In the past week there has been a 180 degrees flip on expectation of how the US/China trade talks will be resolved. With the US threatening to ramp up tariffs, this is a far cry from last week, where according to Steve Mnuchin the talks were entering their “final laps”. US trade representative Robert Lighthizer, has re-iterated the Tweets of President Trump and said that the US will increase tariffs on $200bn of Chinese imports from 10% to 25% on Friday. This means that the two day meeting with Chinese vice Premier Liu He is crucial this week. Markets are increasingly nervous over the trade issue again, with traders opting for the safety of government bonds and the yen. Wall Street fell sharply last night, and Asian markets are also being pressured. With increased market fear (VIX volatility is spiking to three month highs), these moves could continue at least for the next day or so. Perhaps the trade negotiations will be constructive enough to enable Trump to put off his tariffs again. This could calm sentiment again perhaps on Thursday or Friday, but for now the situation does not look good. Given the sharp run higher in equities over the first few months of the year, there will likely be a sharp re-pricing of risk again should the talks fail. Staying with trade, the China Trade Balance came out overnight and showed a sharp drop in the surplus to +$13.84bn in April (+$35.00bn exp, from +$32.67bn in March). This was driven by a surprise increase in China Imports of +4.7% (-3.6% exp, -7.6% last) whilst China Exports fell unexpectedly by -2.7% (+2.3% exp, +14.2% last). There was also a surprise rate cut from the Reserve Bank of New Zealand (no change expected at +1.75% exp, +1.75% last). This took rates to a record low and is driving underperformance of the Kiwi this morning. The RBNZ notes that there were “large” uncertainties over rate projections, leaving the door open to further possible cuts.
Wall Street closed sharply lower with the biggest one day drop on the Dow since early January, whilst the S&P 500 lost -1.6% at 2884. US futures are showing a degree of support today around +0.1% but little real sign of any buying pressure returning yet. Asian markets were mixed to lower with the Nikkei -1.5% and Shanghai Composite -0.6%. European markets also have a mixed look to them, with FTSE futures -0.2% and DAX futures +0.1%. In forex, there is still a safe haven bias, with JPY being the main outperformer. AUD is an interesting outperformer too after the Chinese trade data showed imports better than expected. NZD is underperforming, however, the decline is way off earlier session lows. In commodities, the safe haven moves are helping gold pull mildly higher, whilst oil is just hanging on this morning after yesterday’s decline.
It is a another light day on the economic calendar, with the ECB monetary policy meeting accounts being the main focus. The minutes of the meeting are released at 1230BST and as ever the focus will be on the discussion over subdued inflation. Also look out for commentary on a prospective tiering of the deposit rate and the TLTRO. The EIA oil inventories are at 1530BST with crude stocks expected to build by +0.7m barrels (+9.9m last week). Distillates are expected to drawdown by -1.1m barrels (-1.3m last week) and gasoline drawdown by -0.9m (+0.9m last week). The comments of the FOMC’s Lael Brainard (permanent voter, dove) are worth looking out for at 1330BST.
Chart of the Day – FTSE 100
UK large cap equities are under pressure. The FTSE 100 Index has turned into reverse in the past couple of weeks, but the move is now accelerating through key technical levels. Turning lower from the April high of 7529 a downtrend of lower highs is now forming. Yesterday’s decisive bear candle now brings the correction to a new phase. Breakout support at 7367 was breached last week, along with two separate uptrends in yesterday’s session alone. A four month uptrend broke but also a shallower nine week uptrend channel too. This move comes with confirmation on momentum. The RSI is decisively below 50 to a three month low. Also MACD and Stochastics lines are increasingly corrective. This suggests that intraday rallies back towards the two week downtrend (currently 7379) are a chance to sell. The hourly chart shows a pivot at 7350 as initial resistance, with any move to unwind the hourly RSI towards 50/60 as a selling opportunity. The next support is around 7150 and the March low.
