Traction from good news can often be difficult to maintain. The longer markets have time to react to events, the chances are that the story can be unpicked. The US/China “phase one” agreement is done but yet to be signed as translations need to be poured over. A signing of “phase one” will come in January, but this leaves traders with nagging concerns that something may lie in the translation that puts a fly in the ointment. Now, it is perfectly possible that all will be fine, but it does leave capacity for disappointment. The positive traction of the risk on move is spluttering. This is restricting yields from moving higher, pulling flow back into safety. The dollar is benefitting from this today, whilst gold continues to hover a shade under $1480. Perhaps the same could be said of the new Conservative Government in the UK. Apparently, legislation will be put forward by PM Johnson that prevents an extension to the Brexit transition period beyond December 2020. Sterling has been on a tear, until now, and a degree of profit-taking has set in today. After such a strong run higher in recent sessions, this could still be a healthy retracement, but the bulls need to move fast to protect their medium term gains. The Reserve Bank of Australia minutes show the RBA is open to potential easing of policy again early in 2020 and is weighing on the Aussie today.
Wall Street closed with decent gains with the S&P 500 +0.7% at 3191. US futures are a touch more tentative today, but Asian markets have been positive, with the Nikkei +0.5% and Shanghai Composite +1.3%. In forex, although EUR is holding up well, USD is outperforming across the major pairs. GBP is the biggest slider, down -0.6% whilst AUD is down -0.4% on those RBA minutes. In commodities, gold continues to sit at a crossroads, whilst oil is also holding on to its recent gains.
The focus for the economic calendar today comes with UK employment and US house building. At 0930GMT the UK Unemployment is expected to increase a shade to 3.9% in October (from 3.8% in September) with the claimant count for November at 24,500 (33,000 in October). There will also be a big focus on wages with UK Weekly Earnings expected to fall slightly to +3.4% (from +3.6% in September). Later in the session, US Building Permits are expected to slip to 1.41m (from 1.46m in October), whilst US Housing Starts are expected to increase to 1.34m (from 1.31m in October).
Chart of the Day – FTSE 100
UK assets have certainly been given a boost following the UK election victory for the Conservatives (let’s see if the UK economy can also respond now). On a technical basis, this strong move for UK equities has taken FTSE 100 to breakout for a four month high. This ends a trading range from 7005/7445 with a move that implies upside to test the July high of 7727 in the coming months. A confirmation of the move is seen across momentum, with the RSI at a four month high. Furthermore, there is upside potential with a bull cross on MACD lines and Stochastics accelerating higher from a recent bull cross. After such a huge move higher yesterday, the bulls will be looking to use any near term unwinding move to form breakout support around 7400/7445.
The buyers have put the disappointment of Friday’s failed break of $1.1180 behind them and started to build a platform for another bull leg. A shooting star candlestick is still live, however, the impetus of this corrective candle has been reduced by a positive candle yesterday. The fact that the buyers were happy to return to support a slip, above $1.1100 implies a growing sense of control now. This comes with the RSI sitting in the mid-60s and MACD lines rising above neutral. There is an uptrend of the past two weeks that can be derived and is supportive around $1.1115 today. Another positive open today sets the bulls on good ground for a test of $1.1180/$1.1200 resistance as we buy into weakness. The pivot band remains in place at $1.1075/$1.1100, with a key higher low at $1.1040.
The dust is settling on the Conservative election victory and sterling is beginning to drift back. We continue to hold a positive medium to longer term view on Cable, but the near term picture is beginning to turn corrective. A neutral to negative candle yesterday is being followed by initial weakness today. Momentum indicators are beginning to wane, with the RSI dropping back from 78 to 70 (no basic profit-taking signal yet) and the Stochastics sliding below 80. The hourly chart shows a basis of support around $1.3300 has been breached (since becoming a basis of resistance) with a near term lower high ($1.3420) and lower low in place. A retreat back into the $1.3175/$1.3200 area of breakout support could be seen near term, however, we would be looking for a retracement to find support above $1.3000 for the next bull leg to then build.
The bulls have taken a far more prominent role in positioning on Dollar/Yen in recent sessions. As the market has once more rallied off another higher low (at 108.40) to position above 109.00, the move is holding for now. In recent months, every time the market has rallied above 109.00 there has been a quick retracement as the move has failed. So, is this time any different? It is notable that there have now been three positive closes in a row, all above 109.00 and with neutral to bullish candles. This is a change from other breakouts which have been very tentative. Momentum indicators are swinging positively (RSI above 60, MACD crossing higher above neutral) but also with upside potential. The resistance at 109.70 restricted the move to breakout last week, but this resistance is now under growing threat. A closing breakout will test 109.90 initially before 110.65. The positive implications of a breakout above 109.70 would though be of more significance.
The battle for control continues on gold as the markets continues to sit patiently at a key crossroads. We have been concerned by the overhead supply around $1480 which has limited the gains for several weeks now. However, the reaction to the US/China phase one agreement has been curious by its lack of selling pressure across gold. For months we have seen a series of lower highs and lower lows building up but for over a month now, the sellers have not cut through. The market has moved from the bottom of a downtrend channel (with support at $1445), to now challenge the top of the channel (which sits at $1484 today). Momentum indicators are sitting around neutral levels, but equally the bulls need to be aware that they are around levels were the rallies have tended to fade in recent months. It is also interesting that in recent weeks there is actually a very mild run of higher lows forming, the latest at $1458. The hourly chart shows initial pivot support around $1465 today which would take as a near term gauge for a potential next rejection around the overhead supply.
The breakout to multi-month highs on oil is sustaining. Since Friday’s move above resistance at $59.85, the bulls have held firm. However, it is also notable that the market is bumping up against the 76.4% Fib level (of the $63.40/$51.00 sell-off) and is consolidating. The Fib retracements have often acted as key barriers to gains for this growing uptrend channel. The consolidations have previously turned back into lower Fib levels before the channel re-asserts. Subsequently, the support band $57.85/$58.75 could easily see some action, with the 61.8% Fib level at $58.65. Momentum indicators are positively configured, with the RSI holding in the low 60s, MACD lines rising solidly at seven month highs, and Stochastics above 80. We would therefore see any near term unwind to be a chance to buy within the channel once more. Above the 76.4% Fib level at $60.45 opens a full retracement to $63.40.
Dow Jones Industrial Average
Another tentative session of gains on the Dow has resulted in a close at an all-time high. This continues the push on in the wake of the US/China phase one agreement. Momentum indicators are positively configured, with the RSI into the mid-60s, MACD lines set to cross higher and Stochastics pushing bullishly above 80. However, as discussed previously, this is not a move that comes with high conviction. The last two candles have been relatively tepid for the bulls. This could suggest a near term slip back on the Dow. However, we would continue to view weakness as a chance to buy. There is good support now at 27,805, whilst breakout support comes at 28,035/28,175.