Market sentiment has been hit overnight as the latest set of indicators on the Chinese economy suggest that a broad pick up should not be taken for granted. China PMIs have disappointed cross the board and suggest that the economy still needs to be propped up by stimulus. China Manufacturing PMI fell to 50.1 which is barely in expansion (50.5 exp, 50.5 in March). China Non-Manufacturing PMI also missed estimates and fell to 54.3 after consensus had expected and improvement (55.0 exp, 54.8 in March). The data suggested increased levels of inventories in prior months ad that a degree of patience was needed on the prospect of a Chinese recovery. Risk appetite has been impacted slightly negatively on these numbers, with yen outperformance and commodity currencies under pressure with the Australian dollar bearing the brunt of any selling in the forex space. Perhaps the reaction would have been bigger, but traders are also waiting for the next sign of progress in the US/China trade talks that resume in Beijing today. Steve Mnuchin believes that they are on the final laps, but as ever looking towards the trade negotiator Robert Lighthizer (who is hawkish on China trade) is probably a better gauge.
Wall Street closed a touch higher with the S&P 500 hitting an all-time intraday high of 2949.5 in closing at 2943 (+0.1%). US futures are looking more cautious, currently -0.1%. Asian markets are mixed, with the Shanghai Composite +0.4%. In Europe there is a continuation of the cautious theme, with FTSE futures -0.1% and DAX futures -0.2%. In forex, there is a very slight risk negative move, with JPY outperforming, USD performing slightly better whilst AUD is under mild pressure. In commodities, there is little real direction with gold finding support, whilst oil consolidating also reflects a cautious risk outlook.
A packed economic calendar starts in the morning with the Eurozone prelim Q1 GDP at 1000BST which consensus expects to improve marginally to +0.3% for the quarter (+0.2% n Q4 2018). German prelim inflation for April at 1300BST, expected to increase on the HIPC to +1.7% (from +1.4% in March) and is considered a lead for the Eurozone inflation later this week. US inflation indicators are again in focus today with the US Employment Cost Index for Q1 at 1330BST is expected to remain at +0.7% (+0.7% in Q4 2018). The Conference Board’s US Consumer Confidence is at 1500BST and is expected to improve back to 126.0 in April (up from 124.1 in March). US Pending Home Sales are expected to improve by +1.1% in March (after falling by -1.0% in February).
Chart of the Day – EUR/NZD
With the Kiwi bouncing back in recent sessions, this leaves Euro/Kiwi interestingly poised. It is at something of a crossroads now. The recovery uptrend of the past four weeks has been broken however is this the beginning of another leg lower? Not necessarily. Two strong negative candles have deteriorated the outlook, however, yesterday’s bull hammer candlestick suggests the buyers are preparing again. The recent move lower looks to be one that has just unwound stretched overbought positioning. A move to unwind the breakout to multi month highs (leaving resistance at 1.6960). Also a move to unwind the RSI from 70 (a seven month high). The RSI has unwound to 50. A sharp move lower on the Stochastics (heavily near term weighted) is settling now. The 89 day moving average has been an excellent gauge for sentiment on the pair throughout 2019 and is supportive around 1.6700. Further back, the breakout neckline of the March base pattern at 1.6630 held up well during April and will also be seen as a key source of underlying demand now. A close below 1.6630 would turn the market far more corrective and open 1.6430/1.6290. However, this looks to be a move that the bulls are read to support. Back above 1.6850 re-opens the upside.
After two days of positive candlesticks, the euro is looking to put together another recovery. A move back above $1.1175 is encouraging and the bulls will now look to pull the market through $1.1210 (another old low) as the next step in the improvement. Near term momentum indicators are responding, with the Stochastics crossing higher (a near term positive signal) and RSI above 40. However, it is important to see that, at least for now, this is a near term recovery within a medium term bear market. It is likely to be the source of the next chance to sell. There is a lower high at $1.1265 under the $1.1325 key lower high from April. The hourly chart shows the near term recovery progressing well with the hourly RSI and MACD lines more positively configured now. Also with yesterday’s higher low at $1.1140 (above the $1.1110 recent low) the $1.1175 old support is becoming a near term pivot worth watching today.
There is a technical rally which is looking to unwind the recent dollar breakout across several major pairs. On Cable the recovery is very tentative. The candlesticks are positive but have small real bodies. The move lacks conviction. There is an unwinding improvement on RSI and Stochastics, but the bulls seem to have little real appetite to back a recovery. Resistance of a six week downtrend comes in at $1.3010 today and is a confluence with the old key support area at $1.3000. This is all now a basis of resistance and rallies look to be a chance to sell. The hourly chart shows initial support at $1.2900 but a breach would suggest the bulls have given in. A retest of $1.2865 looks likely in due course before further downside to test $1.2700/$1.2815.
The ten day Japanese public holiday will reduce liquidity and make trading in Dollar/Yen a difficult call for the next couple of weeks. However, given the swathe of crucial fundamental drivers, this could mean a choppy market. So far this is not the case, as the market again formed a quiet, indecisive candle. The dollar correction has pulled the pair back from the resistance around the 112.20 pivot and there is seemingly a near term drift at play now. This is reflected in the unwind of the momentum indicators. There is an increasingly benign look to Dollar/Yen forming and whilst the support at 110.85 remains intact there is little real negative technical impact. The hourly chart shows the market drifting back towards initial support at 111.20/111.35 as a mild negative near term bias plays out. Initial resistance at 111.90.
The breakout back above $1276/$1280 means that this becomes a key area that a prospective near term recovery needs to protect. The strong negative candle yesterday runs the risk that the rebound has already played out. There is a degree of uncertainty as there is still room to unwind to the nine week downtrend (at $1297 today). However, the RSI failure at 50 is a worry, whilst a second negative candle today would likely form another “bear kiss” on MACD lines. The hourly chart has broken the four day recovery uptrend and recovery hourly momentum has turned corrective again. A close back under $1276 would be a bear signal now and re-open the low at $1266. Resistance from Friday’s high at $1289 comes a shade under the old near term pivot resistance at $1290. A failure of the early move higher today would be seen as an opportunity.
The oil price recovery is under threat but for now is clinging on. A run of accelerating bear candles has been halted by yesterday’s mild gain, but oil continues to test the four month uptrend. The near term reaction low at $63.00 was breached intraday last week (to $62.30) and although it holds on a closing basis, momentum indicators are showing the strain. Stochastics are accelerating lower to levels not seen since early February, MACD lines have turned lower and RSI is on the brink testing the low 50s. If the RSI fell decisively below 50 is would be a four month low. A closing breach of $63.00 would continue the correction, opening $61.80, a move below which would turn the market corrective. Closing well below the 61.8% Fibonacci retracement at $63.70 also opens for a move back towards 50% Fib at $59.60. Initial resistance at $64.80.
Dow Jones Industrial Average
Even though the S&P 500 is consistently testing highs, the Dow remains a little way off the pace. A very quiet session of just half the Average True Range of 160 ticks has seen the Dow consolidate once more. Essentially there is still little to be overly concerned by yet, with momentum indicators retaining their positive configuration. However, there is still a lack of drive in this move higher. Last week’s low at 26,310 takes on a near term importance as initial support, but as the market continues to trade above all rising moving averages, the outlook remains positive to buy into weakness. A move above last week’s high at 26,695 would see the bulls re-engage with the all-time high at 26.952 again. This remains the preferred test. Below 26,062 would mark a material shift in outlook.