A sudden bout of selling pressure ripped through Wall Street yesterday to leave traders scratching their heads. Maybe stocks can go down as well as up after all? The tech-led decline was seen most significantly through a -5% decline on the NASDAQ, but with little real catalyst, it seems to be simple profit taking. As eye watering a decline as it may seem, it is important to note that the NASDAQ has simply unwound to levels of Monday last week. The question becomes how will traders respond now? A correction just shy of -10% was seen in June, but was a brief shakeout and just a set up for the next bull run. This has developed a sense of negative sentiment across markets, with bond yields falling and risk aversion hitting assets such as oil. Despite this, the near term dollar rebound has begun to stall, perhaps due to the upcoming Nonfarm Payrolls report today. Traders will be wondering whether this is now another opportunity to sell USD as the broad outlook for the dollar remains negative. A ultra-dovish Federal Reserve, backed by continued dovish Fed speakers (Charles Evans suggesting rates would not go up until inflation hit 2.5%) leaves the dollar under ongoing pressure. It is likely that jawboning from the ECB over the strength of the euro, and the perception of a “no deal” outcome from Brexit trade negotiations hampering sterling could now create an increasingly choppy outlook for major USD pairs. Focus will turn to payrolls later today, with the growth of jobs in the US economy continuing but signs of a slowing pace.
Wall Street closed sharply lower as big profit-taking pulled the S&P 500 -3.5% lower to 3455. E-mini S&P futures are falling by another -0.5%. This selling pressure hit Asian markets, with the Nikkei -1.1% and Shanghai Composite -1.0%. European futures are on the back foot too, with FTSE futures -0.6% and DAX futures -0.4%. In forex, there is a degree of consolidation coming ahead of payrolls, although a mild risk negative and USD positive bias is hinting. In commodities, gold and silver have found a basis of support from recent declines. The selling pressure on oil continues to develop, with another half a percent lower today.
The big focus for today on the economic calendar is the August US jobs report, with the US Employment Situation released at 1330BST. Headline Nonfarm Payrolls are expected to once more show good growth, with +1.400m jobs created (after +1.763m jobs gain in July). Although the ADP employment report again disappointed sharply to the downside on Wednesday, hopes are high for another positive payrolls. Unemployment is expected to improve and to drop into single digits again to 9.8% (from 10.2% in July). The anomaly of wage growth continues to show through, with Average Hourly Earnings expected of zero growth in the month of August, whilst the year on year wage growth is expected to decline to 4.5% (after 4.8% in July).
Chart of the Day – DAX
A bull failure on an intraday breakout above the 13,313 old July high leaves the bulls at a tricky inflection point on the DAX. A sharp intraday correction off the session high of 13,460 say the market lose over -400 ticks into the close and complete a “bearish engulfing” candlestick (or bearish key one day reversal). This reversal is a powerful single session signal and suggests a near term corrective move threatens. There is a two and a half month uptrend coming in around 12,825 today which could now come under pressure. This becomes a confluence around this week’s earlier low of 12,850 and helps to bolster the 12,620/12,800 area of pivot support. Momentum indicators have been suggesting a market struggling to push higher in recent weeks, and this could now play into a near term corrective move. How the bulls respond today to the sharp decline will be interesting, with early indications of weakness today (although it is Nonfarm Payrolls today so this may begin to consolidate). There can often be a knee jerk reaction higher following such a strong negative session, but if gains are then sold into it will be an indication that market sentiment has shifted corrective for now. Important support is at 12,630 and if breached opens 12,253.
The strengthening of the dollar eased into the close of yesterday’s session and this has allowed EUR/USD to stabilise near term. An only marginal decline on the close of yesterday’s session included a rebound of +60 pips off the day lows and has allowed support to begin to form once more. The strong ongoing technical outlook on EUR/USD still suggests that corrections into support are still a chance to buy. The market has been posting continual higher lows and higher highs for several months now and the latest retreat which has found support above the key band between 1.1695/1.1750 means that this is favoured to be another chance to buy. Momentum indicators are warning that the medium term position is not as strong as a few months ago (given the drifting negative divergences), however daily RSI holding in the mid-50s is still suggestive that this correction is favoured to be bought into. The hourly chart shows that if the market can break decisively above 1.1880 it would be a bullish signal that sees the bulls back on track to test higher once more. With hourly indicators having unwound, this is a key inflection point coming into Nonfarm Payrolls today.
As the recent dollar rebound has dragged back Cable, is this a chance to buy again? The technical outlook suggests that this is a near term pullback within a bigger medium term uptrend. A Two month uptrend comes in at 1.3215 today whilst there is a good band of breakout support between 1.3185/1.3265. Daily momentum indicators may not look as strong as they have done previously (arguable medium term slowing and negative divergence) but the price outlook remains positive around these levels and this corrective slip still looks to be an opportunity. The hourly chart shows initial resistance to be overcome at 1.3320, but a move above 1.3355 would really open the renewed upside. A close below the rising 21 day moving average (currently 1.3175) would signal a more corrective move, but the bulls would only really lose control below 1.2980. We favour buying into the weakness for another test of 1.3480.