Appetite for risk is minimal right now as traders remain cautious over trade, but there is a degree of balance with positive news on Chinese manufacturing data. Markets are still reacting to an escalation in rhetoric over various trade disputes that President Trump is picking across the world. Friday’s sharp deterioration in sentiment is still reverberating this side of the weekend as traders come back to their desks on Monday morning. The broad sense of protectionism and a deterioration in global trade links is impacting across markets. This is seen in the classic moves to safety. Bond yields have accelerated lower, equities volatility is rising , investors are moving into gold whilst the yen and Swissy are outperforming. There is scope for this move to continue, however, during times of high anxiety in markets there is also the potential for sharp swings either way. So caution needs to be taken with this unpredictable US President (remember reaction to delaying the autos tariffs last month). Markets also have a tendency to over react too. Sentiment is currently against the dollar, but focus on the PMIs could swing this today as the US economy remains the best of a bad bunch. China Caixin Manufacturing PMI held up well and beat expectations at 50.2 (50.0 exp, 50.2 last). And so we look towards this morning’s European PMIs and the ISM later.
Wall Street closed sharply lower on Friday with the S&P 500 -1.3% at 2752. With US futures lower again by -0.4% this morning, the tide of selling seems yet to be stemmed. Asian markets were negative this morning, with the Nikkei -1.1% and Shanghai Composite -0.3%. European markets are set up for early selling with FTSE futures -0.4% and DAX futures underperforming at -0.8%. In forex there is a mixed look to USD this morning, with commodity currencies (AUD, NZD and CAD) gaining after the China PMI beat whilst JPY is also giving back some of the recent gains. In commodities, gold continues to run another $5 (+0.4%) higher, whilst oil remains under pressure another percent lower.
On the economic calendar, the first trading day of the month is dominated by the manufacturing PMIs. The early European session is dominated by individual countries, with the Eurozone final Manufacturing PMI at 0900BST. The consensus suggests that the flash reading of 47.7 will be confirmed which would be down from April’s 47.9. The UK Manufacturing PMI is at 0930BST and is expected to drop back to 52.0 from 53.1 in April. The US ISM Manufacturing PMI is at 1500BST is expected to improve to 53.0 (from April’s 52.8) which would be interesting considering Markit’s flash manufacturing PMI slipping sharply recently.
Chart of the Day – AUD/JPY
Risk appetite has taken yet another leg lower with Friday’s sharp bearish candlestick on Aussie/Yen. A solid bear candle with a closing level not seen since June 2016 (the wake of the Brexit referendum result). Technically, the market has also closed clear of a mini range below support at $75.30 which also implies $74.20 as a downside target. The move comes with a renewed bear signal on RSI back below 30, with MACD also rolling over. There is a band of overhead supply now between $75.30/$75.45 that is a sell-zone now. There is very little support beyond $74.50 until $73.10/$73.20 which is support from two spikes, one from 2016 and one from January this year. The bears look to be in control whilst $76.15 resistance is intact.
A bout of selling pressure on the US dollar has driven the pair back higher again. However, there is still a trend lower where rallies are being sold into as the market seems attracted to test the $1.1110 key support. A six week downtrend comes in at $1.1200 this morning and whilst the lower rebound high at $1.1215 remains resistance the strategy remains to sell into strength. Momentum indicators are less negatively configured than they have been in recent months, but the bear bias is still in the market on an overall basis. The hourly chart shows an almost ranging feel to it, whilst moving above $1.1175 (an old pivot) would help to encourage the bulls. This hourly chart also shows the resistance is significant near term around $1.1220. Initial support is now $1.1140/$1.1155.
Can the sterling bulls continue to build on Friday’s recovery. For weeks they have been under near constant negative pressure but a bull hammer candlestick on Friday gives some cause for hope. This is a one day reversal signal, which now needs to be backed up by further confirmation. The test today is therefore a four week downtrend at $1.2680, which needs to be breached on a closing basis. Also if the RSI can move into the mid-30s and beyond this would add further weight to the prospect of recovery. Real confirmation would come from a move above $1.2700/$1.2755. The hourly chart shows near term overhead supply around $1.2650 is being tested this morning. A move back below $1.2600 would now be a disappointment and end the immediate recovery prospects. This is not chart to run ahead of and start calling an assured recovery quite yet. Even if $1.2755 were to be breached there is plenty of further overhead supply to restrict a move. Friday’s low at $1.2555 is key support now.
A huge bear candle from Friday is still playing a role in today’s early move lower. Such a decisive negative move below the support band 108.50/109.00 simply reflects the risk aversion in the market right now. There is little reason why the next band of support 107.50/107.75 will not be tested now, however, the early January spike to 105.00 would also be on the radar. How the market reacts to the supply now between 108.50/109.00 will be key. If this band becomes restrictive to any recovery attempts, the likelihood is that the selling pressure will simply accelerate. Given the momentum indicators are taking a decisive bearish turn, the downside bias remains prominent. The RSI is back under 30 but also with downside potential, as do the Stochastics (another bear cross lower) and a bear kiss on MACD. There is a significant resistance now at 109.90/110.00.
After months of selling into strength, there were sharp gains to end last week and suddenly a change of outlook. Adding over $30 in two sessions is a big jump in intraday volatility. It looks as though the buying pressure on gold is not ending there. Closing back above $1300 is also a big move that the bulls will be mindful of holding. This is a seven week high for gold and the momentum is with the bulls now. RSI into the 60s is a shift in sentiment which is a 3 month high. How the bulls react will be key. It does not look as though the dust will simply settle, for renewed selling into a false move. Right now, with the technicals confirming the breakout, this looks to be a decisive shift. Holding above $1300 is key but given the long term implications of the pivot band $1300/$1310, this morning’s move above $1310 could be crucial. A move to decisively close clear of $1310 would be huge for the bulls, as this would clear two key lower highs in the past two months and be a real statement of intent for continued move towards the March high at $1324.The hourly chart shows a band of support $1303/$1310 which needs to now be held. A close back below $1300 would be a disappointment for the bulls.
A massive deterioration in the outlook on oil continues. A series of key lower highs is being left now and another pair of significant bearish candles has taken WTI to new three month lows. The move below the latest old key support of the previous recovery, at $54.50 continues the negative bias. The sell-off is gathering momentum and is increasingly bearishly configured. Any sense of intraday gains should be seen as a chance to sell once more. The old February/March pivot around $57.90 is now a basis of overhead supply, whilst Friday’s decline leaves a resistance band $54.50/$57.30. The next target of the sell-off is the February low at $51.25, whilst the old 23.6% Fibonacci retracement at $50.50 and the psychological $50 suggests this is a confluence of target area. The 38.2% Fib at $55.50 is an area of resistance to be mindful of as a rebound limit.
Dow Jones Industrial Average
A pronounced deterioration in the outlook for US equity markets continues. The run of lower highs and lower lows once more broke to new multi month on Friday as the Dow breached the February low of 24,883. The latest solid bearish candlestick simply reiterates the growing negative outlook. Friday’s move was a double bear break as the 61.8% Fibonacci retracement at 24,950 (which had held earlier in the week) was also cleared. This opens the 50% Fib at 24,333 as the next target zone. There is also a growing band of overhead supply now between 24,950 and the old key low at 25,210, making this area 24,950/25,210 a sell zone for any intraday technical rally attempt. There is a minor gap still open at 25,067 which ideally needs to be filled. Although the RSI has again slipped to a shade below 30 there is still downside potential in the current move, given the accelerating negative move on MACD and Stochastics still.