The WHO seems to have provided a degree of respite to the market fears over the Coronavirus. The World Health Organisation has stated that there was not enough information yet to declare a “global emergency” surrounding the spread of the virus that has already killed now 26 people in China. Markets are breathing a sigh of relief this morning and that is resulting in a swing back out of safety and back into risk plays. The question is whether it is simply some respite before the next swing back into safety. The development of the Coronavirus will be key. For now though, bond yields are recovering higher, which is pulling back on assets such as the Japanese yen and gold. The Chinese yuan which is clearly acutely impacted, is stable this morning a shade under 6.93 versus USD. The oil price has found some support, whilst equities which had threatened a correction in recent days, seem to be getting back on the bull train. Broader forex moves are a little cautious still, perhaps as there is still the potential for the virus to spread further and wider. However, the euro, which has been under increasing pressure in recent sessions, does not look overly positive right now. In the wake of yesterday’s ECB meeting, there has been a decisive negative move. Christine Lagarde cut a cautious President in the press conference. Economic risks are still “tilted to the downside” (which some had expected to have been tweaked). Furthermore, as the review of monetary policy operations by the ECB was released on its website, traders seemed to meet the announcement with a degree of frustration. Perhaps that it will take a year to complete was enough to see selling pressure on the euro, driving EUR/USD below key technical supports.
Wall Street closed a shade higher yesterday as the S&P 500 unwound all the earlier losses to end +0.1% at 3325. With US futures also higher there was a degree of stability on the Nikkei, even as the Shanghai Composite continued to fall sharply (-2.8%). In Europe, the outlook is set for recovery, with FTSE futures +0.7% and DAX futures +0.8%. In forex, there is limited decisive moves, although a marginal risk positive bias as JPY and CHF underperform. In commodities, there is a mild slip back on gold by -$3 but the consolidation essentially continues. There is a minor pick up on oil this morning amid respite from sharp recent selling.
It is an important day for global growth prospects as the economic calendar is awash with flash PMIs for January in focus. The Eurozone flash PMIs are at 0900GMT with a continued improvement expected. The Eurozone Flash Manufacturing PMI is expected to improve to 46.8 (from December’s final reading of 46.3), whilst the Eurozone flash Services PMI is expected to hold at 52.8 (52.8 final December. This would mean the flash Eurozone Composite PMI is expected to improve slightly to 51.2 (from 50.9 final December). The UK flash Manufacturing PMI is at 0930GMT and is expected to improve to 48.9 (from 47.5 final December) and UK flash Services PMI expected to improve to 51.0 (from 50.0 in December). This would mean that the UK flash Composite PMI is expected to pick back up into expansion to 50.6 (from 49.3 in December). In the afternoon, the US flash Manufacturing PMI is expected to improve marginally to 52.5 (from 52.4 in December), whilst the US flash Services PMI is expected to improve slightly to 52.9 (from 52.8 in December).
Chart of the Day – German DAX
The outlook for the DAX has been very positive until the last couple of sessions. Two decisively negative candles in a row threaten the positive outlook, but we see this to be part of the next buying opportunity. Breaking out above the resistance at 13,425 early in January took the market to two year highs and effectively completed a ten week range breakout. The implied target of the break remains 13,900. However, the bulls were unable to sustain a breakout above resistance at 13,596 for an all-time high and the market has since corrected back from 13,640. However, we see this corrective slip as a pullback to the latest breakout and should be a chance to buy. There is gap support at 13,334 which is now a buying area and this morning futures are looking for a reaction higher. Momentum indicators remain strongly configured, with the RSI consistently bottoming around the 45 mark whilst MACD and Stochastics are positively set up. The support of a five month uptrend comes in around 13,210 today, so there is still some potential room to correct back, however, we are increasingly looking at this move as a buying opportunity now. We expect further new all-time highs above 13,640 in due course.
