There has been a distinctly muted reaction on major markets to the signing of “phase one” of a trade agreement between the US and China. The deal keeps most of the tariffs that Trump has issued and contains some rather outlandish commitments to expand Chinese imports from the US to $200bn (an increase of over 20%). The suggestion is that “phase two” is unlikely before the US Presidential Election in November. So there is a degree of relief that the trade dispute may now have a line drawn under it, but the deal itself seems to fall short of what it might have been. The consideration that traders will need to give in the coming days, weeks and now months is to whether this fosters an improved environment for risk appetite. It should at least set nerves at ease of any further escalation in the dispute, but continued tariffs and the potential for China to underachieve on its commitments could set things back again. This morning as the ink dries on the agreement, market sentiment is somewhat luke-warm. Treasury yields are a basis point higher on the 10 year, with a mild slip back on the yen and gold, whilst equities futures are slightly higher. So risk is headed initially in the right direction, but there is very little conviction.
Wall Street closed slightly higher at +0.2% on the S&P 500 to 3289. US futures are another +0.2% higher but these gains have seen limited carryover to the Asian session, with the Nikkei +0.1% and Shanghai Composite -0.5%. In Europe there is a shade of a move higher with FTSE futures +0.1% and DAX futures +0.2%. In forex, there is very little direction of note, aside from NZD gaining on a retracement of recent weakness. In commodities, gold is slightly weaker by -$2 (-0.2%) whilst oil has rebounded by +0.5% after another decline yesterday.
There is a broad US focus to the economic calendar but after a quiet morning the ECB monetary policy meeting accounts at 1230GMT will give more detail over the outlook for the Eurozone economy and the prospects for inflation. Onto the US data in the afternoon, US Retail Sales at 1330GMT are expected to show core (ex-autos) monthly sales increasing by +0.5% on the month (after a +0.1% growth in November). Also watch out for the “Control Group” sales which are considered less volatile. The Philly Fed Business Index at 1330GMT is expected to improve to +3.8 in January (from +2.4 in December). The US Weekly Jobless Claims at 1330GMT are expected to remain around similar levels at 216,000 (214,000 last week).
More central bank speakers today with the FOMC’s Michell Bowman (voter, mild hawk) at 1500GMT, and perhaps more importantly, the ECB President Christine Lagarde at 1800GMT.
Chart of the Day – AUD/NZD
The Kiwi had a huge run of outperformance in the closing weeks of 2019, but the early moves of 2020 suggest this outperformance versus the Aussie is being retraced. This recovery in AUD/NZD has now rebounded to test the 23.6% Fibonacci retracement (of the 1.0865/1.0312 sell-off) around 1.0440. Around here is a confluence of overhead barriers with the resistance of the latest lower highs of the two month bear move at 1.0450/1.0465. The initial look at this confluence has seen the market slipping back from yesterday’s high (at 10460). However, momentum indicators suggest there is certainly a recovery brewing. The RSI above 40 at two month highs, along with a similar look to the Stochastics. However, it is the MACD lines that are encouraging from a medium term perspective. Following a bull cross on the MACD lines in December, now a bull kiss with a bullish divergence suggests there is substance to the recovery. If the market can hold on to the support band 1.0380/1.0400 then pressure looks set to resume on the resistance band 1.0450/1.0465. Closing well clear of the 23.6% Fib would also open 38.2% Fib around 1.0525 as the next target.
The Euro continues to hold up well as the market begins to build on a run of higher lows, but also breaking a recent two week downtrend. We have been discussing recently about the swings higher and lower on EUR/USD although there is a net positive bias on a medium term basis. Building on a three month run of higher lows, MACD and RSI indicators retain their positive configuration and reflect continued buying into weakness. Holding the higher low at $1.1085 (and since bolstering the old pivot band $1.1100) yesterday’s bull candle was a third in four sessions. Having breached a two week downtrend, a new positive trend is beginning to form. This means that yesterday’s low at $1.1115 is initially supportive. The hourly chart shows a new mild positive configuration as moving averages tick higher. Initial resistance around $1.1160 needs to be cleared to open the old $1.1200 resistance area again.
