Newsflow on US trade policy has been a huge driver of markets in recent weeks. A breakdown in talks with China and latterly threats of tariffs on Mexican imports have seen investors flooding into the safety of government debt, gold and the yen. Traders have been pricing in how this effects Fed monetary policy. Will it mean a sharp about turn and move to cut rates by the FOMC? However, there have also been moments of relief, such as the decision to delay tariffs on autos for six months. The latest newsflow is that tariffs on Mexico could be delayed as the US and Mexico continue to discuss the flow of migrants into the US. As the rhetoric has improved, it has also improved sentiment in recent days and allowed the moves into safe havens to settle. Yields are stable and selling pressure on the dollar is dissipating. The key consideration is how it all impacts on US monetary policy. The recent re-pricing of potential rate cuts is taking a pause for breath. Markets are now in consolidation as today’s Nonfarm Payrolls report is eyed. A strong payrolls report could see some of this re-pricing unwind. In recent months, payrolls have seemingly had less on an impact on markets as headline jobs number fluctuations have given way to focus on wage growth. Although wages are expected to remain steady today, given the elevated levels of volatility in recent weeks, this could be a payrolls where we see increased market reaction, especially the knee jerk moves on any initial surprise.
Wall Street closed solidly higher for a third straight session (S&P 500 +0.6% at 2843. US futures are also looking to hold and maintain this move higher, gaining around +0.2% currently. This has helped mixed gains on Asian markets (Nikkei +0.6%, the Shanghai Composite was closed). In Europe, there is a positive look to early trading, with FTSE futures +0.2% and DAX futures +0.5%. In forex, there is a very slight USD positive bias, but little real direction as majors consolidate ahead of payrolls. In commodities, there is a mild slip back on gold as the dollar weakness is dissipating, whilst oil is also beginning to build support on a bit of positive news on the trade tariff front.
Traders looking at the economic calendar will be squarely focusing their attention on today’s Non-farm Payrolls. The US Employment Situation report for May is released at 1330BST with headline Nonfarm Payrolls expected to drop back to 185,000 (from 263,000 in April). However, there could be a risk of a downside surprise with such a large miss on the ADP employment change on Wednesday. Average Hourly Earnings are expected to grow by +0.3% on the month which would maintain the year on year growth of +3.2% (+3.2% in April). The US Unemployment is expecte to hold at 3.6% (3.6% in April) which would keep it below the Fed’s 2019 projection of 3.7%. Also keep an eye out for the laborforce Participation Rate which dropped to 62.8% in April and contributed to the decline in unemployment. The U6 Underemployment is also interesting to note, holding at 7.3% in the April report.
Chart of the Day – DAX Xetra
Having completed a two month head and shoulders top pattern at the end of May, the DAX has rallied sharply this week. But for now, this rally has to just be treated with caution as rallies since the beginning of May have been treated as another chance to sell. Since the market turned lower from 12,435, a run of lower highs has formed. Despite this rebound in recent days, the run of lower highs remains intact, so from a price perspective, little has changed to the outlook. A downtrend comes in at 12,100 today, whilst a lower high comes in at 12,125 as initial price resistance. So this confluence between 12,100,12,125 is key for the rally early in today’s session. The daily candlesticks suggest that the bulls have been mixed to faltering in recent days, something that is also reflected in the RSI which has tailed off under 50. The hourly chart shows the recent price action also showing near term bear signals setting up on hourly RSI, MACD and Stochastics. Yesterday’s high at 12,077 is a level to add to resistance. The scope of this week’s rally moving above the neckline at 11,845 means that this is a basis of support above 11,620. Renewed weakness breaking back below the 11,845 neckline would be a decisive negative signal now.
The market clearly expected the ECB to be more dovish than it was yesterday, and this drove Euro gains for a lose above $1.1265 (previously a key level of resistance). A strong positive candle brings the bulls into today’s session in a good position to now challenge the key downtrend that has run for the past nine months. Is this part of the euro basing out? There is a positive hint on the MACD lines which are close to edging above positive for the first time since February. This would be a key development if seen. However, the RSI also needs to push decisively above 60 as this has limited all of the key rallies for several months. An old floor around $1.1300 is a key gauge on price, a decisive close above would be confirmation of recovery momentum building. On the downside the hourly chart shows $1.1220 is a pivot and near term floor of note. Moving into Nonfarm Payrolls, a close either below $1.1220 or above $1.1300 would be the key development.