The ECB meeting as not done the euro bulls any favours at all. A decisive negative candle on EUR/USD has continued the corrective move of the past few weeks and driven an outlook changing move below $1.1065. We have been watching this support of the first key reaction low of the October to December rally, knowing that it was crucial to holding on to a positive outlook. However, having been breached the old medium term uptrend bias has been confirmed as broken. A new downtrend phase is in place. Lower highs and lower lows, with a downtrend channel forming over the past few weeks. Momentum indicators confirm the breakdown, with RSI below 40 (a key move), MACD lines below neutral and Stochastics negatively configured. This may still just be part of a bigger trading range $1.0980/$1.1240, but in the least there is a negative bias formation now. Subsequently, we favour selling into strength as a strategy. There is immediate overhead supply at $1.1065/$1.1100 which is now a sell zone. It would need a breach of $1.1120 resistance and the downtrend channel (at $1.1140 today) to now change to a positive outlook. A move back towards $1.0980/$1.1000 support area now looks likely.
Sterling continues to hold up well as Cable builds upon Wednesday’s bull breach of resistance. We are now cautiously positive on outlook. The move is helping to solidify the medium term support of the band $1.2900/$1.3000 as the lows of $1.2950 and $1.2960 have been formed in the past two weeks. Momentum indicators are tentatively edging positively again, with the RSI above 50, MACD lines turning positive around neutral and Stochastics rising. The reason for caution is that the market has not kicked on with the breakout above $1.3117 this week. It has been met by consolidation. The 23.6% Fibonacci retracement (of the big bull run $1.2192/$1.3515) comes around $1.3200 and is another resistance area. Getting through here would see the outlook really progressing for the Cable bulls. The hourly chart shows initial support at $1.3095 with $1.3030 a minor higher low.
A third bearish candle in as many sessions sets Dollar/Yen on a corrective path. We talked yesterday about the downside implied target of 109.20 from the top and this has all but been achieved already. The bulls will be looking to build support around the 109.00 medium term pivot, but given the magnitude of recent candles, the deterioration in momentum and downside potential, there could be further to run in this move. The RSI pulling below 50 would be a trigger to see a correction back into 35/45 area that has been consistent since August, whilst the MACD and Stochastics lines are only just bear crossing now. The breakdown at 109.70 is now resistance and a pivot line today, and a failure of any recovery around here would be a selling opportunity. The resistance in the band 110.20/110.30 is growing stronger. Initial support at yesterday’s low at 109.25.
There is a continuation of recent ranging conditions on gold which has now formed a trading band of $1536/$1568 over the past two weeks. A mix of signals leaves the technicals in doubt over decisive next direction, however, we still favour the weakness being bought into. An uptrend of the past five weeks runs at $1555 today and it is interesting to see each of the past three sessions testing the trend before rebounding higher again. It suggests a market buying into weakness and with yesterday’s positive candle to test the $1568 resistance, there is a positive bias. However, there is caution across momentum indicators with MACD and Stochastics in near term decline (whilst the price is rising) and RSI almost entirely flat. A close above $1568 would be positive, with the bulls in control back above the 23.6% Fibonacci retracement (of $1445/$1611). Support of 38.2% Fib at $1548 is also increasingly important. Initial price support at $1550/$1551.
After the sharp recent sell-off, the oil price begun to steady. Having held the support of the November low (the bottom of the band $54.75/$55.00) the bulls have finally found some sort of footing in the market. The question is how sustainable it is. The hourly chart shows initial resistance at $56.05 with the 61.8% Fibonacci retracement (of $51.00/$65.65) at $56.60. Momentum remains very negative with MACD and Stochastics especially suggesting the bulls have a lot of work to convince even support is forming, let alone recovery. A close below $54.75 would be a key downside break. Tentative signs are there but it is very early days.
Dow Jones Industrial Average
We continue to see the Dow as a buy into near term weakness. All the trends remain positive and momentum is strong. The slip back over recent sessions should be seen as an opportunity. Despite the market closing lower yesterday, the one day candlestick was actually positive (closing above the open) as an intraday correction was solidly bought into, forming a hammer candle pattern. The fact that the low of 28,967 was in the 28,789/29,010 support band, in a move which bolsters the five week uptrend (rising at 28,955 today) increases the conviction of the support. Momentum indicators are positively configured on a medium term basis, and the recent move has just helped to unwind any sense of stretched momentum to renew upside potential. This week’s all-time high at 29,373 now comes back into view for a retest and ultimately further all-time highs. Initial support now 28,967.