Whilst markets have seemingly been hopeful (or should that be “duped”?) by the apparent signs of progress in the fiscal stimulus negotiations, as yet, there is nothing to show for it. We are now just one week before polling day for the US Presidential and Senate election (where 35 of the 100 seats are up for re-election). Despite the Democrat House Speaker Pelosi remaining “optimistic” there is an apparent fatigue setting in for market sentiment. Agreement will not happen before the elections and after that, it is open to significant uncertainty on the results. This lack of certainty on fiscal stimulus, coming as COVID-19 infections hit record levels in the US and the second wave takes full force across Europe, is leaving markets increasingly nervous. Equities felt the full force of these concerns yesterday as Wall Street fell sharply, also with the dollar gaining strength on a safe haven bias. There is a slight unwind of these moves early today, but how far this develops in the coming days will be shown through bond markets. A flattening of the US yield curve (which continues this morning with US 2s/10s spread narrowing) would reflect risk aversion. Wall Street futures have stabilised early today, but if bond yields continue to fall (and curve flatten), the dollar will climb and market sentiment will favour safe havens (such as the yen and the dollar).
Wall Street closed with strong losses yesterday (albeit off session lows) with the S&P 500 -1.9% at 3401. US futures have found some support early today (E-mini S&Ps +0.2%) which has helped Asian markets consolidate (Nikkei -0.1%, Shanghai Composite +0.1%). European indices seem to be looking supported too with FTSE futures +0.2% and DAX futures +0.5%, but can this last? In forex, there is little real direction to speak of, aside from a shade of USD underperformance (aligned to a tick higher in equities sentiment). In commodities, this USD slip back is helping gold to tick higher (+0.2% ) and silver (+0.7%), whilst oil is also rebounding (+0.7%) after sharp losses yesterday.
It is a big US theme to the economic calendar today, but don’t forget the US announcements are an hour ahead this week as the daylight savings time shift is not until next weekend. US Durable Goods Orders are at 1230GMT with core ex-transport good expected to increase by +0.4% in the month of September (after a +0.6% increase in August). The Case Shiller House Price Index for August is at 1300GMT and is expected to improve to 4.2% (after +3.9% YoY in July). The key data release for the day is US Conference Board’s Consumer Confidence at 1400GMT which is forecast to improve slightly to 102.0 in October (from 101.8 in September).
Chart of the Day – German DAX
The past week has seen a dramatic shift towards negative sentiment on equities. Selling pressure has ramped up and there has been a significant breakdown on the DAX. The late July higher low at 12,253 has been decisively broken. This is the first higher low of the recovery to be breached and now confirms that a reversal of the March to September bull run is underway. Momentum indicators are now decisively corrective, with daily RSI consistently failing under 60 for the past seven weeks and falling into the low 30s. This suggests an outlook of selling into near term strength. We see 12,253/12,540 now as an area of overhead supply and a near term sell-zone for any bounces this week. Futures are ticking higher today, so a failing rebound could be an opportunity. There is initial resistance at 12,405 and a gap from yesterday’s initial gap lower at 12,515. The last gap 12,975 proved to be a great sell signal when it was filled last week. Breaking down below 12,253 opens 11,955/12,095 as initial support but the June low at 11,597 is the next key support. It would need a move above 12,720 to at best neutralise this selling outlook, whilst the bulls need to break the October key lower high of 13,150 to regain more sustainable control.
The repeated swings higher and lower over recent sessions reflect a highly nervous market, lacking certainty. It shows false signals are likely and despite the market ticking higher early today, we should not be overly confident of any trending moves. There are huge fundamental newsflow events in the coming days (ECB, US GDP, US election) which leave it likely that these daily swings could continue. Momentum indicators retain a positive bias (have done since the break above 1.1830 last week) but this is a difficult market to navigate right now. Initial support at 1.1785 needs watching as a close below would open a move back lower once more. A close above 1.1880 opens 1.1900/1.1915. whilst our preference is for a weaker dollar, the negative market sentiment is preventing this move from trending EUR/USD higher.
A big breakout on Cable has spent the past few sessions being dragged back again. The reaction in the 1.3000/1.3080 band is now the focus. For now, with Brexit trade deal newsflow limited by the “tunnel” negotiations, Cable is all about the dollar moves. A near term dollar rebound (on broad market risk aversion) has dragged Cable back to 1.3000 again. There is an argument to say that Cable is now rising within a four week uptrend channel, and that this pullback to 1.3000 is a chance to buy. As the near term slide begins to settle this morning, and given the mild positive bias to momentum still, this is our preferred strategy. Channel uptrend support comes in around 1.2950 today. A move back above 1.3080 would be a positive signal now for a renewed run higher to retest last week’s high of 1.3175. Breaking the channel uptrend would neutralise the outlook. Below 1.2860 is near/medium term corrective again.