With the dollar moves increasingly uncertain on a near term basis, EUR/USD has formed into a period of consolidation. The old key lows between $1.1175/$1.1210 are a pivot area and overhead supply as the market considers the next move. Each of the past six sessions have seen the market close between $1.1175/$1.1220 as this consolidation has built. There is a very slight positive bias that is arguable with the recent candlesticks, something that is beginning to pull momentum indicators (MACD and Stochastics) mildly higher. However, the resistance of a six week downtrend comes in at $1.1235 today and there is still a negative outlook on a medium term basis that would suggest rallies will struggle for traction. The hourly chart shows support at $1.1165 and $1.1135 above the crucial $1.1110. The resistance is building at $1.1265.
Friday’s sharp bull candle has not given the bulls the encouragement they were hoping for and the market has since spent the time unwinding much of the move. Two rather negative looking candles are now weighing on the positive outlook. The uptrend of the past two weeks comes in at $1.3050 and is now being tested. The recovery has held above $1.3000 (if you include the spike low at $1.2990 on Friday) in the past week, but given the momentum indicators are beginning to roll over again, this improvement is beginning to wane. The hourly chart momentum configuration is beginning to look less positively configured as the RSI and MACD lose their impetus. It does seem as though neither the dollar nor sterling bulls are especially dominant for now and this could be part of a consolidation phase again. Waiting for political development on both US/China trade and Brexit are key factors in this. Above $1.3130 again would certainly improve, whilst below $1.2990 would see the Cable bears in control.
With the safe haven draw of the yen at a time where the dollar is struggling, the outlook for USD/JPY is under pressure. Bearish candles are racking up as intraday rallies are being sold into. The market is now trading below all the moving averages whilst momentum indicators turn increasingly negative. The RSI is now below 30, Stochastics falling below 20 and MACD lines accelerating below neutral. This is all set up to sell into strength. A test of the key low from March at 109.70 look imminent. A breach would signal a decisive negative shift in technical outlook, forming a three month top pattern. The concern is that momentum indicators are leading the market for the breakdown. Below 109.70 opens 108.50 as the next support. Resistance is at 110.85/111.05.
Although the gold bulls are trying to recover, there is a concern that this is a struggle for upside traction and will be the source of the next chance to sell. The trend of lower highs in the past 10 weeks now comes in at $1291 whilst the top of a recent mini range is resistance at $1289. The fact that this is also all now playing out underneath the long term pivot band $1300/$1310 (which is resistance) is also a sign that the bulls are up against considerable overhead supply. Momentum indicators have ticked higher with the rebound from $1266 last week, but this is still just unwinding a bear trend positioning. Although the sensitive Stochastics have swung higher, the feeling is that the MACD and RSI lines are still struggling to get going. The near term move is higher, but given the safe haven bias throughout markets and dollar struggles, gold should be tearing higher. For now, it is now. Rallies remain a chance to sell. The hourly chart shows a pivot around $1278 in the near term range.
Following the small top pattern and formation of lower highs, the market is turning increasingly corrective. This is the first real time the market has posted lower highs and lower lows in 2019. A new downtrend is also ow building. A top pattern completed below $62.30 to imply a move back towards $58.00 and give the renewed bear candle yesterday, this move is gathering momentum. The market has closed below $61.80 (another near term support) and is now testing the breakout range between the 50% Fib at $59.60 and the breakout at $60.40. A breach of $59.60 would open $58.00 which is the next pivot support within the old uptrend. Momentum indicators are increasingly corrective and suggest that rallies are becoming a chance to sell. The resistance around $63.00 is also increasingly important following Monday’s failed rebound.
Dow Jones Industrial Average
The Dow is turning increasingly corrective. Peaking at 26,695 the market has now broken the first key higher low of the early 2019 rally, at 26,062. It is also now building new lower highs with Friday’s high at 26,535. Yesterday’s bear candle was the biggest one day loss since January and momentum in the move lower is beginning to develop. This comes with the RSI at 40 and its lowest since January and the MACD lines falling in the wake of a bear cross. Losing the support at 26,062 opens the key March support band 25,210/25,370. The hourly chart shows resistance 26,035/26,180 as overhead supply now.