The US ISM Manufacturing data sent further warnings signals over the impact of the global slowdown as the US/China trade dispute continues to bite. The forward looking survey data moved into contraction (below 50) for the first time in around three years and was worse than all expectations (according to Refinitiv data). Markets are moving to price for the need for ever loser monetary policy. Additionally, (perma) dove on the FOMC James Bullard calling for a -50 basis point rate cut (to get ahead of the market) in the September meeting. Treasury yields fell and higher risk assets suffered, whilst the yen and gold continue to perform well. This move is being given back slightly today as risk appetite has been ushered higher after the unofficial Chinese services PMI data came in ahead of expectations. In the UK, and more specifically, the Parliamentary bubble, Brexit politics is having a key impact on sterling. A move by the House of Commons to take control of proceedings (via a motion that defeated the Government yesterday) means that a Bill to legislate to prevent a “no deal” Brexit will be debated and voted on today. The counter threat from Boris Johnson to hold a General Election needs the backing of two-thirds of MPs, something that seems unlikely until Parliament has legislated to prevent a no-deal Brexit. Sterling found a relief rally yesterday as the prospect of another extension to the 31st October deadline is growing.
Wall Street fell decisively yesterday (S&P 500 -0.7% at 2906), but US futures have rebounded early today and have pared yesterday’s weakness, around +0.7% higher. In Asian markets there has been consolidation and support off the day lows as the China Caixin services PMI ticked higher than expected. In Europe, there is a move to follow US futures higher, whilst it is interesting to see FTSE futures lagging slightly (as sterling has bounced). In forex, there is a mild bounce in risk appetite, with JPY slipping back, AUD continuing to perform well and the rebound on GBP continuing to develop. In commodities, the better risk outlook is pulling gold back by around half a percent (-$7), whilst oil is higher by around half a percent.
It is a day of services PMIs today in Europe (the US data is tomorrow due to Monday’s Labor Day public holiday). The Eurozone Final Services PMI is at 0900BST which is expected to see the flash reading of 53.4 confirmed at 53.4 (53.4 flash August, 53.2 final July). This also means that the Eurozone final Composite PMI is expected to be 51.8 (51.8 flash August, 51.5 final July). The UK Services PMI is at 0930BST and is expected to show a deterioration to 51.0 in August (down from 51.4 in July) which would also be a drag on the composite PMI which was at 50.7 last month as the UK economy continues to stagnate. Into the afternoon, the US International Trade Balance is at 1330BST and is expected to show the trade deficit improving marginally to -$53.5bn in July (from $55.2bn in June).
Chart of the Day – DAX Xetra
Around the turn of the weekend, the DAX completed a breakout above the key resistance at 11,845/11,865. This was an important technical development as it completed a head and shoulders base pattern and now signals a shift in the medium term outlook. Instead of the July to August sell off of lower highs and lower lows, a turnaround means a new trend higher is forming. The breakout also now lends neckline support in the band 11,845/11,865. The higher low around 11,550 is the right hand shoulder and the breakout means that a new trend of higher lows and higher highs is building. The bulls would ideally be looking to use the neckline support as a spring board, but whilst the support of the first key higher low at 11,550 remains intact, the prospect of a recovery will still be live. Momentum indicators are confirming the improvement but still have work to do to take on a bullish configuration. The RSI would need to be above 60 and MACD lines rise above neutral. The bulls are open for a move to the next band of resistance 12,100/12,200. Initial resistance at 11,995 has already been broken this morning and now becomes initially supportive, with a gap open at 11,956. The implied base pattern target for the coming weeks is 12,425.
