There has been a pick-up of sentiment in the past few days which has helped to pull a near term improvement in risk appetite. The question is whether these trends are sustainable. Better than expected Chinese services data got the ball rolling and since then we have seen reduced expectation of a chaotic Brexit, an attempt to diffuse the civil unrest in Hong Kong and now better news on the trade dispute. The US and China have agreed to meet to discuss trade in October. This has allowed bond yields to tick slightly higher (the US 2s/10s spread is currently +2bps positive), dragging on safe haven assets (gold and the yen) whilst allowing a rebound on risk (Aussie, sterling and broad equities). It has certainly taken the edge off some pretty negative sentiment across markets, but much of this is near term noise at this stage, and the sustainability of an improvement is questionable. The delivery of Brexit is still blurred between a tragedy and a farce, whilst few really expect there to be any realistic progress in the trade dispute this side of the 2020 Presidential election. For now though, there is a positive bias and several markets we cover are around interesting crossroads levels where the very near term move could gain some traction. It could be that tomorrow’s payrolls report will be the catalyst.
Wall Street closed decisively higher with the S&P 500 +1.1% at 2938, whilst US futures are a further +1.0% this morning. This has helped Asian markets to a significant bounce of Nikkei +2.2% and Shanghai Composite +1.5%. In forex, there is a slight paring of yesterday’s strong gains on GBP and EUR, but AUD continues to climb in its recovery with positive risk appetite. The safe haven majors (CHF and JPY) are weaker. In commodities, the better risk environment is a drag on gold by -$7 (or around half a percent lower), whilst oil is consolidating.
There is very much of a US focus on the economic calendar today, with the delayed ISM Non-Manufacturing data top of the bill. First up is the ADP Employment change at 1315BST which is expected to slip slightly back to 149,000 in August (down from 156,000 in July). Weekly Jobless Claims at 1330BST are expected to remain at 215,000 (215,000 last week). After the surprise move into contraction of the manufacturing sector, the most important announcement is ISM Non-Manufacturing at 1500BST which is expected to improve to 54.0 for August (from 53.7 in July). US Factory Orders are expected to grow by +1.0% in the month of July (after growing +0.6% over the month of June). Another data delayed over from Wednesday are the EIA oil inventories at 1600BST where crude stocks are expected to again be in drawdown by -2.6m barrels, whilst distillates inventories are expected to have built by +0.5m barrels and gasoline stocks expected to have drawn down by -1.6m barrels.
Chart of the Day – AUD/USD
After weeks of negative bias on the Aussie versus the US dollar, a sudden shift in sentiment is showing through. The question is whether this is a sustainable move. The market has been bearishly moving lower through the past six weeks, but a big bullish engulfing candlestick (bullish key one day reversal) posted on Tuesday has signalled the change. The fact that this is not an isolated signal is encouraging for a potential recovery now. There is a range of bullish divergences on momentum indicators which show that the selling pressure has been running out of steam in recent sessions and the market is ripe for a rally. A bullish divergence with a (positive) failure swing has formed on RSI, whilst MACD lines show a similar positive divergence but also now have a bull kiss too. A second positive candle yesterday adds to the improving outlook. However, the key test for the bulls lies ahead with the overhead supply and resistance in the band $0.6820/$0.6830. This needs to be overcome to suggest there is traction in a recovery. Until then, the move could simply be playing out as part of a rectangle consolidation between $0.6675 and $0.6820. Effectively therefore a closing break above $0.6830 would complete a base pattern and imply around 150 pips of additional recovery. The hourly chart shows initial support $0.6750/$0.6770 needs to hold to maintain the recovery momentum.
The euro rally has engaged well in the past 36 hours, but there is much more for the bulls to do for this move to be sustainable. The real test lies in the next couple of sessions. A knee jerk reaction higher has been seen, but one which has simply pulled the market up to the overhead supply of the $1.1025/$1.1050 old key lows of August. We see EUR/USD is now trading within a downtrend channel and with all momentum indicators still negatively configured, for now this is just another bear market rally for the euro. There is considerable resistance overhead but there is scope for an unwind within the channel resistance, which comes in today around $1.1140. Yesterday’s sharp positive candle added around 60 pips to Tuesday’s bull hammer candlestick and suggests the bulls have the recovery momentum with them. This needs to be maintained, with the hourly chart showing a basis of support $1.1020/$1.1000 now. A failure in the $1.1025/$1.1050 band with a close back under the psychological support at $1.1000 would be disappointing for the bulls now. The key low is at $1.0925.
We discussed yesterday the prospect of a near term rally and this really took off yesterday with a bull candle that added 165 pips to Cable. The move has instantly now brought the market up for a test of the big four month downtrend. The technicals had already been improving with the bull hammer, but they are really responding to this move now. This is especially the case with the bull kiss on the MACD lines, whilst Stochastics have bull crossed higher and RSI is above 50 again. Throughout recent months, technical rallies have faltered between 52/54 on RSI. Cable is at a crossroads and is testing this big downtrend today, but the key resistance is at $1.2307. There has not been a key lower high broken on GBP/USD since March and this will certainly be on the minds of the sterling bulls. We have talked previously about a short squeeze, well the market breaking above $1.2307 would be a crucial outlook changer for sterling. The hourly chart shows a potential unwinding of at least some of the gains is threatening. A band of support $1.2160/$1.2210 needs to now hold.
A tick higher has once more given a neutral configuration to the range of the past month. It is interesting to see that for weeks there has been a key attraction towards a test of the resistance at 106.75, but consistently this is an area of overhead supply which is seen as a chance to sell. There remains a negative bias to the medium term outlook, but the