According to reports coming out, the US and China trade delegations are set to meet for the latest round of negotiations on 10th and 11th October in Washington. For now, this is pretty much the only real factor that is a positive influence for market sentiment. Brexit remains a drag on risk appetite, with the UK Parliament an absolute shambles and little progress with the EU for moves towards an exit deal. President Trump is becoming embroiled in allegations of impropriety with a whistleblower suggesting a White House cover up over Trump’s conversation with the Ukrainian president. Politicial risk of impeachment remains someway off, but is just another drag on sentiment. The global economic slowdown driven by the trade dispute also shows little sign of any reversal. Subsequently, on a broad basis, there is an ongoing negative bias to risk appetite. With volatility elevated again, equities have found positive traction difficult to come by and the main winner in this seems to be the US dollar. This is reflected in a turn lower on both gold and silver this morning. A bounce back on equities has come with news of the US/China meeting, but with little expectation of any material progress towards a deal, the traction is limited. Risk aversion is hitting the euro and sterling now, whilst the removal of supply shocks in the oil market leaves traders focusing on a weak demand story and is therefore a drag again. Global markets need positive surprises on PMIs next week otherwise the malaise of risk aversion could continue.
Wall Street closed lower again, with the S&P 500 -0.2% at 2778, whilst US futures are a touch higher early today at +0.2%. Asian markets have been mixed again overnight, with the Nikkei -1.0% and Shanghai Composite +0.2%. There is a mild rebound on European markets again early today with FTSE futures +0.2% and DAX futures +0.3% but an the traction hold? In forex, there is little real direction, however, further negative drift for EUR, a mild rebound on JPY and AUD. In commodities, gold is a shade lighter by -$2 whilst oil is around -0.5% lower as the unwind continues.
It is another US-centric day on the economic calendar to end the week, with key focus on inflation. The Fed’s preferred inflation gauge, the US core Personal Consumption Expenditure is at 1330BST which is expected (as usual) to grow by +0.2% on the month of August (after +0.2% in July). However, this would pull year on year core PCE up to +1.8% in August (from +1.6% in July). There is also US core Durable Goods Orders (ex-transport) at 1330BST which is expected to grow by +0.2% in August (following a -0.4% decline in July). The revision to Michigan Sentiment will be keenly watched at 1500BST (especially after the big drop in consumer confidence earlier in the week. Prelim sentiment improved to 92.0 in September (up from 89.8 in August) and this is expected to be confirmed at 92.0 in the final reading.
Chart of the Day – AUD/NZD
For several weeks we have seen the Aussie consistently outperform the Kiwi. However, is this performance about to turn around again. After turning back from 1.0839 last week, the market has consistently fallen away. The move is now breaching the breakout support of the old April/May highs at 1.0730, but also the support of a six week uptrend. This comes with a move below the 21 day moving average (at 1.0725 today), but most notable are that the momentum indicators are leading the corrective move. The RSI is at a six week low, whilst a bear cross on Stochastics has been decisively confirmed, with a bear cross also on the MACD lines too. The MACD bear cross is the most pertinent as the last time a bear cross was see was back in April, when the previous big rally topped out and months of slide lower resulted. There is support with the 23.6% Fibonacci retracement of the 1.0263/1.0839 bull run (at 1.0703) but a closing breach would suggest corrective momentum is growing. There is now a resistance band 1.0730/1.0770 and a failure of this morning’s rally forms the next lower high within this range, it will be a further signal of ongoing correction. Subsequent support below 1.0700 is at 1.0620/1.0630.
The euro is under growing pressure. There has been a decisive slump in performance of the euro in recent sessions that is breaking key technical levels now. Earlier in September the market bounced from $1.0925 on a couple of occasions, however, this floor has now been breached to bring the market to levels not seen since May 2017. The next key low is at $1.0850. Yesterday’s downside break also once more opens the bottom of the three month downtrend channel (today at $1.0840) as a potential target area. The concern is with momentum which is not only decisively negatively configured, but also with downside potential. The RSI is falling into the mid-30s (sell-off tend to move towards 30), whilst Stochastics are accelerating below 20 and MACD lines have once again crossed lower. Near term rallies are a chance to sell. The initial breakdown of $1.0925 is an initial basis of resistance this morning, but more considerable is $1.0965/$1.1025.
The integrity of the recovery base pattern is being seriously questioned now. A run of four decisive negative closes in the past five sessions has dragged Cable back to the neckline support of the breakout around $1.2305. Given the deterioration on the momentum indicators now, this is a key moment in the medium term outlook. Sterling’s strong performance has been turned on its head and if Cable begins to trade decisively below $1.2280/$1.2305 support then there could be a much deeper correction on the way. Of concern yesterday was that the bulls tried to muster a recovery but it faltered at $1.2380 a level which is turning into a pivot now. The next session or two will be key. A continued failure under $1.2360/$1.2380 will ramp up the negative pressure. The hourly chart shows a mild consolidation this morning, but the negative bias is still present. A close under $1.2280 would be a bearish confirmation. Subsequent support is at $1.2230.
There is an increasingly uncertain outlook to Dollar/Yen. The bull candle of Wednesday was followed by another mildly positive session yesterday, but seemed to fail to inspire the bulls. There is a resistance forming between 107.75/108.00 that the bulls need to overcome to regenerate positive traction. Momentum indicators are now increasingly inconclusive in configuration with the MACD and Stochastics lines flattening, whilst RSI is flat just a shade above 50. The bulls will point to the fact that the market is back above the 106.75/107.50 pivot band which lends a very modest positive near to medium term outlook (although there is little conviction in this view). There needs to be a pull through the resistance 108.00/108.50 to resume the bull control. The support at 107.50 is important to the bulls again.