Market sentiment has had several shots in the arm throughout the past few days and that was before yesterday’s better than expected US private payrolls data and ISM reading of the service sector impacted. For now, good news on the US economy is good news for markets. A rate cut in September is on the way (still a probability of 92% according to CME Group FedWatch), so any data showing the US economy holding up well is a positive for risk appetite. This means that traders have pulled back on their safe haven positioning. Profits are being taken on Treasuries, gold and yen longs. However, we still view this as likely to be just another near term pullback which ultimately provides another chance to buy. For now though, this risk rally is a move that needs to play out first. Yields need to watched and a move above 1.66% on the US 10 year Treasury would be a bullish signal for markets. However, today’s Non-farm Payrolls will take on added importance now as given the data improvements of late (such as the ADP number) there is an anticipation of a positive surprise in the headline jobs. The pick-up in market sentiment could prove to be short lived if payrolls disappoint.
Wall Street pulled strongly higher last night with the S&P 500 +1.3% at 2976, whilst US futures are consolidating these gains early today, around +0.1% higher. In Asia, there has been a cautiously positive session with the Nikkei +0.4% and Shanghai Composite +0.1%. European indices are also cautious but a shade lower, with FTSE futures and DAX futures mixed to slightly lower. In forex, there is little real conviction (often the case early on payrolls day) but the recent improvement in sentiment is holding firm with JPY and CHF slipping whilst AUD and NZD are higher. In commodities, the slip away of gold is slight but continues, whilst oil is also a shade lighter.
The payrolls report is of primary focus on the economic calendar today. However, first up is the revised reading of Eurozone Q2 GDP at 1000BST. No changes are expected from the +0.2% QoQ growth and +1.1% YoY growth in the previous reading. The US Employment Situation is at 1330BST is expected to show headline Non-farm Payrolls grew by 158,000 in August (down marginally from 164,000 in July). The Average Hourly Earnings are expected to have improved by +0.3% on the month but this would only be enough to see +3.1% YoY (down from +3.2% in July). Unemployment is expected to have remained at 3.7%.
Also this afternoon it will be worth keeping an eye out for the speech by Fed chair Jerome Powell who speaks in Zurich on “Economic Outlook and Monetary Policy”. Anything that hints towards September and future Fed moves will be market moving.
Chart of the Day – GBP/JPY
A massive shift in sentiment on Brexit and also broader market sentiment is pulling sterling higher and weighing on the yen. The net effect is GBP/JPY on a tear higher with two huge bull candles. The major cross has now completed a one month base pattern on a closing breakout above 130.65 which implies 415 pips of additional recovery towards 134.80. The move has come with decisive confirmation on the RSI which is at four month highs, whilst MACD and Stochastics accelerate higher. The market is consolidating this morning around the 23.6% Fibonacci retracement of the big 148.66/126.49 sell-off (around 131.75) but if the bulls can clear this it would open the 38.2% Fib at 135.05. This is around the 134.80 implied base target. Given the strength of the bull candles, intraday weakness is now a chance to buy. The neckline at 130.65 is initial support, with a buy zone around 130.00/130.65. There is little real resistance until 133.85/135.60.
The euro has recovered well this week but a continuation of the move is looking uncertain. This comes as yesterday’s session closed entirely flat on the day with a long upper shadowed doji. A failed test higher to lose all gains into the close is a worry for the bulls. We have discussed previously the resistance band $1.1025/$1.1050 but also overhead at the old key low at $1.1100. There is a sense that this resistance is still key as a barrier to gains. The market is still trading within what is now a ten week downtrend channel, with negative medium term configuration on momentum. Near term rallies are still a chance to sell. Leaving resistance at yesterday’s high of $1.1085 will be concerning for the bulls now and despite the momentum indicators edging a near term positive bias, the recovery is looking tentative today. The hourly chart shows the need to hold on to $1.1025 support through payrolls. A close back under $1.1000 would suggest the sellers back in control.
