As the dust settles, a continued run of risk aversion and safe haven bias continues to trend through major markets. Whilst Treasury yields continue to fall and the yield curve continues to move ever further into inversion, the risk appetite will struggle. This is reflected in the tendency for the yen to outperform and for gold to outperform. Signals of risk aversion are also coming in the continued weakening of the Dollar/Yuan fixing and the rate continuing to move to highs not seen for more than a decade. This sentiment would not have been helped either by the renewed concern yesterday of the direction on Brexit. In the bubble of elevated UK political uncertainty, nascent Prime Minister Johnson has called to suspend Parliament in a move to restrict opposition attempts to legislate against his threat of a “no deal” Brexit. It may now force the hand of opposition parties and draw a vote of confidence in the Government which paradoxically could even play into Boris Johnson’s hands. This increases the potential for a hard Brexit but also the potential for a general election. With political risk and uncertainty elevated, sterling comes under pressure as the probability for either scenario increases. For now though, this morning, sterling holds ground.
Wall Street closed with gains (S&P 500 +0.7% at 2888) but US futures are back lower by -0.2% early today as risk appetite diminishes again. Asian markets still don’t know what to do, once more cautious with the Nikkei -0.1% and Shanghai Composite also -0.1%. European futures are weaker with FTSE futures -0.3% and DAX futures -0.2%. In forex, there is a safe haven bias, with JPY and CHF mildly outperforming, whilst AUD and especially NZD are weakening again. In commodities, gold is supported higher once more whilst oil is once more showing signs of losing momentum.
The big focus for the economic calendar today will be the second reading of US Q2 growth, however, German inflation could also cause a stir. Regional German inflation is released throughout the morning, with the country wide German CPI announced at 1300BST which could give an insight into the Eurozone data on Friday. German CPI is expected to fall by -0.1% on the month of August (following +0.5% in July) which would pull year on year inflation down to +1.5% (from +1.7% in July). The Prelim US GDP is at 1330BST which is expected to show a slight drop back to +2.0% (from the +2.1% Advance reading of Q2 GDP, and the growth of +3.1% in Q1). US Weekly Jobless Claims are at 1330BST and are expected to increase slightly to 215,000 (from 209,000 last week) still below the three month average of around 220,000.
Chart of the Day – Silver
Silver has been busy bursting through key levels of resistance throughout this past week. The market has added around 7.5% in the past four sessions, exploding through resistance at $17.35, $17.70 and now the September 2017 resistance at $18.20. However, having run so strongly, there is a risk now of this move becoming exhausted. Breaking out above a steep uptrend channel is bullish but the market is trading consistently outside its Bollinger Bands which are at their widest for well over two years. The RSI over 79 is also as stretched as it has been for three years. Whilst these are bullish conditions, this also points to a run higher in its maturity and an exhaustion could be close. However, this does not necessarily mean a decline, exhaustion could simply take hold as a consolidation. Therefore, we need to watch the hourly indicators for near term corrective signals. On the hourly chart there has been no intraday key reaction low breached on silver for over a week. So watch $18.14 support today. Also the hourly RSI is showing signs of possible negative divergence and a move below 50 would be a trigger. Hourly MACD lines below neutral would also be a warning. A breach of support at $18.03 from yesterday’s low would be confirmation of a near term topping out and potential trigger for a reversal. Key resistance of the 2017 high of $18.65 is approaching fast.
EUR/USD retains a negative bias in its near to medium term outlook. Trading below a clutch of falling moving averages and a continuation of negative medium term configuration across momentum indicators maintains this view. However, the selling pressure still seems to be limited. Once more, in the past couple of sessions, there has been just a mild drift lower and now this morning, a tick back higher. The lack of conviction on the dollar bull position is clear. There is sizeable resistance of overhead supply that has built up between $1.1160/$1.1200, whilst the barrier of a two month downtrend comes in around $1.1190 today. This would all restrict any attempted recovery. On a nearer term basis, the hourly chart shows resistance forming around $1.1100/$1.1115 again. However, hourly momentum only shows the mildest of negative configuration. Initial support at $1.1070 protects $1.1050 and the key low at $1.1025. We continue to look for rallies to fade and selling into strength, but this is a very slow burner.
