Risk aversion is building once more amidst the ongoing US/China trade dispute and political uncertainty in the UK. There is little prospect of any resolution of the US/China trade negotiations any time soon. There has been nothing scheduled between the two sets of officials for the time to come, so talks seem to be on ice for the foreseeable future. Furthermore, there is a consistent drip of negative newsflow as the US pushes back against Chinese tech integration. This all makes a trade deal even less likely in due course. The EU goes to the polls today and eyes will be on what sort of advances the populist parties can make. However, UK politics has the added dimension that Prime Minister May is now surely on the brink of resignation. After her latest attempt to appease on her Brexit deal ended up alienating almost everyone, another key member of her Cabinet has resigned. Talk is that Mrs May will be gone possibly y the weekend. This raises the prospect of her replacement, who is likely to be more Eurosceptic and more likely to court the prospect of a no deal Brexit. Sterling is suffering. Back in the US, just to give some semblance of calm, the FOMC meeting minutes again reiterated patience. Seeing recent the inflation as transient, the FOMC sees the patient approach will “likely remain appropriate for some time”. Although Treasury yields have slipped again on the creep back in of risk aversion, the minutes have again bolstered the dollar.
Wall Street fell back slightly last night with the S&P 500 -0.3% at 2856, whilst the risk aversion is pulling US futures further lower today by around -0.6%. Asian markets have been broadly weaker overnight with the Nikkei -0.8% and Shanghai Composite -1.0%. In Europe, the markets are also widely lower in early moves, with FTSE futures -0.5% and DAX futures -0.6%. In forex, there is an ongoing sell off on GBP amidst the political uncertainty, whilst USD remains an outperformer in the wake of the Fed minutes. It is also interesting to see CAD dropping back as oil comes under pressure. In commodities, there is a degree of consolidation in gold today with respite from the recent move lower. However, oil is under pressure on the surprise inventory build in the US this week.
Today is an important day on the economic calendar with the forward looking flash PMIs in focus. Eurozone flash Manufacturing PMI is at 0900BST and is expected to improve slightly to 48.1 (from the final reading of 47.9 in April). Flash Eurozone Services PMI is expected to improve slightly to 53.0 (form a final reading of 52.8 last month). Tis would all mean that the flash Eurozone Composite PMI is expected to tick slightly higher to 51.7 (from 51.5 in April). It is also important to keep an eye on the German Ifo data also at 0900BST. German Ifo Business Climate is expected o slip a shade to 99.1 (from 99.2 in April) with German Ifo Current Conditions expected to improve slightly to 103.5 (from 103.3 last month). US Weekly Jobless Claims are at 1330BST and are expected to increase slightly to 215,000 from last week’s 212,000. The US Flash Manufacturing PMI is at 1445BST and is expected to drop back slightly to 52.5 (from last month’s final reading of 52.6). US Flash Services PMI is expected to improve slightly to 53.2 (from 53.0). US New Home Sales for April are forecast to decrease to 675,000 (back from 692,000 in March which was a 15 month high).
Chart of the Day – DAX Xetra
The uptrend channel remains intact, but the consolidation on the DAX in the past week is beginning to be a concern. We highlighted the strength of the renewed buying as a series of key supports kicked in last week. However, resistance has since formed at 12,310 with the impetus of the run higher dissipating. Although the DAX does not have the potential negative configuration of the CAC, the bull failure is beginning to weigh on the outlook. The RSI has rolled over at 60 with MACD lines still falling and Stochastics crossing back lower. The importance of Monday’s low at 11,994 is growing now as a breach would ramp up pressure on the near five month uptrend (today at 11,960). The hourly chart reflects an increasing neutral configuration. Watch yesterday’s high at 12,211 is initial support.
The dollar strength continues to be a key factor here as EUR/USD remains under pressure. This is reflected in another bearish on day candlestick and the negatively configured momentum indicators. A period of minor near term consolidation has set in, but this looks ready to pull lower again. The RSI is falling into the 30s now, MACD lines in decline following their recent bear cross and Stochastics are also pulling lower again in what looks to be a “bear kiss”. Resistance is building between $1.1175 (the old key floor) and $1.1185. There is support between $1.1130/$1.1140 but this is creaking and a move to test $1.1110 is preferred. A breach of $1.1110 would open $1.1000. The hourly chart shows consistent negative configuration on momentum as the hourly RSI fails around 50/60 and MACD lines failing around neutral. Intraday rallies are a chance to sell. Above $1.1185 resistance is $1.1220.
