Risk aversion is taking a renewed lease of life as markets begin to really sit up and take note of the potential impact of the Coronavirus. Some 24 hours ago there was a sense that markets were relatively well contained, but there has been a key shift in sentiment. With the number of fatalities in China growing, the government is taking decisive steps to try and quarantine the main affected city of Wuhan. However, the virus has spread to the cities of Beijing and Shanghai. Coming just in front of Chinese New Year, where travel and tourism in and around China increase, the timing could not have been worse. Global markets are reacting decisively and a retreat in risk appetite is the primary move. Demand for safety is growing again. Treasury yields are falling, which is driving Japanese yen gains but also the into the relative safe haven of the dollar. We talked yesterday about watching the Chinese yuan as a gauge, and this is seeing a sharp move higher on the Dollar/Yuan rate back above 6.9000 edging towards 6.9300 today. Is 7.000 possible again? With tourism in Asia potentially at risk, the demand for oil is at risk, which is driving oil prices lower. We also see equities under growing pressure again. The main risk play that is bucking the trend is coming with a stronger Aussie today. This comes as Australian unemployment dropped to 5.1% (5.2% exp, 5.2% in November), and employment picked up strongly. One other interesting factor is how sterling now reacts. Davos is traditionally a place where the global elite likes to elevate their sense of self-importance, but occasionally something interesting happens. If anyone was in any doubt before, US Treasury Secretary Steve Mnuchin has shown that the UK is in for a rough ride on negotiating a trade deal as he raised the prospect of tariffs on UK automobiles. This could weigh on sterling.
Wall Street closed mixed yesterday with the S&P 500 +1 tick higher at 3322, whilst US futures are slipping back slightly by -0.1%. In Asia there has been much broader selling, with the Nikkei -1.0% and the Shanghai Composite -2.8%. In forex, there is a risk aversion at play, with a stronger JPY whilst USD is also performing well. A clear winner is also a strongly performing AUD. In commodities there is mild weakness on gold (although the consolidation essentially continues), whilst oil is around -1.5% lower, continuing yesterday’s strong losses.
The ECB policy meeting will be key for traders looking at the economic calendar today. The European Central Bank monetary policy decision on rates is released at 1245GMT but there is no expectation of any changes to the main refinancing rate of 0.0% or the deposit rate at -0.50%. Christine Lagarde has a press conference at 1330GMT which will also be watched. The US Weekly Jobless Claims at 1330GMT are expected to tick back up to 215,000 (from the low level of 204,000 last week). Eurozone Consumer Confidence for January is at 1500GMT and is expected to improve slightly to -7.8 (from -8.1 in December). The EIA Crude Oil Inventories are a day delayed this week due to Monday’s public holiday and are at 1600GMT and are expected to drawdown again (a sixth week in the past eight) by -1.3m barrels (after a drawdown of -2.5m barrels last week).
Chart of the Day – EUR/GBP
The outlook for sterling has been in the balance recently. A dovish tilt to Bank of England members’ speeches has raised the prospect of a rate cut. However, this move is being priced out in the wake of the positive employment data. Coming as the euro has come under increasing pressure this has driven EUR/GBP to break to a five week low below support at £0.8440. This move has completed a downside break from a mini consolidation range £0.8440/£0.8600 and now implies a -160 pip downside target to effectively open a test of the key December low at £0.8275. Notably, with a deterioration on the momentum indicators there is also a confirmation. The RSI below 40 whilst MACD lines are bear crossing around neutral and Stochastics are accelerating lower. Given intraday volatility, there is now a near term sell zone £0.8440/£0.8485 which is overhead supply of the January lows. We look to use intraday strength as a chance to sell now. The move has increased the importance of resistance at £0.8600 which is now a medium term key high. The ECB meeting is a caveat today, but once the market settles down, the outlook is once to sell into strength now.
We have seen the euro under pressure in recent sessions. A marginal intraday breach of the three and a half month uptrend was seen yesterday only to hold the trend into the close. However, we have been seeing the old $1.1100 pivot becoming a basis of resistance in recent days and once more seems to be acting as a ceiling. Pressure is subsequently resuming on the medium term uptrend. What is of bigger concern for the technical outlook would be the support at $1.1065. This is the first key higher low of the three month recovery and if it were to be breached on a closing basis it would mark a significant change in outlook. The growing three week downtrend of lower highs and lower lows is becoming increasingly prominent and would become the dominant trend if $1.1065 were to be broken. We still see momentum indicators just hanging on by their fingertips, with the RSI still hovering 40/45 and MACD lines falling back to neutral. A breach of $1.1065 would come with a momentum breakdown and open the old key lows around $1.0980/$1.1000. Resistance above $1.1120 needs to be broken to at least think about a rally, with the three week downtrend at $1.1145 today.