A band of just over 50 pips of resistance on Cable is the barrier at the moment. An old pivot around $1.2700 and the late May lower high at $1.2755 are providing overhead supply that is preventing any recovery traction from building on Cable. This comes as the market has picked up in the past week but the impetus in the move is dissipating. In the past couple of sessions there have been two unsuccessful attempts higher which have floundered intraday around $1.2740 and closed back under $1.2700. These bull failures are now beginning to see the improvement on Stochastics and MACD lines wane away. The hourly chart also shows a market slipping into more of a neutral configuration now. The resistance at $1.2755 is key near term as a closing breach would actually complete a small base pattern (implying 200 pips of further recovery). For now though as the rally momentum tails off, this three week pattern is more of a consolidation move. Initial support at $1.2665 needs to be watched as a near term low.
As market sentiment has gradually levelled off in recent sessions, Dollar/Yen has consolidated. This consolidation is stuck under the initial support of the old February low at 108.50. This is a band of overhead supply which is being repeatedly tested but the bulls are unable to find traction in a recovery. For now the market is stuck in what is a 70 pip band of consolidation (between 107.80/108.50). This is shown best on the hourly chart, with several tests of support and resistance, whilst the hourly RSI now oscillates in consolidation between 40/60. Nonfarm Payrolls are likely to provide a resolution to this pattern. A decisive break above 108.50 implies 70 pips of upside and a test of the next resistance at 109.00. It would also generate momentum again for another rebound within the downtrend channel. The falling 21 day moving average (at 109.33 today) is consistently where the rallies pull back to, whilst the channel resistance is 109.50 today. Support is building at 107.50/107.80 but a breach after such a period of consolidation would open the flood gates again.
The bulls continue to fight hard to sustain the momentum of the rally, however has the impetus now been lost? The move higher has found six consecutive positive closes, but despite a strong reaction to Tuesday’s intraday failure, an “inside day” could be beginning to reflect the stretched momentum state. The rally is beginning to consolidate. Although consolidation does not necessarily mean the end of the bull run, it does give opportunity to take profit for some nervous bulls. Momentum is strong with RSI above 70, but both RSI and Stochastics are beginning to roll over. Resistance is mounting overhead at $1344 and the key February high at $1347, with yesterday’s rebound high at $1340 initial resistance. Today’s early slip reflect little real move of note, but the hourly chart does show momentum indicators waning. Today’s focus coming into payrolls Friday is initial support at $1326.70. A strong payrolls report could be the catalyst for a breach. On the technical though we see a less positive set up with the hourly chart momentum signals losing impetus. Initial support at $1326.70, whilst the breakout at $1324 continues to protect an unwind back towards $1310.
There are hints that the downward momentum may be beginning to dissipate after yesterday’s positive candle. The market has eyed the key psychological $50 level and for now the support seems firm. Support at $50.50 (23.6% Fib) held on Wednesday and the market has since begun to consolidate. But is consolidation about to turn into recovery? Daily momentum signals are beginning to improve slightly as yesterday’s rebound has continued early today. The RSI is looking to pull back above 30 and if combined with a Stochastics bull cross, then the potential for recovery grows. The hourly char shows signals of this momentum improvement, with the hourly RSI into the 60s, which has been a barrier for more than a week. A positive divergence on MACD also reflects improvement. A move above $53.80 would constitute a small base pattern and less significant selling pressure. Initial support at a pivot of $52.45 with support between $50.00 and $50.60 increasingly important.
Dow Jones Industrial Average
A change of sentiment in recent sessions has driven the market into a strong rebound again. Three successive decisive positive candles have now overcome a number of initial technical hurdles, as the positive signals begin to mount. A move through the neckline at 25,210, breach of the four week downtrend, above the 21 day moving average (at 25,531) and now above resistance at 25,717. The prospect of a recovery gaining momentum comes with RSI at a four week high above 50, Stochastics traction after a bull cross and also now MACD lines bull cross. However the main hurdle is the first decisive lower high at 25,958 and if this can be breached it really would be a decisive signal. Momentum is strong in the recovery but the hourly chart is looking stretched. The key move would be how the bulls reacted to any intraday weakness, something that has not been really seen in the bounce so far. Another higher low above 25,210 would be a another signal of the bulls building a recovery.