The outlook for sterling looks increasingly terrible. A significantly underperforming sterling (on horrific UK politics) coupled with renewed dollar strength adds up to continued Cable selling pressure. Yet another bear candle yesterday and pulling decisively clear of the latest support to be broken at $1.2700 means there is very little until $1.2475. Momentum looks deeply negatively configured. RSI is falling around 25 (but has been known in the serious selling phases, of which this is one, to go to 20). Furthermore, Stochastics and MACD are also extremely negatively set up. Initial support is at $1.2620 from yesterday’s low. However, when things become this extreme there is always the potential for a snap rally, so caution needs to be taken. Politics in the UK can be a volatile force with regards to sterling. There will come a point at which Mrs May’s departure will have been fully priced in. Initial resistance is at $1.2700 now with $1.2770 and $1.2815 further barriers overhead.
A little bit more risk aversion creeping back into the market and the yen begins to rebound. However, this is not yet a game changer on Dollar/Yen. A negative daily candle yesterday and a slip at the open today brings the market back to the mini uptrend of the past week. However, with a positive set up across momentum indicators this is a chance to buy. With a MACD bull cross and Stochastics rising encouragingly, the recovery is positively configured. The breakout above the 109.70/110.00 pivot is a basis of underlying demand now. The hourly chart shows a retreat may have slipped below 110.25 but the outlook remains positive. Hourly MACD lines are crossing back higher and today’s initial low at 110.10 is building support. Resistance is still at 110.70 but this move back towards the near term breakout looks to be an opportunity for the bulls. Below 109.70 would change this view.
Gold remains on the brink as the market consolidates around the support of the nine month uptrend (today at $1273). However, with the negative strength of momentum indicators not giving up, the pressure is mounting on the trend. MACD lines have bear crossed and Stochastics continue to fall with downside potential. Yesterday’s tiny daily range ($6 when the current Average True Range is over $10) was a bit of a throwaway session, however, the hourly chart shows intraday rallies remain a chance to sell. The pivot at $1278 continues to cap the upside and the hourly RSI continues to fail around 60. Expect further pressure on $1269 from Tuesdays low, and the key support at $1266 in due course. Further resistance is at $1289. A closing breach of $1266 opens $1240 as the next key support area.
With the surprise build in the EIA inventories confirming the API build, oil has turned corrective. Given the magnitude of yesterday’s bearish candlestick and the further move lower this morning, this is a development that the bulls will be increasingly worried about. With the market already beginning to roll over in recent days, the pressure is mounting on key near to medium term support. Closing decisively below support at $62.50 has quickly fallen to eye $60.60 . However, the key May low sits at $60.00 and a breach would be a significant outlook changer. The hourly chart also shows that rallies are increasingly being sold into now. Initial resistance is $61.40/50 under the more considerable $62.50/$62.70 which is overhead supply.
Dow Jones Industrial Average
Losing 100 ticks on the Dow used to be a big thing. In the context of contemporary moves on the market, it is small fry. A minor blip with the market forming a very slight negative candlestick has seen the Dow slip back. In the recovery of the past week or so, this is a move back to a near term uptrend. However, this outlook is set to come under pressure today. Yesterday’s move filled Tuesday’s bullish gap at 25,752, however, could this gap now be closed today? With futures pointing lower, the bulls will have to fight to maintain the recovery momentum. The uptrend is likely to be broken and subsequently a bear close of the gap would increase concern for the recovery. Primarily the aim for the bulls will be to maintain support of the higher low at 25,560. Also a second negative candlestick formation would also be a concern. A close below 25,560 would re-open the crucial 25,210 neckline support. Resistance is at 25,957 from last week’s high, whilst the key near term resistance is a neckline of a potential base at 26,020. The bulls still have work to do to build on this recovery.