A clutch of negative factors continue to drive the trends of recent market moves. The US/China trade dispute continues to tread down a path of deterioration as the two sides implement tariffs and struggle to agree on a potential meeting. The economic resulting malaise is shown bare through continued worsening manufacturing PMIs. Furthermore, the worsening political outlook for the UK’s exit from the European Union is beginning to gather pace. The UK Parliament returns from its summer recess today and this means that the race to thwart Boris Johnson’s plans to keep a “no deal” Brexit in play will begin in earnest. It appears that any push to legislate for preventing a “no deal” Brexit will be swiftly countered by Johnson pushing for an October General Election (Monday 14th October has been suggested). Brexit developments could now move at a pace this week. The market reaction for all of this is for yuan weakness, euro weakness and sterling weakness. The flip side involves the benefit of safer haven assets, with demand for government bonds high, gold supported, along with the Japanese yen but also an increasingly outperforming the US dollar. There is one glint of light this morning, from Australia. The Reserve Bank of Australia held rates steady at +1.00% (no change expected at +1.00%). After successive 25 basis points rate cuts in June and July, the RBA has held fire and “will continue to monitor developments” in an attempt to counter sluggish wages and slowing economic growth. However, the RBA perhaps did not sounds as cautious as the market had expected, and this is helping the performance of the Aussie dollar this morning.
Wall Street was mixed into the close on Friday with the S&P 500 +0.1% at 2926, but with US futures falling away early today by -0.4% the pressure is on a correction. Perhaps surprisingly, Asian markets have held up well with the Nikkei and Shanghai Composite both all but flat. European markets are also mixed in early moves although it is interesting to see the negative correlation of sterling and FTSE 100 playing out as FTSE futures +0.3%. In forex trading we see JPY and USD performing well, along with the AUD, whilst GBP is facing mounting selling pressure. In commodities, gold is slipping on the stronger dollar, whilst oil is also dropping back slightly.
With yesterday being Labor Day in the US, the big focus on the economic calendar is ISM Manufacturing. First up though is the UK Construction PMI at 0930BST. The construction industry accounts for around 7% of the UK economy, but has been on its knees in recent months. Consensus expects the Construction PMI to improve marginally to a still very weak 45.9 (from 45.3 in July). Then attention turns to the US ISM Manufacturing which is at 1500BST and is expected to tick the slightest amount lower to 51.1 in August (down from 51.2 in July).
Chart of the Day – EUR/JPY
We continue to see Euro/Yen breaking ever lower within the bear trend. Lower highs and lower lows where consolidations are sold into and the market is breaking to levels not seen since April 2017. A test of the old key April 2017 low at 114.80 looks likely in due course. We spoke last week of the breakdown below 117.50 support and although a downtrend was briefly breached, the run of falling resistance has left a key area of resistance 117.50/118.20. Another run of negative candles is forming and has now broken below last week’s low of 116.55 to open the downside once more. Momentum indicators remain deeply negatively configured with the RSI barely able to peek above 40 before the sellers resume control, whilst the MACD and Stochastics lines have turned lower again. On the hourly chart there is a band of resistance has built between 116.85/117.10. Yesterday’s close below 116.55 leaves the market with almost no support until 114.80.
A run of bearish candles continues as the euro slides to its weakest level since May 2017. Breaking decisively below $1.1025 last week, has opened the way lower once more and the next real support at $1.0850 is now within sight. EUR/USD has now closed lower on each of the past six sessions and has opened decisively lower once more today. There has become a deeply negative configuration on momentum but the indicators are beginning to look historically stretched. The RSI will often see 30 limiting the downside before consolidation or rebound. Falling decisively below 30 leaves it at a 12 month low. The feat is that in May 2018 the RSI spent much of the month below 30 as the market kept falling. MACD and Stochastics are also negatively configured. There is resistance now $1.1000/$1.1025 to restrict any attempted recovery.
Cable has now been falling for the past four sessions and looks under pressure once more today. The market is testing the key August low at $1.2013 as momentum has swung decisively negative again. The Stochastics are accelerating lower, whilst the RSI is falling below 40. The concern is that if the MACD lines bear cross which would be a strongly negative signal. Selling pressure is mounting with the $1.2013 August low broken this morning but also pressure on $1.1980 which is the post Brexit low (from normal trading conditions, outside the October 2016 flash crash). Essentially, a closing breach of $1.1980 opens the floodgates of potential weakness. There are upper shadows on each of the past three sessions which shows that intraday rallies are being consistently sold into. The hourly chart shows initial resistance $1.2075/$1.2100, with 40/50 on hourly RSI consistently an area where the rallies are being sold into.
The bulls continue to be resisted by the overhead supply between 116.75/117.50 which is still rebuffing any recovery. Once more last week’s rally has faltered over the past couple of sessions, with momentum of the move dissipating. The question for today’s session, is whether the Labor Day public holiday in the US caused the negative drift yesterday and whether, with a full complement of traders, is this going to be another slip lower taking hold. We continue to view strength as a selling opportunity for pressure back towards 104.45/105.00. The RSI remains stagnant under 50 whilst the pick up on MACD is slow and painful to suggest this is not a burgeoning recovery. The Stochastics are also once more threatening to roll over and cross lower. The hourly chart also shows that the bulls are struggling with hourly RSI under 60. There is a band of support 105.60/105.90 helping to prevent a retest of the lows again.
The mild drift consolidation of the past week has seen the market begin to steady once more at higher levels. The price action prior to the latest breakout found support between $1481/$1492, and now the market is looking to form a new higher low above the $1510 old pivot of the previous range. In recent months, momentum indicators have often used the periods of consolidations to unwind and this looks to have one more been the case. The RSI is holding above 60, whilst MACD lines are positioning similarly to where they were during the July consolidation. The hourly chart shows the old $1510 pivot, but in the past couple of sessions a basis of support has formed at $1517 before yesterday’s positive candlestick. A close back above $1534 today with another positive candle would suggest the bulls are building their support again and looking to move the market on once more. We continue to see the rising 21 day moving average as a good gauge of support, currently around $1513.
A six week downtrend may have been broken last week but the bulls have once more been unable to gain any sustainable control. The resistance of highs left during August at $57.50 and $57.15 have been added to by last week’s high at $56.90. As yesterday’s negative candlestick has ushered in the market to reverse once more, there is a suggestion that there will now be renewed weakness towards the $53.00 low area again. This is playing out under the four month downtrend (currently $57.30). However, what is also noticeable is that there is less conviction within the bear legs of the past three weeks. Momentum may have a slight negative bias but is not trending as negatively any more. Is this becoming a bear market in consolidation?
Dow Jones Industrial Average
Even though broader risk sentiment remains cautious across asset classes, we see Wall Street pushing higher for a near to medium term breakout. For the Dow this comes with an intraday break above 26,465 yesterday. This is the market testing the top of a band of resistance 26,425/26,465. However, a drift back into the close could not quite hold the breakout. Looking at the improvement across the momentum indicators, the market is prepared for a positive breakout. RSI and Stochastics are both rising above 50 at four week highs, whilst the MACD lines are bull crossing. Having attempted to breach the resistance, the Dow now runs the risk of leaving a false breakout. US futures are looking weaker by around half a percent today, so the bulls will need to respond. There is a gap open at 26,040 still to be filled too. Leaving a high from yesterday’s session at 26,515 has added further resistance now in the band 26,425/26,515. The question is whether the bulls can sustain the improved momentum.