Given the suggestion over the weekend that the US and China are close to coming to an agreement on trade, it was interesting to see the reaction of the bond markets yesterday. Treasury yields fell back (the 10 year yield as down over 3 basis points). Equity traders initially boosted in the European session, but traders moving back into Treasuries reflects cautious sentiment and this dragged Wall Street decisively lower. Is this an assessment of the market already having priced in the recovery from the end of the trade dispute? With the S&P 500 around 20% off its December lows, the market has gone a long way already. Whilst official detail is still to be known, the market seems to be distinctly cautious. It is also interesting to see the dollar strength being maintained. There is little real risk rally that would be dollar negative, with the dollar gaining ground across the majors today. China has set a lower growth target for 2019, down to a range of 6% to 6.5% which is below the 6.5% target of 2018, which adds to the cautious sentiment today, although Chinese equities seem to have been boosted by promises of 2 trillion yuan of tax cuts (c. $290bn). There is an added focus on services PMIs will add to the mix of sentiment today. Overnight we had the Reserve Bank of Australia which has held rates steady at +1.50% (no change expected at +1.50%). Although the RBA did not seem too dovish, the further slip back in the China Caixin Services PMI to a four month low has put pressure on the Aussie.
Wall Street fell last night with the S&P 500 -0.4% to 2793 with US futures steady at a tick or two higher today. There was a cautious look to Asian markets this morning, with the Nikkei -0.4% although the Shanghai Composite was +0.9% higher. European markets are mixed to slightly lower with FTSE futures around flat, whilst the DAX futures are -0.3%. In forex, the dollar is once more looking solid across the major pairs, with the higher risk commodity currencies (Aussie, Kiwi and Loonie) feeling the pinch, whilst sterling also continues to unwind. In commodities, there is a degree of support that has been found for gold with the more cautious risk sentiment today, whilst the oil prices are around -0.4% lower.
The big focus is on the services PMIs on the economic calendar today. The final Eurozone Services PMI for February is at 0900GMT which is expected to be confirmed at the flash reading of 52.3 (52.3 flash, 51.2 final January), with the final Eurozone Composite PMI expected to show an improvement to 51.4 in February (from 51.0 in January). UK Services PMI is right on the brink of turning negative (depending on which forecasts you look at), with Reuters looking for 49.9 (down from 50.1 in January). The US ISM Non-Manufacturing is at 1500GMT which is expected to show significant relative strength of the US economy with an improvement to 57.3 (up from 56.7 in January). New Home Sales are also at 1500GMT and are expected to take a sizable drop back to 590,000 (down from the big jump to 657,000 last month). It is also worth keeping an eye out for the FOMC’s Eric Rosengren (voter, leans hawkish) who is speaking at 1230GMT. The Bank of England’s Governor Mark Carney is also testifying to the House of Lords at 1535GMT.
Chart of the Day – GBP/JPY
After the big sterling rebound of the last two weeks, the question is whether the market will start to retrace. It is interesting that retracements have been seen against the euro and the dollar, but not yet against the yen (due to more positive risk appetite). However, is a correction brewing? Technically the market has struggled in the past few sessions, with recent candles showing a couple of very small real bodies to end last week and now a bear candle with a lower daily high on Monday. The RSI rolling over at 75 (the highest peak since September 2017), although no basic crossover negative signal has been seen yet, this is coming as the Stochastics also begin to roll over. The hourly chart shows a consolidation threatening to turn into a correction and a loss of the support of a pivot around 147.00 could drive corrective momentum. Watch also for the hourly RSI falling below 30 to be a signal too. Near term resistance is growing now between 148.00/148.55. If the support at 147.00 is breached it could begin to accelerate the corrective momentum and see a retreat back towards the 144.85 breakout.