The momentum of the Cable recover has just begun to ease slightly this morning, although this can certainly be put down in part to today’s Non-farm Payrolls report. That aside the recovery on sterling has been remarkable in the past few sessions. Since hitting a low around $1.1960 on Tuesday, the market has rallied almost 400 pips to yesterday’s high. The move has had significant technical implications, breaking the key reaction high around $1.2305 and breaching a four month downtrend. With the improvement seen on momentum indicators, if the bulls can get through the payrolls report today unscathed, then the prospect of continued recovery is high. The next resistance is $1.2380, where there sits overhead a 200 pip old trading band. The hourly chart shows initial breakout at $1.2305 is holding as a basis of resistance whilst $1.2260/$1.2305 is now a near term buy zone. With the market repricing for another Brexit delay, sterling is positioned well for a continuation of this short covering rally.
An incredible improvement in risk appetite has massively hit the yen and subsequently a huge bull candle formation yesterday has seen USD/JPY closing above the 106.75 resistance. This takes the pair to a one month high and significantly improves the outlook. The market is now seriously testing the overhead supply resistance band 106.75/107.50. However, the bulls need to maintain their momentum otherwise the move could quickly dissipate. Throughout 2019 the major rallies on USD/JPY have faltered around 60 on RSI. The near term improvement is clear but MACD lines are still unwinding towards neutral, whilst Stochastics are around levels where they struggled in July and August as the rallies turned lower around 80. Subsequently the pair needs to pull through the 107.50 resistance to really suggest traction building is sustainable. For now though certainly the outlook is improving. How the market reacts around 106.75 could be a key factor today. This old ceiling becoming support would be a positive signal that the bulls were in control. Above 107.50 opens 109.00.
The positive sentiment seemed to flip on gold yesterday. Suddenly the support of buying into the weakness was not there. The question is whether this is a near term blip, or something more prevalent. The 21 day moving average (today around $1519) has been a gauge of support for several months and is now being severely tested, even close to turning down. The first key support of $1517 is also breaking. There has been a notable drop on momentum indicators, but nothing yet that would be a screaming sell signal. We continue to believe that weakness on gold is a chance to buy. This view is under threat, but for now, still holds water. Closing decisively below $1517 is certainly now a risk with this morning’s further weakness and would be disappointing now, whilst old support $1500/$1510 is also to be watched. The support band $1481/$1492 is crucial for the medium term outlook as a breach would suggest a much deeper correction forming. Resistance overhead comes in at the $1534 pivot and $1550/$1557.
Positive risk appetite (driving by better news on the trade dispute and US economy) along with larger than expected EIA crude oil drawdown has pulled oil higher, but essentially the market is still ranging for the past month. A brief intraday breach of $57.50 could not be sustained, leaving resistance at $57.75, for the market to maintain the ranging conditions of the near to medium term outlook. RSI is still hovering a shade above 50, whilst MACD lines drift towards neutral and Stochastics meander. Resistance of the four and a half month downtrend was tested but also essentially remains intact. More is needed from the bulls. The hourly chart shows $55.90 support of yesterday’s low needs to hold firm as the market slips back today. A failure of this support simply re-iterates the market in its ranging state.
Dow Jones Industrial Average
The bulls really have begun to make their move in the past couple of sessions. This took a sizeable leap forward yesterday as the market gapped through resistance at 26,515 to a one month high and a range breakout. This move is confirming on RSI which is rising above 50 and at a five week high, whilst MACD lines accelerate higher and Stochastics are strongly configured. The bulls are now well positioned as the range breakout effectively implies a move back towards the all-time highs again at 27,399. How the market responds to a pullback will be key now. The neckline is supportive at 26,515 and gap support is at 26,355 meaning there is a buy zone of support 26,355/26,515. Futures are relatively quiet in front of payrolls today but weakness is now a chance to buy. Initial resistance is at yesterday’s high of 26,835 and then 27,060/27,280.