Sterling has been hit by a wave of dovish Bank of England commentary in recent sessions and now yesterday’s very weak inflation data. However, to see Cable closing higher on the day shows how strong the band of support between $1.2900/$1.3000 has become. We continue to see this area as supportive on a medium term basis and the price action of the last two sessions does little to change this view. It is interesting to see that the RSI has picked up again around the 40 mark, whilst MACD lines are moderating their decline around neutral and Stochastics are looking to bottom out around the 20 mark. The next step for the sterling bulls would be to break the downtrend of the past couple of weeks (at $1.3070 today). The hourly chart shows how selling momentum is now reversing, but there is a band of resistance from a near term pivot at $1.3050 that needs to be overcome in order to build on the recovery. Above $1.3095 would be a first real lower high breached and see the near term trend turning positive again.
There is much to ponder on USD/JPY as another near term crossroads has been reached. The breakout above 109.70 has been met with a period of uncertainty on USD/JPY. The last two daily candles suggest a market nervous of the breakout. However, is this not just in keeping with several other breakouts in recent months? Time and again, the move goes maybe 30 to 50 pips through resistance, only to then hit the buffers, consolidate before retracing. Momentum indicators suggest that the pair is now into a consolidation phase. The RSI is again faltering in the 60/65 area, whilst the Stochastics are turning lower. How the market negotiates the breakout support at 109.70 or the rally high of 110.20 will now be key. Given today’s early tick back higher towards 110.00, another rejection to close back under the 109.70 breakout would be a corrective signal. However, the bulls will be looking to regain momentum again above the initial breakout high (at 110.20) which is something that has not been seen on previous breaks. That would then open 110.65 the old May 2019 high.
Gold has become somewhat stuck betwixt and between in the past couple of sessions. Support at the old breakout of $1536 could be an important development but there is still a corrective bias (of lower highs and lower lows) to gold. The last couple of candles have managed to stem the tide of selling initially, but the near term outlook has an uncertainty. However, taking a step back, if the market can look to build support with a new higher low around the 38.2% Fib (at $1548) or the 50% Fib (at $1528) of the bull run, then this will further encourage the positive medium term outlook. For now, the momentum indicators are still in a near term unwinding phase of a bigger medium term positive outlook. Despite this, the RSI holding above 60 reflects ongoing underlying strength, whilst the Stochastics shallowing off just a shade under 50 is also encouraging for the bulls. Resistance for the bulls to use as a gauge is at the lower high of $1563, so leaving a high yesterday at $1558 will have been a mild disappointment today. We continue to look towards weakness to be a chance to buy. On the hourly chart, holding the near term pivot at $1547 would be positive.
The positive medium term outlook is coming under significant strain now after oil fell back again to close at six week lows yesterday. This move has arguably breached a three month uptrend, whilst a support band $57.50/$57.85 is also being significantly tested. The bulls really do need to hold on to the 40 level on RSI to prevent increasingly negative momentum from developing. However, there could be signs of improvement in the hourly chart indicators, with initial resistance at $58.70 needing to be overcome to even consider a recovery is building again. This would then open resistance around $60.00 with the 38.2% Fibonacci retracement (of $51.00/$65.65) at $60.05. Yesterday’s low at $57.35 in reaction to the EIA inventories is an initial gauge now.
Dow Jones Industrial Average
The bulls have once more regained control of the market as the Dow has closed again in all-time high territory, now breaking the 29,000 barrier. Trends are all accordingly bullish, whilst momentum indicators are positive without being overtly bullish (flat MACD lines remain irksome). The market continues to respond well to weakness, with eight of the last ten candlesticks from a bullish configuration. There is the support of a five week uptrend around 28,750 today, whilst initial support comes in at 28,790. As these levels remain intact, there is little to overly concern the bulls. Furthermore, the three month uptrend now rises above what is the first key reaction low at 28,376. This helps to maintain medium term bull control. Initial resistance at yesterday’s intraday all-time high at 29,127.