After a consistent run of negative candlesticks and closes, yesterday’s hammer candlestick comes as welcome relief for the bulls. Leaving a low at $1.0925 the market has bounced from what looks now to be the bottom of a downtrend channel and is looking to build a near term recovery. A hammer is a positive one day signal but ideally needs a second positive candlestick to lend confirmation of a shift in sentiment. The market is tentatively higher early today. We spoke yesterday about how stretched the RSI had become around 30 and this is consistent with the market forming a near term rebound in recent months. Stochastics are also threatening a near term positive cross signal too. There is scope for a rebound into the resistance $1.1025/$1.1050 of the old August lows. The hourly chart hints at a near term rebound, with more positive configuration on RSI and MACD lines. Holding above $1.0960 minor support would help the bulls to build today.
A positive reaction from sterling bulls has seen the market bounce from $1.1957. The intraday breach of $1.1980 means that the market touched levels not seen during normal trading for decades (aside from the October 2016 flash crash). A rally into the close has now left Cable with a positive hammer candlestick and the potential for a near term rally. Sterling is reacting positively again this morning with the market back above $1.2100 (which has previously been a basis for a near term pivot throughout August). The momentum indicators are also responding encouragingly, with the RSI holding above 40, and MACD lines resisting a bear cross. It is important to stress that, at this stage, we still see this as a near term recovery within what is still an overpowering medium to longer term bear trend. However, there is scope for a move higher now. A four month downtrend comes in around $1.2250 today, whilst the hourly chart shows another August pivot band around $1.2180/$1.2210 as resistance. How the market responds around these levels will determine how sustainable a recovery is.
A run of negative candles is building once more as Dollar/Yen backs away from the resistance band above 106.75 again. A decisively negative session yesterday means the market has formed daily lower highs and lower lows in the past couple of sessions and momentum is gaining to the downside. The RSI is faltering again below 50, whilst the Stochastics are also threatening to cross lower once more. The hourly chart shows that the initial band of support 105.60/105.90 is being tested now, but a breach (especially on a closing basis) would open the support band 104.50/105.00. A lower high at 106.40 comes with the renewed mild negative bias on hourly RSI. Another intraday failure under 106.40 today would add to the corrective momentum. The hourly RSI is failing at 60 and pushing the low 30s, whilst MACD lines drift slightly lower, suggesting that intraday rallies are a chance to sell.
For months, we have been buyers of gold into weakness and see little reason to change that view right now. As the US ISM Manufacturing data turned into contraction, gold has jumped higher again. The move to leave a second decisive positive candlestick has put a bullish bias back into the consolidation that has built between $1517/$1555. We are subsequently looking for the latest breakout. Momentum indicators are ticking higher again from continued positive configuration and reflects a market willing to continue to support any weakness in gold. The rising 21 day moving average is now at $1517 and has been a strong basis of support for gold over the past few months. Subsequently we see the range holding above $1517 and a move to breakout above $1555 in due course. The hourly chart shows a mid-range pivot at $1534 which is now supportive and a good gauge for control of the range. Above $1555 there is very little real resistance of note.
WTI oil remains stuck under a four and a half month downtrend which means that rallies continue to be seen as a chance to sell. However, we discussed yesterday about the trading in the past few weeks which has been more ranging. This is the case, but there is a negative bias within this range and we favour an eventual downside break. A couple of strong bear candles in the past two sessions have put pressure on the range support at $52.95 but the support has just held intact (yesterday’s intraday low at $52.85). A minor rebound has been found, but we are concerned by the deterioration in the hourly momentum indicators and how the daily Stochastics are sliding now. Downside pressure is mounting. The hourly chart shows initial resistance $54.80/$55.20.
Dow Jones Industrial Average
The Dow remains stuck in the four week trading range and is giving a variety of mixed signals which suggests there is still no overall control of the outlook. Yesterday’s significant sell-off included a negative gap at the open and a loss of -1.1% into the close. However, the move also filled a previous upside gap from last week (arguably a positive development) too. Momentum indicators are still on their path of improvement but are still in aggregate giving an uncertain configuration. The RSI around 50, MACD lines stuttering under neutral and Stochastics approaching positive territory gives a sense of near term recovery that has much more to be done to be considered sustainable. The bulls need to now close the gap at 26,295 in today’s session. Support is now building in the range 25,960/26,040.