There is a cautious look to major markets this morning. Wall Street markets fell away late into yesterday’s close and this is leaving a bitter taste in the mouths of equities traders early today. A risk negative bias is threatening through US bond markets as a “bull flattening” is emerging. With longer dated yields (associated with growth and inflation expectations) are falling more than shorter dated yields (which are fairly anchored now on expectations of Fed tinkering with yield curve control). This could begin to weigh on equities if it continues. Forex markets have been choppy in recent days, with false moves seen on major pairs and increasingly ranging configuration. The UK has a bit of focus into today. Sterling has been boosted in the past 24 hours from a more constructive dialogue over the Brexit trade deal talks. UK Chancellor Sunak is also set to announce further fiscal support today. Whether this is all enough to make a sustainable difference to sterling, with forex pairs seemingly stuck ranging, remains to be seen. One other key mover is a breakout on gold to multi-year highs, as it closes in on $1800 for the first time since 2011. Daily drip feed of risk negative newsflow on rising COVID-19 reinfection rates, economy re-openings paused and snipping between the US and China over Hong Kong, all play into a stronger outlook for gold.
Wall Street fell into the close last night to leave the S&P 500 ending the session -1.1% at 3145. US futures are all but flat today with the E-mini S&Ps -0.1%. This has left Asian markets mixed, with the Nikkei -0.8% but the Shanghai Composite has climbed another +2.2%. European look set for a mildly negative early session, with FTSE futures -0.8% and DAX futures -0.7%. In forex, there is little direction, aside from a mild underperformance from AUD and NZD along with risk aversion. In commodities, gold and silver are consolidating, whilst oil is a shade lower by around half a percent.
It is a quiet day for the economic calendar today. The EIA Crude Oil Inventories at 1530BST are the only significant release. Oil stocks are expected to drawdown by another -3.4m barrels (after last week’s surprise -7.2m barrels of drawdown).
Chart of the Day – AUD/USD
As the dust settled from the Reserve Bank of Australia meeting yesterday, the outlook for recovery on the Aussie is being threatened, but for now, remains on track. Support of a three month uptrend (coming in at $0.6915) is important to the continuation of the medium term strong outlook. The corrective move of early June has left support at $0.6775 and the market has spent the past few weeks building a run of higher lows along with trend line support. However, that strong trend line is being threatened as momentum in the bull run seems to be slightly less decisive now. The RSI is still above 50 but has tailed off back under 60, whilst MACD lines are subdued and Stochastics are also tailing off. Could this be a market set to consolidate and breach the trend? The Aussie remains positive above support at $0.6830 within what is essentially a range between $0.6775/$0.7060. In backing away from a breakout above $0.6975/$0.7000, if the trend is breached today, this could open a phase of choppy sideways consolidation. The bulls need a close above $0.7000 to open a test of key resistance band $0.7060/$0.7075. The hourly chart shows good support now between $0.6900/$0.6920 needs to hold to prevent a near term top formation.
The last couple of candlesticks sum up fairly well the growing medium term position on EUR/USD. A strong positive candle followed by a retracement negative candle not entirely unwinding the move but which leaves the bulls again frustrated. It leaves the pair all but in the middle of a trading range $1.1165/$1.1420 but taking a step back, EUR/USD is far more positively configured into Q3 than was during the first half of the year. Momentum indicators retain a slightly positive bias as RSI holds above 50, Stochastics rise above 50 and MACD lines are and in a mild drift above neutral. Our strategy continues to be buying into weakness within the range for an eventual upside break and test of $1.1490. The problem is that the bulls just cannot hold traction. Resistance at $1.1350 is growing, after three times the market failing there. Initial support is now $1.1215/$1.1255 and weakness into there is an opportunity. Holding upside traction is the next step for the bulls.
A bull run on sterling in yesterday’s session (on the prospect of a more constructive outlook for the Brexit trade deal talks) pulled Cable through an important near term resistance at $1.2540. Although the break could not quite be held into the close, the bulls are looking more positive now. A closing move above $1.2540 would complete a small base pattern within the range (arguably a head and shoulders bottom) which would imply a test of the $1.2810 key June high once more. The is a more positive bias now forming through momentum indicators, with RSI at a three week high and leading the mini breakout, whilst Stochastics are rising strongly and MACD lines have just crossed higher. We have now drawn in the key 7 month downtrend from December which is a barrier up at $1.2705 today and may now become an issue for the bulls in the coming days. Support is building in a range of around 100 pips between $1.2435 (what is effectively the right hand shoulder of the base pattern) and the $1.2540 neckline of the breakout. The bulls will look to use this as a base for moves higher now. Next resistance is $1.2685.