The euro had been holding up relatively well against the dollar until yesterday’s strong negative session which closed the market back below the old near term pivot at $1.1345. Although not a decisive pivot, this is a gauge that suggests further pressure back on $1.1300. The concern is that this move has come in the wake of a failure under $1.1420, and as the RSI failed around 50, MACD lines are falling over under neutral and Stochastics have already crossed back lower. The hourly chart shows the corrective configuration of selling into intraday rallies now, with the $1.1350/70 band of resistance. Whilst an initial intraday test of $1.1300 was rebuffed, the pressure is growing and a closing breach would open the medium term range lows again around $1.1215. However, it is also important to point out the number of times that buyers have supported between $1.1215/$1.1300 since August is now running into double figures.
A third consecutive negative candle has continued the drag back on Cable, as the market drifts back into the band of old breakouts between $1.3110/$1.3215. The slip on momentum indicators is relatively benign at the moment, with the RSI still in the high 50s, whilst the MACD lines are just tailing off now and Stochastics dropping back under 80. This all points towards a continued near term unwind but essentially, the bulls will be remaining positive within the medium term range whilst the support between $1.3000/$1.3050 remains intact. The hourly chart shows a very near term negative configuration as the hourly RSI struggles under 60 and MACD lines struggle under neutral. Resistance is $1.3250/$1.3275, whilst the old breakout at $1.3215 is the initial gauge.
The dollar recovery remains on track as a day of consolidation again seems to be finding buyers once more this morning. The uptrend channel of the past eight weeks continues to pull higher and weakness is a chance to buy. The recent breakout above 111.35 which is a medium term pivot now means that this is an area of support. Momentum of the recovery is strongly positive, with the RSI camped in the high 60s, MACD lines rising and Stochastics strong. A move to test the next resistance at 112.25 is forming, whilst a breakout would open 113.70 as a subsequent resistance. The hourly chart shows how corrections are a chance to buy, with initial support around 111.60 and hourly momentum having unwound to areas where the buyers have tended to return again.
The way that gold has really come under pressure in recent sessions, reflects the rapid unwinding of the move higher. It now means that the $1276 support if the January low could come under pressure. This is a key level of support and being the second key higher low within the recovery, becomes an important marker. If it is breached it would open a much deeper correction which could unwind the market back towards the shallow 7 month uptrend which comes in at $1241 today. Momentum indicators are increasingly corrective and closing in the mid-30s yesterday, the RSI has fallen to its lowest since the August rally kicked off. The bulls are under serious pressure and how they respond to an early consolidation today will be interesting. The resistance of overhead supply in the failure of the support band between $1298/$1302 is now a growing resistance. This is also around the bottom of the old long term pivot band $1300/$1310. The hourly chart shows any intraday rallies are now seen as a chance to sell as the bulls seem to be floundering. Initial resistance at $1290/$1298. It needs a decisive rally at least above $1300 to improve the outlook now with a break back above $1310 for the bulls to feel more comfortable again.
The uptrend from the December low remains intact as the bulls have once more looked to use as correction as a chance to buy. The move back to the 38.2% Fibonacci retracement around $55.55 is once more supportive, with a band of support growing between $55.00/$55.75. The now ten week uptrend comes in at $55.50 today to add to the confluence of support here now. Yesterday’s solid positive candle once more turns the focus back on the test of resistance at the medium term pivot at $58.00. A closing breakout above here would trigger a continuation move towards the 50% Fib level at $59.60. It will be interesting to see if the consolidation of the past two weeks now breaks the uptrend. For now though corrections are a chance to buy.
Dow Jones Industrial Average
For several threat there has been a growing potential that the recovery may be in its maturity. A run of neutral and negative candles has been seen since the market hit a multi-month high of 26,241 last week. Yesterday’s bearish engulfing candle has seen that threat grow significantly more. An intraday move to a two week low may not have been held into the close, but the selling pressure is building now. This comes after the eight week uptrend has been broken and momentum indicators are on the brink of a series of sell signals. The support around the 76.4% Fibonacci retracement at 25,715 remains an important area that the bulls need to defend. Yesterday’s low at 25,611 could not be held but another negative candlestick today and this would really open the corrective potential. Especially if there were to be a close below the Fib level. The hourly chart already shows a more corrective configuration on hourly RSI and MACD lines. Resistance at 25,875/26,155.