There is a sense of anticipation that has built up across major markets as consolidation has crept in. The major mover right now is sterling, which is like an excitable puppy, trading with significant volatility as it jumps up and down. The EU/UK negotiators have been working hard for several days to get some sort of text ready for the EU Council to consider, and apparently the “foundations” are there. Michel Barnier said last week, “where there’s a will, there’s a way”, so markets are on tenterhooks. However, time is running out for a deal this week and sterling is slipping this morning. Suggestions are that the unionist party in Northern Ireland, the DUP, will not support the deal when it is put to Parliament (probably on Saturday). It is interesting to see that the euro is holding on to its recent positive performance, but it would also suffer should there be an impasse in Brussels/Parliament. Broad risk appetite has been a beneficiary too recently amid the elevated Brexit deal prospects, with yen and broadly US dollar underperformance. However, this could all turn on a sixpence though today. Although Gilt yields and Bund yields have been higher on the Brexit story, Treasury yields have been struggling recently. A worrying decline in US Retail Sales is certainly something that could now play on the minds of Treasuries traders. The US consumer has been doing the heavy lifting with US growth, and if sales start to decline consistently, then this could usher the Fed into more of a dovish cycle.
Wall Street had a bit of a quiet session yesterday, with a mild decline on the S&P 500 by -0.2% to 2990. US futures are again a little cautious today -0.1%. Asian markets were mixed overnight, with both Nikkei and Shanghai Composite almost dead flat. In Europe, there is a slip back for DAX futures (-0.4%), whilst FTSE futures (+0.2%) are being supported by an early decline on sterling. In forex, the GBP decline is the big move, but it is interesting to see AUD stronger after the Australian Unemployment numbers showed the headline rate a shade lower than expected at 5.2%. In commodities, gold and silver are fluctuating around the flat line, whilst oil is stumbling to give back yesterday’s rebound gain.
The economic calendar for the European session is focused on the final of this week’s major UK data. UK Retail Sales (ex-fuel) is at 0930BST and is expected to fall by -0.1% in the month of September (having fallen by -0.3% in August) but this would mean the year on year data would improve to +2.8% (from +2.2% in August). The US data begins with the Philly Fed Business index at 1330BST which is expected to slip back to a still positive +8 in October (from +12 in August). There is also US Building Permits at 1330BST which are expected to drop back to 1.32m in September (from 1.42m in August) and Housing Starts expected to drop back to 1.32 (from 1.36 in August). Weekly Jobless Claims are expected to remain around recent levels, with 215,000 (a shade higher from 210,000 last week). The EIA Oil Inventories are a day delayed this week and are at 1600BST, with crude stocks expected to again be building by +2.7m barrels (2.9m barrels last week), with distillates in drawdown by -2.2m barrels (from -3.9m barrels last week) and gasoline stocks in drawdown by -1.4m barrels (-1.2m barrels last week).
There are more Fed speakers today, with Michelle Bowman (voter, leans hawk) at 1900BST, whilst Charles Evans (voter, leans dove) at 1900BST and John Williams (voter, centrist) at 2120BST.
Chart of the Day – EUR/JPY
A risk positive market makes for a weaker yen but positive signs for a Brexit deal are benefitting the euro too. Subsequently the outlook for EUR/JPY has improved significantly recently. Resistance at 120.00 has been a key pivot and a barrier for the past few months. However, yesterday’s latest strong bull candle was a second (confirmatory) closing breakout, taking the pair to an 11 week high. The multi-month downtrend was broken last week and now clearing 120.00 on a decisive basis means that the bulls are finally building some traction in a new positive trend. This has been a crossroads moment that the euro bulls are now pushing through. Momentum indicators are positively configured with RSI in the mid-60s, whilst MACD lines accelerate above neutral for the first real time since April and Stochastics are strong. This points to buying into weakness now. There is a burgeoning run of seven successive higher daily lows now, meaning the support at 119.75 is a key near term gauge and 119.75/120.00 is a near term buy zone. The hourly chart shows 119.10 as the first real higher low and key support. A consistent close above 120.00 opens further recovery to 121.30.
The euro had been stuttering in recent sessions, but has taken another shot in the arm with progress in the Brexit process. Technically this has bolstered the developing two week uptrend, but yesterday’s decisive bull candle has now taken the market clear of the $1.1000/$1.1025 range which had become a sticking point. Breaking above $1.1060 (last week’s high) also now opens the real test, the resistance at $1.1100. This old low from April/May became key resistance throughout September and would be a signal for a crucial shift in euro sentiment. It is the first key lower high and a breach would confirm that a new positive medium term trend would be developing. This improvement is reflected in the momentum indicators, with RSI into the 60s and multi-month highs. MACD lines are accelerating higher towards neutral and Stochastics are above 80. Intraday weakness is now a chance to buy, with the hourly chart showing support between $1.1020/$1.1060 and within that underlying demand at $1.1040. There is a key higher low within the recovery at $1.0990 now. A decisive close above $1.1100 opens $1.1160 and more importantly $1.1250.
Another session of significant volatility on sterling left Cable on a wild ride of a 220 pip rebound from the day low to close with a further 45 pips up of the day. Closing through $1.2780/$1.2800 resistance area now opens moves towards the $1.30s. There is an old basis of support around $1.3000 from March with the next key reaction high at $1.3175 meaning a band of resistance $1.3000/$1.3175. However the move is fuelled by the politics of Brexit right now. This could easily come crashing down this morning if the EU Council do not get to discuss a new Brexit deal proposal. Weakness has been bought into repeatedly in recent sessions, with the hourly chart showing the rising 55 hour moving average (this morning at $1.2745) repeatedly capturing intraday corrections for the past three sessions. Resistance initially at $1.2875 from yesterday’s high, but as we have been discussing throughout this week, if the politics change again, then technical levels will not matter one jot. Yesterday’s low at $1.2645 is the latest higher low.
Having broken out above 108.50 a move to test the key medium term pivot level at 109.00 is on. Yesterday’s mild negative candle has done little to change the outlook on this, so far. Momentum indicators remain strongly configured (