Commodity markets driving deterioration in risk appetite

Market Overview

Markets have been trading under an increasingly negative sentiment for a while now, but something felt different yesterday. Once more on the trigger of weaker China data (industrial profits), the sell-off has been exacerbated by the targeting of short sellers on mining giant Glencore which has sent ripples through the commodities markets again. The concerns over commodity markets and a subsequent deterioration in risk appetite resulted in huge losses on European markets yesterday. This was followed by Wall Street sharply lower (S&P 500 down 2.6%) and the Asian markets have plunged overnight. It appears as though the European markets are still under pressure again today, with eyes on the key commodities plays once more. India has become the latest in a long string of countries to continue to loosen interest rates (by 50 basis points to 6.75%) but this is unlikely to stem the tide for commodities or their mining companies. The concerns over global growth are reflected in the yield on the US 10 year Treasury falling back to a 5 week low and the lowest since the Fed failed to hike rates. The classic safe haven plays (Treasuries and yen) are in favour.

In forex trading there are a number of conflicting signals. It would appear that the market may be taking a view off the back of the moves from yesterday that market turmoil could potentially prevent a rate hike, because the dollar remains under pressure today against the yen and the euro. However clearly the commodity price weakness is weighing on the commodity currencies with the Aussie especially under pressure but also the Kiwi and Canadian dollar lower. Precious metals also remain under pressure with the gold price remaining weak. Although the oil price has settled overnight, it will be interesting to see if it can prevent further selling pressure again today if risk appetite continues to deteriorate.

Aside from concerns over market turmoil, traders will be on the lookout for a clutch of Eurozone sentiment indicators all out at 1000BST, whilst the flash German CPI data is at 1300BST (a dip on the CPI from 0.2% to 0.1% is expected). At 1400BST the US Case Shiller Home Prices Index is expected to improve slightly to 5.1% (from 5.0%), whilst the US Consumer Confidence is at 1500BST but is expected to dip back to 96.1 (from 101.5 last month).

Chart of the Day – FTSE 100

The volatility in the daily trading seen on equity markets in the last week has been incredible. The FTSE 100 has been flying around all over the place with a different direction every day. However there is a growing feeling that there could be another big sell-off just bubbling under the surface, which could come through today. The fact that the strong bearish candle from yesterday entirely unwound a strong bullish candle from Friday is a real concern. This has left a massive resistance now at 6120 underneath the key September highs around 6250. The key reaction low at 5933 has been broken at the open today and a decisive breach re-opens the big sell-off low at 5768. The momentum indicators have been suggesting for a while that the rallies would be treated as a chance to sell and the concern is that the RSI has plenty of downside potential. The intraday hourly chart is not horribly bearish and really just reflects a market that is using rallies as a chance to sell. There is minor overhead resistance at 6025.

FTSE   29092015


Perhaps it is something to do with the commodities rout and concerns over China, but the euro is strengthening again. Previously this has happened as an unwind of the carry trade (due to risk off and an expectation that market turmoil would prevent a Fed rate hike). The session yesterday was rather choppy until some direction was finally found in the afternoon as the euro bulls supported once more deter any thoughts of pressure back on the key pivot support at $1.1100.  This is rather in keeping with the technical outlook that remains neutral near term, with momentum indicators picking up once more and the euro now trading back above all the moving averages. Having breached the initial resistance around $1.1215 yesterday, the pair has continued to move higher and is set to test the reaction high at $1.1295. This is effectively around the mid-point of this upper part of the big medium term trading range between $1.1100/$1.1465. A move above $1.1295 would re-open the range highs again. Hourly momentum is improving for the test. The pivot level at $1.1215 becomes supportive again, with $1.1150 now a key support.

EURUSD   29092015


Cable is absolutely hanging on to the range support by a thread now. For a second straight day, Sterling has come within a whisker of closing below the range low at $1.5170. The breakdown has not been achieved yet, however the bulls are finding it tough with trading for much of yesterday being well clear of the support until the bears finally took control towards the close. However, looking at the daily momentum indicators, the RSI is settling and the Stochastics which have been negative are also slowing, furthermore, yesterday was the first session in 6 that there was not a lower low on the price. The intraday hourly chart continues to show a bull divergence, whilst the six day downtrend has also been broken. The support from Friday came in at $1.5133 and the pressure is growing as a breach would open $1.5088. There still needs to be a move above a key near term reaction high, with yesterday’s peak of $1.5240 now the initial near term barrier, with $1.5285 key.

GBPUSD   29092015


A drive for safe haven plays has meant the yen strengthening once more. However in the context of the range over the past few weeks this is still nothing to get too worked up about, yet. The Range between 118.30/121.70 has tightened to 119.00/121.30 but there never seems to be more than a day or so where we find consistent direction. We now have yesterday’s bear candle and this morning’s move has continued to correct lower. However is this going to be directional move? It is too early to day. On the intraday hourly chart, in the past few weeks, every time the hourly RSI has got back to 30 it has limited the downside and support has come in for another rally. If this is to continue then the hourly RSI at 24 is looking stretched. It is always difficult to decipher the change from a range play to a trending play, and right now the momentum is showing little sign of a reversal. However, the pair is also now close to testing key near term supports at 119.20 and 119.03. The initial resistance is at 120.00.

USDJPY   29092015


The selling pressure on gold ramped up once more yesterday as the entire bull candle of Thursday last week was retraced. This downside pressure has continued today and the market is increasingly putting across bearish signals now. The Stochastics have crossed over negatively and any trend higher that may have been forming has been broken. The intraday hourly chart shows that having peaked at $1156.30 a series of lower highs is now in place at $1148.60 and now at $1136.80. The support at $1121.00 is the immediate test and this will be the level that really determines if the bears are in control. This is a key near to medium term reaction low and a breach would re-open a move back towards $1098 again. The hourly momentum is increasingly weak and intraday rallies are a chance to sell now.

Gold   29092015


Looking at the selling pressure seen on equity markets in the wake of the weak China industrial data, perhaps the oil price did not sell off too badly. However, the technical trend of lower highs that have been present through the past four weeks continues to be a drag on the price back towards another test of the key support at $43.20. I have been worried about the falling Stochastics over the past few weeks and perhaps this is reflective in the tendency for lower highs, however they are now beginning to slow their deterioration which could be encouraging for maintaining the support. The recent moves and continuation of lower highs have strengthened the resistance at $47.15, whilst also leaving another lower high at $46.40. The strategy has to be to continue to play the range but use rallies as a chance to sell. The hourly RSI has played a strong role as an indicator of the range in the past week and the move towards 30 would suggest the downside potential is limited. Initial resistance comes in around $45.50.

WTI   29092015