Back when they were good, the line from an early U2 song went, “Nothing changes on New Year’s Day”. It would appear that Bono may have been on to something there, as financial markets seem set to continue the same themes as we closed with last year. Market sentiment remains weak and so the safe haven plays are benefitting. There may be warm words from both Washington and Beijing over the trade dispute, but there are concerns over a China slowdown as the weaker than expected official manufacturing PMI has been reflected in the Caixin number, both of which are now in contraction territory below 50. The trade dispute is finding warm words, but markets seem wary to take any positives from this too soon. The US Government remains in partial shutdown. A wild, wild ride in equities from the thin trading markets of Christmas silly season leaves a legacy of caution. Treasury yields are lower, so the dollar is suffering as yield differentials tighten, whilst the safety of the yen and Swiss franc mean that they are in favour. The euro is an outperformer as European spreads tighten as the Italian budget has passed through parliament, whilst sterling still trades with a Brexit handbrake firmly applied. The manufacturing PMIs are in focus today for European countries (the US is tomorrow) and the extent of a burgeoning slowdown will be the focus.
Wall Street closed the final session of 2018 with a gain of +0.8% on the S&P 500 (at 2507) which after a wild December left the market around -6% lower for the year. Futures are though back lower by -0.9% early this morning. In Asia, Japan was closed for public holiday, whist the Shanghai Composite was down -1.1%, whilst European markets are dropping again in early moves, with FTSE futures and DAX futures both around three quarters of a percent lower. In forex, the euro is gaining ground, whilst the safe haven yen is the big winner. The Aussie and Kiwi are underperforming. In commodities, there is a mixed look to gold (mildly higher) and silver (mildly lower), whilst oil is back over -1% lower once more as.
It is the first trading day of the year, so a time for manufacturing PMIs. The final Eurozone Manufacturing PMI for December is at 0900GMT and is expected to be 51.4 (unrevised from the 51.4 flash reading and down from 51.8 final reading from November). The UK Manufacturing PMI is at 0930GMT which is expected to fall back to 52.5 (from 53.1 in November). .
Chart of the Day – USD/CHF
The negative market sentiment running through markets is reflected through the Dollar/Swiss pair which is in decline as the safe haven Swissy finds ground. This is shown with three consecutive negative candles to end 2018 and a close below the confluence support around 0.9835 which was the December lows and the 50% Fibonacci retracement of the 0.9540/1.0128 rally. Closing clear of the 50% Fib level now means that a move to the 61.8% Fib level at 0.9764 is now on, whilst 76.4% Fib is at 0.9768. This is also the support of the old September highs and now look set to be tested. With a succession of lower highs in recent weeks this would suggest that rallies remain a chance to sell. Anything to the 38.2% Fib at 0.9903 is now a chance to sell. The last two highs have failed at 0.9875/0.9885, whilst the 50% Fib at 0.9835 is a basis of initial resistance this morning. A move above 0.9963 would abort the move lower.
As Christmas was approaching, the euro was threatening to put together a decisive recovery move. Although this move was initially rebuffed, into the new year, there is another swelling of support for the euro which is pulling the price back towards $1.1500 again. In November, EUR/USD formed the latest key lower high at $1.1500 but since a bottom at $1.1213 started to form, the recovery has been progressing. This is now showing through with decisive improvement through momentum indicators, with the RSI into the 60s, Stochastics into the 80s and MACD lines rising above neutral. The early move of 2019 is higher and a close above $1.1500 would be key moment. Already the improving technical suggest that corrections are a chance to buy. Initial support is at the previous resistance around $1.1420/30. Above $1.1500 is initial resistance at $1.1550 and the next key lower high is $1.1620. A move below $1.1340 would scupper the bull momentum.
There was a shift in the negative sentiment just prior to Christmas as the six week downtrend was broken. Although the bears no longer seem to be in control, there is still a sense that the bulls cannot break free quite yet. There is resistance between $1.2840/$1.2925 initially as the barrier which needs to be overcome in order for there to be a decisive improvement taking hold. There is an upturn in the momentum indicators, but again, more needs to be seen otherwise this mini rally will simply be seen as another chance to sell. The higher low at $1.2615 needs to hold now as the first move. A close above $1.2850 would be a good start too.
The outlook for the dollar remains under pressure as the latest break of support has been seen at the end of 2018. With three strong bear candles pulling the market once more decisively lower, a lower high has been left at 111.40 which reinforces the overhead supply that resides now following the decisive break down below 111.35, the old October low. Momentum indicators are decisively negatively configured with the MACD and Stochastics continuing to accelerate lower. Closing below the support 109.75/110.00 was the lowest close since mid-June and opens the next key reaction low at 108.10. It also means that there is a key lower high in place at 111.40 which drives a negative outlook and means that rallies will remain a chance to sell. Markets have been thin over the Christmas period will mean that the market reaction in the next few days will be key to the medium term outlook. The reaction this morning does not bode well. Another lower high failure rally at the old support of 109.75 will be very concerning for the bulls.
The gold rally ran consistently higher over the thin trading of the Christmas period, but included the move higher through resistance at $1266 and up to the next band of overhead supply of the old May 2018 low at $1281. This resistance is now being breached as the new year trading seems to be serving up more of the same. This means the market is now open for a run up towards the old long term pivot band $1300/$1310. Momentum with this run higher is the strongest since the bull runs of January 2018 and given that this is such a strong trending move, there is little real reason to back against the move continuing. This is despite the RSI being over 70, as the MACD and Stochastics are accelerating higher still. Even though, corrections will still be seen to be a chance to buy. There is now decent breakout support at $1250/$1266 which will be seen as a buy zone for any slippage now. The hourly chart shows initial support $1275/$1279, with the latest key reaction low on the daily chart at $1233.
The concern that there is with the bear market on oil, is that there is a consistent theme that once old support has been broken, it becomes new resistance. In the final week before Christmas, oil breached $49.40 and subsequently $45.60, only for this to become a basis of resistance for a rebound. The support at $42.05 is key from June 2017 as the market bounced from $42.35 but the overhead supply seems to prevent any meaningful recovery from gaining momentum. With technical indicators remaining negatively configured, rallies remain a chance to sell. If there were to be a breach of $42.05 then the way is open for the next key support at $39.20. Resistance is initially around $45.20, with $47/$48 then overhead, whilst $49.40 is now key.
Dow Jones Industrial Average
There were a series of key lows throughout 2018 between 23,345/24,000 which means that this is now a basis of key overhead supply. The incredible rally in the final days of 2018 from the low at 21,172 added over 10% back on the market but with the overhead supply and momentum indicators looking simply to unwind, this looks to be a rally that may begin to struggle. Unless the market can decisively move above 24,000 in the coming sessions, this is a move that the bulls may struggle to hold on to. Initial support is at 22,980. Let’s see how the market responds. If seen as an opportunity to lighten up positions again, this rally may not last long.