After the volatility and elevated market fears seen throughout last week, there is a sense that sentiment is starting to settle down. However, if that means Treasury yields start to track higher again, then this will impact through a stronger dollar and mean that risk aversion will sustain across markets and prevent a sustainable recovery on equities. Despite yesterday’s US Retail Sales coming in below estimates (hurricane related?), US treasury yields closed the session towards the day high and continue to pull higher today. This is currently only small moves, especially within the context of what has been seen in the past couple of weeks, but if this move begins to trend then it will have an impact. The dollar is gaining small ground today. However as we approach the middle of the week, attention turns back to Brexit, with a crucial UK Cabinet meeting today coming ahead of the EU Summit tomorrow where we are approaching make or break time. Squaring the circle of the Northern Ireland border issue remains the critical stumbling block still and unless the negotiations can conjure up a way to solve the problem in a way that somehow placates all sides, then an extreme outcome (a hard landing no deal, or perhaps even stay in) could even result. Today’s Cabinet meeting could also contain some resignations which would again further undermine the already knife-edge position that Mrs May finds herself teetering on.
Wall Street closed lower last night, led lower by tech stocks with the S&P 500 -0.6% at 2751 but futures are +0.3% higher today. This is helping a mixed session in Asia where the Nikkei was +1.3%, however China’s Shanghai Composite was weaker -0.7%. An indication that the trade tensions with the US are having an impact, producer inflation continues to drop back in China. However the inflation data was broadly in line with expectations with China CPI rising a shade to +2.5% as expected (+2.5% exp, +2.3% last) whilst the China PPI came in a touch above expectations in its dip to +3.6% (+3.5% exp, +4.1% last). In European markets there is a mixed start to the session. In forex, there is a shade of dollar strength through the majors, with the yen being the main underperformer as yield differentials play a role here, with sterling just edging a shade higher ahead of a key couple of days for UK politics. In commodities, the recoveries on gold and silver remain on track whilst the oil price is marginally lower but broadly stable.
It is a wide and varied economic calendar for trader to keep an eye on today. First up will be the start of run of key UK data point throughout this week. The UK unemployment is at 0930BST and is expected to stay flat at 4.0%. However, more importantly will be the UK Average Weekly Earnings growth which is expected to stay at +2.6% on a total compensation basis (salary and bonus). Then at 1000BST there is German ZEW Economic Sentiment which is expected to drop back to slip back to -12..0 (from =10.6) which would be a disappointment after two months of improvement. The US Industrial Production is at 1415BST and is expected to show monthly growth of +0.2% (+-.4% last month) whilst Capacity Utilization is expected to tick higher to 78.2% (from 78.1%) and back to August’s three year high. The US JOLTS jobs openings at 1500BST are expected to slip back a shade to 6.90m (from 6.94m).
Chart of the Day – USD/CAD
For almost two weeks the Canadian dollar was under pressure and a sharp rebound on USD/CAD was seen amidst a fall on oil and increased market fear. However, the Bank of Canada is expected to hike interest rates next week and with oil showing signs of stabilising, it will be interesting to see whether the Canadian dollar can start to perform better again. There is a strong medium term technical outlook for the Canadian dollar that is dragging a downtrend channel over the past three and a half months. The recent loonie weakness translated to a rally within the downtrend channel, however the medium term negatively configured momentum indicators are now back around the selling pressure tends to resume on USD/CAD. The RSI failing around 60 and MACD lines unwinding to neutral and also Stochastics beginning to cross back lower again, all suggests that sell signals are on alert. This has also come as the resistance of the lower high at 1.3080 has kicked in to limit the rally last week, with the past three candles all under the resistance. The psychological 1.3000 has been broken on a closing basis and has now opened the n