In the early weeks of 2019 it is likely that the progress of the trade negotiations between the US and China will be crucial for risks sentiment. Almost everything else is looking concerning for global markets (continued deterioration of data pointing to a global cyclical downturn, US Government shutdown, continued Brexit uncertainty). However, there are signs of positivity in the US/China talks this week (stretched into a third day due to progress being made) which is allowing risk appetite to improve once more. There will need to be substantive progress on market access, along with protection of intellectual property for the market to take it as an unambiguous positive, but there is traction in the talks seemingly. Equities are feeling the main drive of recovery, with Wall Street another percent higher. There has also been a decisive bounce on oil, with WTI having bounced an incredible 19% in just over two weeks. This positive risk is driving a reversal of the flight to safety, with Treasury yields higher (albeit with a flattening yield curve), gold slipping and the yen unwinding. However also, we see the dollar performance ebbing away. The continued progress in US/China talks would be dollar corrective.
Wall Street closed decisively higher once more with the S&P 500 +1.0% whilst futures are showing further gains of +0.3% early today. These gains have helped Asian markets stronger with the Nikkei +1.1% and Shanghai Composite +0.8%. The gains are solid coming into the European session, with FTSE 100 futures and DAX futures both around half a percent higher. In forex, there is a risk positive look across the majors, with the yen underperforming, whilst the commodity currencies (Aussie, Kiwi and Canadian dollar) are stronger. The euro and sterling are also making gains on the dollar. In commodities, the stalling of the gold rally continues, whilst the recovery in oil is also ongoing.
Looking at the economic calendar the European data seems to be broadly limited to the Eurozone Unemployment for November at 1000GMT which is expected to stay at 8.1% (8.1% in October). The Bank of Canada monetary policy decision is at 1500GMT and analysts seem to be split on whether there will be a 25 basis point hike to +2.00% (from +1.75%) which could heighten volatility on the announcement. US EIA Oil Inventories are at 1530GMT which are expected to show a drawdown in crude stocks of -3.4m barrels (flat last week) with distillates building by +3.4m barrels (+9.5m last week) and gasoline building for +3.1m (+6.9m last week). The key release on the calendar will be the FOMC minutes for the December meeting at 1900GMT which will see the market focused on the groundswell of voices on the committee calling for a slowdown in hikes. Also today there are a bunch of central bankers speaking. For the FOMC there is Charles Evans (a voter in 2019, broadly centrist) at 1400GMT and Eric Rosengren (voter in 2019, hawk) at 1630GMT. UK traders will also keep an eye out for Bank of England Governor Carney who is speaking at 1530GMT.
Chart of the Day – EUR/JPY
The yen has spent the past few sessions unwinding the effects of the flash crash last week. However, as the market settles, the outlook for the yen remains positive and this rebound looks to be a chance to sell. The rebound has simply unwound the market back into the resistance band of the overhead supply 124.60/125.40. With this coming as a confluence with the three week downtrend resistance (today at 125.35) and momentum indicators quickly unwinding, this could be the chance to sell. The RSI has unwound to 40, similar to the late December rally), whilst the Stochastics are back around their neutral point. This should help to renew downside potential once the rally loses steam. It looks as though with yesterday’s mild negative candle, the rebound may now be in the process of running out of steam. If the rally fails and leaves another lower high between 124.60/125.40, it is likely that the sellers would then regain control. Yesterday’s high of 124.80 is initial resistance and the hourly chart shows a move below 123.40 re-opens the downside once more. There are a succession of higher lows in the recent recovery with 122.35 an old support.
With the euro edging towards the highs of a range that has now been in place for the past ten weeks, the bulls blinked again. Yesterday’s 35 pip slip back from $1.1485 again shows that the resistance in the band $1.1475/$1.1500 is a significant barrier for the bulls to overcome. However, there is a mild positive bias in the momentum now, with the MACD lines above neutral and Stochastics towards the upper limits of their range. This suggests an ongoing upside pressure on the resistance, something that is again hinting early this morning. This would suggest buying into weakness in the range. The hourly chart shows a near term pivot around $1.1420 is a basis of initial support. A close above $1.1500 would be a key near to medium term upside break. Key support remains around $1.1300.
The positivity of the recovery following the flash crash has taken a knock with yesterday’s mildly negative candle. The resistance at $1.2815 subsequently remains intact. It will be interesting to see how Cable bulls now respond as essentially there is a basis of support between $1.2600/$1.2700 and momentum indicators are edging for a continued recovery with a bull bias pulling the market to test $1.2815. Today’s reaction could be key in this. A second negative candle would suggest the positive momentum beginning to wane. The hourly chart shows that a move back below $1.2700 (especially on a closing basis) would see the bulls lose their way again. Whereas, a close above $1.2815 would begin to really turn a corner in the recovery. The market is interestingly poised as Brexit politics resume.
The market has recovered well since the flash crash last week. The downtrend of the past three weeks is now being tested. However, this still looks to be a rally that is unwinding oversold momentum and is one to renew downside potential. It will be interesting to see how the market responds to yesterday’s almost perfect doji candlestick (open and close at the same level), a signal that denotes uncertainty. The momentum indicators have unwound but are already beginning to lose their way. There is overhead supply in the band between 108.10/110.00 and the next lower high is likely to be in this region. The downtrend is at 109.00 today with yesterday’s high of 109.10. The hourly chart shows the recovery is still in progress but is beginning to lack impetus. Initial support at 108.10 and a close below would resume the selling momentum.
The bullish outlook for gold has just stalled a touch in the past few sessions. However, so far the bulls have prevented a corrective move from taking hold. The support of the upper limit of the old four month uptrend channel (today at $1278) is playing a supportive role and maintaining the positive outlook. There has been a slip on momentum indicators in the past couple of sessions, but unless the Stochastics dropped to multi-week lows and the RSI falls decisively below 60, it is difficult to see this move as anything more than a near term blip that will provide another chance to buy within the bull trend. Support of the five week uptrend channel (which coincides with the rising 21 day moving average) comes in around $1264 today and around the old $1266 breakout support. This would be a key support area should a correction set in. However, for now this is just a consolidation and near term weakness which should be a chance to buy for further pressure on the $1300/$1310 long term pivot.
Another positive session and more bullish pressure is building for the oil market recovery. The market is now trading decisively clear of the $48.00 near tem breakout (which is now supportive) and the run of bull candles is really seeing momentum indicators accelerate higher. The RSI is over 50, with the MACD and Stochastics increasingly positive with this near term recovery. However, the market is now at a key crossroads as the overhead supply of the old November/December lows between $49.40/$50.50 is a basis of resistance. This needs to be breached for the run higher to continue. Having broken the 12 week downtrend, rallied above the 21 day moving average, and started to form a new uptrend, corrections are now a chance to buy. Any unwinding move that gives a renewed buy signal around $48.00 would be ideal for the bulls now. A close above resistance at $50.50 would also be above the 23.6% Fib retracement of $76.90/$42.35 and open the 38.2% Fib at $55.55.
Dow Jones Industrial Average
The Wall Street recovery is progressing well now. In the past few sessions the market has moved from a technical rally to a recovery with substance. Closing well clear of resistance at 23,345 the market has left a key higher low at 22,638 whilst also recovering above the falling 21 day moving average to a three week high. The momentum indicators are increasingly encouraging now with the bull kiss on the Stochastics, a bull cross on the MACD lines and RSI back up to 50. The bulls will be eyeing the resistance at 24,000 as a breakout would be a real signal of intent for the recovery. The hourly chart shows how 23,345 is now a basis of support whilst 23,507 is also supportive initially today.