An improvement in Cable really took off yesterday as a decisively strong positive candle broke not only a three week downtrend but also resistance at $1.3117. Once more the support band in the $1.2900/$1.3000 range has been used as a chance to buy. Momentum has swung higher once more from around key levels, with RSI back above 50 (from another low around 40) and MACD lines beginning to turn up from neutral. However, this move comes with a minor caveat today as an early unwind back is setting in (leaving potential resistance around $1.3150). It will be interesting to see how sterling responds today to the threat of US tariffs on UK car production. The hourly chart shows support between $1.3080/$1.3120which needs to hold to maintain recovery momentum. Below $1.3020/$1.3030 support would put the support levels on alert once more. It would seem the choppy ride on sterling will continue.
Dollar/Yen has been forming a near term consolidation range between 109.70/110.28 in recent sessions. However, a bull failure candle yesterday has been followed by selling pressure early today. The move lower has now broken decisively below 109.70 and means that this consolidation has turned corrective. The move completes a small top pattern (of around 50 pips) and implies 109.20 of a projection target. More importantly though, this now becomes the latest breakout to falter as the dollar bulls just cannot hold enough traction for sustained upside. The momentum indicators are all deteriorating now, although no sell signals have been confirmed on MACD or Stochastics yet. A closing breach of 109.70 would be the next step today, and that would suggest the market on a corrective path. A prime area to then look for is around 109.0 which is an old medium term pivot. The resistance between 109.70/109.75 today, with 110.20/110.30 a key band of highs now.
Gold is re-establishing the trading range that has been forming over the past couple of weeks. Tuesday’s failed bullish breakout may have been a false start for the bulls, but there are still conflicting signals that would suggest keeping powder dry at this stage. There is an uptrend that can be derived from the past five weeks (rising at $1551 today), whilst the daily RSI remains above 60. However, there is a slight negative bias to MACD and arguably Stochastics which are a slight concern. The last two daily candlesticks have had very small real bodies which suggest a real lack of conviction on gold now. Essentially though, we are still seeing the 38.2% Fibonacci retracement (of $1445/$1611) around $1548 as a basis of support. Again during yesterday’s session the bulls were happy to support the market around this Fib level. Given the failed break, the bulls now need a close above $1568 to really suggest advancing once more. In the meantime, there is a mini range ($1536/$1568) at play. The hourly chart shows initial support $1546/$1550, whilst hourly momentum remains in subdued range-bound configuration.
The outlook for oil has taken a real dive in the past few sessions. With concerns over the Coronavirus growing in South East Asia, the impact on the outlook for oil demand is suffering. Subsequently we are seeing sharp bear candles on WTI. The consolidation and basis of support around the old pivot at $57.35/$57.85 has been completely smashed in the wake of almost -3% downside yesterday. Another bearish look to today’s session is continuing the slide. Having broken $57.35 so decisively, the next support area is $54.75/$55.00. Technically though, with momentum indicators increasingly negatively configured, intraday gains are under growing selling pressure. There is though also downside potential. The RSI is still a shade above 30, but the lessons of May/June 2019 suggest that once the bears get a grip, there could be little to halt the slide. At some stage, the market will have priced in the Coronavirus (and often the knee jerk goes too far) but for now, the oil price is in sharp decline.
Dow Jones Industrial Average
With a mildly negative close yesterday (just a minuscule -10 ticks) the Dow has now closed lower for a second consecutive session. Bearish candles are a rarity for the Dow, but to get two in a row is worthy of at least a raised eyebrow. Essentially, little has really changed, but selling into intraday gains yesterday poses a few questions. However, whilst the market continues to trade above a five week uptrend (today at 28,915) and the support band 28,789/29,010 remains intact, then little intraday corrections will be seen as a chance to buy. There is little real sign on momentum indicators of any sell signals. A drift back lower on RSI towards the 60/65 area has tended to be a buying opportunity in recent weeks, whilst MACD and Stochastics are still strongly configured. Futures are a shade lower early today, but any weakness into 28,789/29,010 should be a chance for the bulls again to retest the 29,373 all-time high in due course.