPY with a decisively sharp bear candle yesterday that opens for a potential retracement of the bull run. The long pivot band 120.75/121.40 holds the key to this move now. Yesterday we saw the support of a three month uptrend under pressure and this has now been decisively broken today. However, the support of the late December lows (at 121.05) has been broken, whilst the 55 day moving average (today around 120.80) which has been an excellent basis of support in recent months is also breaking. A close below 120.75 would confirm a correction is gathering pace (with an initial downside target of 119.60) but also opens the November low at 119.25. The momentum indicators are notable in their deterioration but within still positive medium term configuration. The RSI below 45 is a six week low, but below 40 would be a move into a medium term corrective configuration. The old 121.40 pivot is becoming an increasingly important gauge of resistance now.
A decisive negative candle to kick off 2020 pulls the handbrake on the latest attempted EUR/USD rally. A close back below not only the $1.1200 breakout but also the $1.1180 old support too, now suggests the market has moved into reverse again. The $1.1180/$1.1200 band now becomes resistance under the $1.1240 key high. Yesterday we discussed the stretched RSI hitting 70 and subsequently a move back below 60 suggests a loss of momentum. The bear cross on Stochastics is another warning signal. The hourly chart shows the bearish divergence we discussed yesterday is weighing now, and that 50/60 on hourly RSI is now restrictive. A move below $1.1160 today puts the pressure on for what could then be another retreat back towards the $1.1100 pivot.
Are we once more seeing Cable rolling over again. The rocking motion of the market in recent weeks has been notable as once more the traction from a rebound is beginning to dissipate. The strong negative candle from yesterday’s session has left resistance firming around $1.3285 and with additional early weakness today the market is shaping up for another near term correction. The momentum indicators are swinging lower again but interestingly, are coming from far less positive positioning now, which could be a reflection of the more difficult near t medium term outlook forming on Cable as a new ranging market could be forming. For now, the hourly chart shows a loss of support at $1.3150 is forming resistance $1.3150/$1.3160 and a move back under $1.3100 today would put pressure back on the old breakouts around $1.3010. The market needs a move back above $1.3200 to re-engage the bulls.
A continued strengthening of the yen was threatening for much of yesterday’s session and even though there was a USD/JPY rebound into the close, the seeds have been sown. Having broken the support of a four month uptrend in late December, a decisive bear move lower on USD/JPY has now broken the support of 108.40 which is the first higher low of the five month recovery. Given the confirmation of a breakdown on momentum, this really is a key move. The RSI is now falling in the mid-30s which is the lowest since August, whilst the MACD lines are also close to moving below neutral too. In the context of trading over the past week, the market is now consistently trading lower, whilst also posting lower highs. Yesterday’s high of 108.85 is now resistance under the old 109.00 pivot. Breaching 108.25 support confirms the corrective market but a decisive (two day closing breach) of 108.25 would actually complete a two month top pattern and imply a continued retracement back towards 106.75 in due course. Resistance from overhead supply is also now building initially around 108.40/108.60.
Into the New Year, gold was hovering around the $1518 old resistance. This was seen as a crossroads, was gold a ranging market, or a renewed bull market? A simple range play would likely then begin to retrace some of the Christmas move, but it looks instead that the outlook is stronger than that. Yesterday’s strong bull candle suggests that this is a trending move and the bulls are running with it. The move well clear of $1518 and $1536 with an acceleration on momentum is a really strong sign that a rally has got legs to test the $1557 key September resistance. The bulls also have the underlying demand of the old October resistance at $1518 for support leaving $1518/$1525 as a band to work from now. We still cannot rule out a near term retracement, but given the strength of the breakout, this is a gold bull run now, where corrections are a chance to buy. Above $1557 is multi-year highs again opening $1600/$1616.
An overnight spike higher in the oil price on escalating geopolitical tensions in the Middle East briefly took WTI above the key September high at $63.38. Although there has been a step back from there, there is a clear risk premium that comes with this newsflow and the bulls are still strong. Momentum is strong without being too stretched and given that this is clearly an uptrend channel, the RSI around 70 should not be too restrictive. Whilst volatility is elevated, the upside potential is present. Support is initially at $62.35 but the $60.00/$60.65 band if growing now. A close above $63.40 opens $66.60 which was the crucial April 2019 recovery high and the top of what is effectively a year long broad trading band on oil between $50/$66.