With the politics of Brexit again coming to the fore yesterday, Cable volatility has ramped up once more. The prospect of a recovery base pattern on Cable has been battered and bruised but as yet is not quite dead. The past three weeks have been showing recovery potential and moving above resistance at $1.2210/$1.2250 encouraged the bulls. However, the intraday spike down to $1.2155 seriously questions this potential. However, closing around the $1.2210 breakout yesterday leaves the bulls still with a chink of light. Looking at the momentum indicators though, this recovery prospect would be dashed were there to be another negative candle and close lower today. The Stochastics are rolling over and close to a bear ross, whilst RSI is topping out around 50 and MACD lines losing momentum under neutral. The hourly chart shows support at $1.2180 needs to hold and a close below would confirm the bulls having lost their recovery. Resistance at $1.2250 once more.
There was a hint of dollar regaining strength throughout yesterday but given the safe haven bias in the market, this barely made a dent on Dollar/Yen. A mild positive candle and a few ticks higher into the close but the weight of resistance overhead is prohibitive. With the early yen strength pulling the market lower again, it is still on a bear drift back towards a test of 104.50/105.00. Negative configuration on momentum indicators, with the RSI stuck and struggling under 50, whilst the MACD lines also show signs of rolling over again. Even if the market can muster some positive intent today, given the resistance around 106.75 and the falling 21 day moving average (currently around 106.20) seemingly used as a basis of resistance again, the bears remain in control. Initial support at 105.60 protects 105.00 and 104.45 being tested.
The bulls may not be in complete control of the market, as shown by yesterday’s mild close lower, however there is an undoubted continuation of the strategy to buy into weakness. This week’s breakout above $1534 now leaves gold forming a new basis of a support zone $1525/$1534 which the market continues to buy into. Momentum indicators remain positively configured on a medium term basis, whilst also retaining upside potential too. The hourly chart shows that $1525 was a base of support earlier in the week and now the old high of $1534 is taking form as a higher low. Hourly RSI is consistently above 50 and MACD above neutral pointing to classic bull market conditions. Above $1547 re-opens $1555, but realistically there is little resistance of significance as it dates back to April 2013. We continue to see weakness as a chance to buy.
The surprisingly large EIA crude inventory drawdown (although largely anticipated in the wake of the previous day’s API inventories) enabled WTI higher yesterday. However, technically, this was a struggle into the close and given the market has consistently used rallies as a chance to sell, this is a market that looks primed for another bull failure. A six week downtrend is breaking, but there is nothing on momentum indicators that suggests a breakout is sustainable this time around. RSI is still stuck around 50, whilst MACD lines are below neutral. The run of lower highs remains intact too. Yesterday’s intraday high of $56.75 was under highs of recent weeks at $57.15 and $57.50. A close back lower today would suggest that the bulls are struggling once more. We expect a retest lower, with $52.95 likely to come back under scrutiny in due course.
Dow Jones Industrial Average
The past few sessions have shown just how difficult it is to trade Wall Street on a day to day basis right now. There is a lack of certainty and this is showing through with the run of contradictory sessions as markets flip flop around looking for sense in the macro picture. Trading first higher, then lower and higher again this week, the last two with fairly solid and decisive candles, but lacking real direction. This is all playing out within the confines of a three week range of volatile trading between 25,340/26,425. Allied to this, momentum indicators are increasingly indecisive too, with the MACD lines having converged to flatten, whilst RSI and Stochastics hover around neutral. Given the market is trading under the moving averages there is a very marginal negative bias to the outlook, but this remains a market in search of definitive direction. The hourly chart shows support initially with yesterday’s low around 25,635 which helps to bolster the range lows between 25,340/25,510. Resistance mounts up around 26,400. This remains a market very difficult to call.