There has been a lack of conviction on major markets which is taking over from the optimism that drove markets into last weekend. The cracks are beginning to show on the US/China agreement for “Phase 1” of their trade deal. Steve Mnuchin (US Treasury Sec) is talking about the December tariffs being enforced should a deal not be signed. This US administration continues to believe that the “stick” is a better approach rather than the “carrot”. Further negotiations could also take place in the coming weeks ahead of the APEC summit in November when a prospective deal could be agreed. However, it leaves traders with a sense of uncertainty. Not having a steer from US bond markets yesterday (due to Columbus Day) will not have helped either, so perhaps more direction will be found today. Playing a bit of catch up, Treasury yields have dropped early today and this is acting as a mild drag on the dollar. Subsequently there has been little traction so far this week as markets have started with an early consolidation. Adding to the sense of uncertainty, last week’s sudden optimism of a Brexit deal was pegged back by a degree of realism yesterday. Achieving an agreement will be incredibly tough still. Both sides have been relatively tight lipped (which is in itself a sign of progress) but time is not in abundance, with the EU Council meeting on Thursday/Friday looming. Can a deal be done with such a tight window? This morning, EU’s chief Brexit negotiator Michel Barnier has said that “a deal is still possible this week”. Sterling has jumped again, trading volatility remaining elevated and this hope of a deal is underpinning sterling. However, newsflow will be critical and the roller coaster ride is not over yet.
Wall Street closed a quiet session with the S&P 500 losing -0.1% at 2966 whilst US futures are more positive today, around +0.3% higher. Asian markets have been mixed but much due to the Nikkei playing catch up from yesterday’s public holiday +1.9% higher, whilst the Shanghai Composite was -0.6% lower. In Europe there is a slightly positive start to trading, with FTSE futures +0.2% and DAX futures +0.8%, the negative correlation of GBP and FTSE still showing clearly. In forex, USD is slipping back as Treasury yields have dropped. GBP is the clear outperformer, whilst EUR also may be catching a bid on its coattails. In commodities there is a continued mixed outlook with a lack of traction, whilst oil is slipping back again as the bulls hit a wall yesterday.
UK wages and a crucial German survey dominate the economic calendar of the early European session. UK Unemployment is at 0930BST which is expected to remain at 3.8% again (3.8% in August) whilst the September claimant count is expected to be 26,500 (28,200 in August). UK Average Weekly Earnings growth is expected to also remain at +4.0% (+4.0% in August). The German ZEW Economic Sentiment for October is expected to deteriorate further to -27.0 (from -22.5 in September). US data is restricted to the New York Fed Manufacturing which is at 1330BST and is expected to slip marginally to +1.0 (from +2.0).
There are also some Fed speakers to keep an eye on, with dissenters everywhere. One of the two dissenting hawks, Esther George (voter, hawk) speaking at 1745BST, whilst the uber dove James Bullard (voter, dove) at 2025BST.
Chart of the Day – EUR/CHF
We have been looking at the improvement in the performance of the euro in recent weeks. This has also been the case against the Swiss franc, but an outlook changing breakout is yet to be seen. However the tide of selling with the market trending lower for several months, has at least been stemmed. Since August EUR/CHF has been building support in a consolidation pattern but that is threatening to turn higher now. Friday’s intraday breakout above 1.1020 could not be held into the close (which would have completed a base pattern), but the bulls are massing. Momentum indicators are far more positively configured now, with the MACD lines again pulling above neutral, whilst RSI oscillates between 40/60 which is at least neutral. The hourly chart shows a support band 1.0940/1.0975 and another higher low within this band will be a buying opportunity to play an improving outlook. A close above the old June/July pivot at 1.1055 would be confirmation of the base pattern that would imply a recovery target of 1.1210 in the coming months. Below 1.0895 aborts the recovery potential.
There has been a degree of caution in the wake of the conclusion of the US/China negotiations. However, it is interesting to see that the breakout above $1.1000/$1.1025 is something that the EUR/USD bulls can work from. There is an uptrend of the past two weeks which now rises at $1.1000 today and this is also a confluence with the old downtrend channel support. It comes with the market sustaining improving momentum indicators with the RSI still holding multi-month highs and MACD lines advancing. There is a new sense of optimism for EUR bulls now and the recent improvement is holding. Keeping a $1.10 handle is increasingly important now. The resistance at Friday’s reaction high of $1.1060 is restrictive but the bulls will know that $1.1100 is the first key resistance that this recovery needs to overcome now to be a sustainable move. Losing $1.1000 opens $1.0940.
There is still a lot of uncertainty over how sustainable this move higher on sterling is. The improved prospects of a Brexit deal sent Cable soaring higher last week, but the uncertainty drove another volatile session yesterday. The likelihood is that this will continue throughout the week (lots of crucial UK political events, not to mention tier one data points too). Holding above the breakout at $1.2580 on a closing basis will have given the bulls encouragement. The market has been positive again this morning (on another positive hint from Barnier) whilst technical momentum signals continue to favour a positive bias, with the Stochastics looking strong, RSI in the mid-60s and MACD lines advancing above neutral. Yesterday’s reaction low adds to support between $1.2500/$1.2580 now. Politics will still be the main driver, but there is a positive bias coming into the European session today. Resistance is at $1.2705 and then more considerable at $1.2785, however, if the political ground shifts again, there will not be much respect for technicals.
There is still a degree of uncertainty over the market reaction to