With volatility elevated the market reactions, both positive and negative, will be accentuated. Subsequently there has been a considerable positive reaction to the G20 meeting at the weekend and riskier assets feeling the benefit with the US dollar under pressure. There were two factors coming away from the G20 that financial markets have been interested with. Firstly, the meeting between Presidents Trump and Xi to discuss trade. The leaders of the world’s two largest economies have come to an agreement that has put an escalation of their trade dispute on hold for 90 days. This means that in January the US will not increase tariffs on $200m of Chinese imports from 10% to 25%. This is certainly a positive and markets have responded strongly, especially in the equities space. Quite whether this is any more that kicking the can down the road seems to be for another day remains to be seen. Although I fear that markets may come to appreciate this too, with a more positive outlook for the near to medium term, this could fuel positive risk for the coming weeks. Also out of the G20 a meeting between Russian President Putin and the Crown Prince of Saudi Arabia Mohammad Bin Salman suggested the two countries will co-operate on oil production. Although no official announcement has been made, traders are taking it that this is sign of Russia (the world’s second largest oil producer) taking part in a move to cut production by OPEC later this week. Equities have jumped and the oil price has also jumped. The improved sentiment has pulled Treasury yields higher (US 10 year is +3bps) whilst the dollar, which has also been seen as a safe haven currency of choice during the US/China trade dispute, is weaker this morning. Is this a sustainable turning point for risk appetite? December seems to be starting on a positive note.
Wall Street already felt positive coming into the weekend (S&P 500 +0.8% at 2760) but futures are very strong today (c. 1.8% higher) which has driven Asian markets stronger this morning (Nikkei +1.0%, Shanghai Composite +2.5%). European markets also look strong with FTSE 100 futures +1.8%. In forex, the strong risk appetite is leaving the US dollar feeling the pressure across the board and the yen a key underperformer. The higher risk commodity currencies (AUD, NZD and CAD) are all strongly higher. In commodities, gold is mildly higher on the dollar weakness, but silver is strong, whilst oil is the standout mover around 5% higher.
The first trading day of the month is packed with manufacturing PMIs. The final Eurozone Manufacturing PMI is at 0900GMT and is expected to show the flash reading confirmed at 51.5 (51.5 flash, 52.0 final October). November UK Manufacturing PMI is at 0930GMT and is expected to tick a shade higher to 51.5 (from 51.1 for October), with the US ISM Manufacturing at 1500GMT which is expected to also improve a touch to 58.0 (from 57.7 in October).
Chart of the Day – EUR/CAD
Several of the major pairs and crosses are trading around key crossroads for their outlook. Euro/Canadian dollar recovered back to a confluence of barriers last week, with the resistance at 1.5130, a five month downtrend and the falling 144 day moving average. However, the barrier has held firm and the recovery subsequently seems to have not only failed again, but is also now this morning breaking below support of a three week trend support. This importance of the overhead trend resistance (which restricted recoveries throughout October and November) comes with the RSI having fallen over around 50 and Stochastics also crossing back lower again. Is this crossroads again too much for a euro rally? A close today below the three week uptrend would open a test of support at 1.4945 which is a key near term support. Resistance is mounting around 1.5135/1.5170.
The downtrend channel of the past ten weeks continues to pull the market lower as Friday’s bear candle once more re-affirmed the trend that is now falling today at $1.1400. However, it is becoming apparent that the bulls are becoming more of a force and the integrity of the channel is being tested. With the upper bound of the downtrend channel under consistent threat, and momentum indicators looking to take on a more neutral configuration, the bulls are looking to build for a channel break. This morning’s positive start is looking to build for this. With the market bouncing off $1.1300 which has been an old key floor, the prospect of $1.1265 being a higher low remains. However, there is a sense that this needs to be the time that the bulls are going to make their move. Resistance from last week’s high at $1.1400 stands in the way.
Sterling bulls are hamstrung by Brexit negatives, however, the downtrend of the past three weeks is being tested this morning as it seems that there is a reluctance to sell Cable around $1.2720/$1.2730. The outlook has stabilised as a result and momentum indicators may be negatively biased on a medium term basis, the near term position is quite benign. Despite this though there is still a sequence of lower highs that would need to be broken to begin realistic thoughts of a recovery. Initially $1.2850 stands in the way, before $1.2925. Undoubtedly the technical configuration would suggest a preference of being short but the support at $1.2720 is holding firm above the key lows $1.2660/$1.2695. A curious position for Cable traders as Brexit politics will dominate the sterling outlook once more this week.
The corrective move on the dollar is hanging on to what is now a two week uptrend and means that the pivot support at 112.90 remains intact. There is a positive bias to momentum configuration that points to corrections being bought into still, and this still suggests pressure on 114.00/114.20. However, there are increasing question marks around the longevity of the run higher, and as to whether the medium term configuration on momentum shows upside is actually waning. However, for now the downside looks limited and the two week trendline is holding (just) this morning. Support initially at 113.20 with 112.60 above a key near term support at 112.30.
The drab run of trading in the past couple of weeks has been pointing towards a market losing impetus. So it will be interesting to see how this morning’s strong open impacts the market. Resistance around $1230 is being broken initially but that only opens the more considerable barrier of the $1236 key long term pivot overhead. Even if a break above $1230 were to be seen on a closing basis, $1236 is crucial for the prospect of a sustained move higher. Momentum indicators are still positively biased with the RSI and Stochastics swinging higher this morning and this suggests that buying within the uptrend channel remains viable, with support at $1210 above the key low at $1195. The channel support is around $1203 today, but the pivot band $1208/$1217 is holding still as initial support.
With technicals so bearish but stretched, a recovery on oil was always likely to be a triggered by a newsflow driven event. And so the two factors of the G20, Trump’s meeting with Xi over the trade dispute, and Russia’s co-operation with Saudi Arabia on oil, means that oil has traded strongly higher this morning. This move of around 4.5% initially is having a profound impact on the technical analysis too. The RSI has been edging higher in recent sessions but has now crossed back above 30 (a basic buy signal) but also we see the MACD lines threatening to cross higher. These would be positive signals to go on and could trigger a decent recovery now. The market has broken above a pivot line for the first time in weeks too, with a move above $52.75, an old support which had been resistance last week. Holding $52.75 now as a basis of support will be key. There is a gap at $51.80 but this could be a breakaway gap so may not necessarily be filled. Next resistance is $54.75 and the treatment of that could determine the nature of the rally. Above $54.75 is $58.00.
Dow Jones Industrial Average
The outlook for Wall Street is looking a lot perkier now. Already on Friday a solid bull candle broke above 25,500 resistance to open 25,800. However with the meeting of Trump and Xi giving sentiment a boost over the weekend, the futures are looking set for a big boost and so the November rebound high at 26,278 should not be ruled out. The technical have swung positively once more with the Stochastics and MACD lines advancing strongly after a bull cross, whilst RSI is rising (albeit less decisively) above neutral. The hourly chart shows that 25,200/25,250 is a basis of support now, but the bulls will be looking way beyond there. Above 26,278 opens the October all-time high again at 26,951.