Slowdown in China trade data hitting sentiment

Market Overview

Will China again be the factor that breaks the bulls? Overnight the trade data from the world’s second largest economy was truly awful. Although double digit declines were already expected for both imports and exports, recording -25.4% for exports (-12.5% was expected) and -13.8% for imports (-10.0% expected) drives real concerns of the pace of the slowdown Not only does this reflect badly on the emerging markets that supply China but also the state of global demand. There are certain mitigating factors with February being the month of lunar new year, the drop in exports was still the biggest year on year decline since 2009. Will this slowdown in China trade data continue to be a negative hit on sentiment and have the capacity to derail the risk recovery? Already we are seeing the yen beginning to strengthen again, whilst the oil price is off the top in early moves. The minor gains on Wall Street last night (S&P 500 +0.1%) have been followed by broad selling on Asian markets, although the degree of the downside pressure has not been too severe (Nikkei down 0.8%). European markets are also weaker around the open.

Forex trading shows a fairly standard risk-off outlook, with Dollar/Yen lower and the commodity currencies also weaker across the board. Interestingly the euro has been supported again today as traders look forward towards the ECB on Thursday. Gold is trading a few bucks higher again, whilst the oil price is around 1% lower.

Traders will be digesting German Industrial Production data (better than expected) and French trade data early in the session, whilst Eurozone GDP is expected to be revised slightly lower on the year on year data to +1.5% (from +1.6%). The API weekly crude oil stocks is expected to show a build of 3.5m barrels.

Chart of the Day – DAX Xetra

Corrections have been used as a chance to buy on equity markets in recent weeks and the DAX is no different. However the rally on the DAX is today coming under strain. The uptrend that has been tracking the recovery today comes in at 9611, which is also interestingly right around the latest breakout around 9600 which is also a basis of support. The momentum indicators are positive but the support of the uptrend needs to hold to prevent the recovery rolling over. The concern for the bulls is the fact that once more the Fibonacci retracements of 8355/12390 have come in as a key pivot. This time the 61.8% Fib level at 9897 has capped the upside to within two ticks before the rally has rolled over last Friday. The big question is now whether this support around 9600 can hold otherwise the DAX could quickly find itself back at 9308 (the 23.6% Fib level) again. This is an important moment for the recovery with the confluence of supports. The intraday hourly chart shows 9690 is initial support that has already been breached early in the session today to re-open 9600, whilst there is further support back at 9580. A move above 9905 resistance opens the next resistance at 10,122/10,165.

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Despite a rather choppy intraday move yesterday, the euro seems to be settling down. This may not come as too much of a surprise with the crucial ECB meeting approaching on Thursday. A very small bodied candle with just 6 pips gained on the day reflects the settled nature of the chart which has recently rallied towards the overhead pivot at $1.1050 but once more seems to be finding this as the basis of resistance. The momentum indicators reflect both the rebound (on the rising Stochastics) but also the medium term neutral outlook (RSI flattening at 50, MACD flattening around neutral) which has now taken hold. The hourly chart shows a slight positive bias but with little real decisive intent from the bulls. A loose pivot around $1.0950 was again supportive yesterday. The key near term support at $1.0900 protects a decline back towards the medium term lows around $1.0800 again. I fully expect the pivot band $1.1050/$1.1100 to contain the bulls in front of the ECB meeting.

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I talked yesterday about the slowing force of daily gains, and this continued yesterday with 30 pips of upside. Taken in isolation that would seem to be rather positive but for a second session the bulls have had to fight back from early weakness, with Cable down almost 100 pips at one stage. The fight back is admirable but this is the second day this has been necessary and the strength of the candles is waning. I still believe this is a rally that is a chance to sell and the downtrend that has been in place since December is today coming in at $1.4310. This comes with the RSI possibly rolling over around 50 and I think that the selling pressure may not be long in coming now. Perhaps it will be a dovish ECB that induces relative US dollar strength on Thursday but I feel that the rally continues to slow. The intraday hourly chart is reasonably positive still although the hourly MACD suggests yesterday’s late rally could be rolling over again, whilst also showing a slight bearish divergence. Yesterday’s range is now seen as the key resistance at $1.4282 and the key near term support at $1.4132.

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My fears of the bulls having lost control of the rally could be coming true as the overnight strengthening of the yen has pulled the pair lower. The 23.6% Fibonacci retracement on the daily chart which had been the basis of support for the bodies of the candles seems to now be giving way to the downside. Furthermore, momentum indicators are all rolling over to the downside with the RSI falling over and perhaps more concerning the Stochastics crossing lower. The intraday hourly chart shows the pivot at 113.15, which has also been a basis of support, has also been breached as hourly momentum looks increasingly corrective again. A continued failure below the 113.15 support would now re-open 112.15 as the next support. Resistance comes in at 113.50 with the Fib level on the daily chart before 114.25. Increasing we are seeing intraday rallies being sold into at lower levels. This is a concern for general market sentiment.

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There seems to be a consistent feel now to the creeping gains on gold. Once more we have any sense of a negative shift being shut down as the bulls return to pull gold higher again. This comes with the price trading solidly above the $1261 breakout resistance and should help to ensure a retest of key early 2015 highs at $1285 and $1306. My reservations about the momentum indicators are still present and whilst the bearish divergences may at some stage kick in to the price, for now the upside creep continues. The hourly chart suggests that perhaps the recent moves on gold are more of a consolidation, showing more of a range having built up in the past few days between $1256/$1280. However, signals are still positive for the continuation of the trend higher. The near term caveat is that the 4 week uptrend today comes in at $1232 giving plenty of room for a correction still.

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The incredible rally continues and has now added over 40% to the WTI price since the bottom of $26.05 just under 4 weeks ago. The base pattern above $34.80 has been confirmed now and the implied target is $43.50 in the coming weeks, but the way WTI is accelerating higher, it may not even take that long! As the price has used the uptrend as a basis of support (today coming in at $35.40) but has accelerated in the past couple of days to test the next upside barrier coming in at the old key August 2015 low at $37.75 and the January 2016 high at $38.40. Through there and the bulls will be eying $40 again. The incredible run continues to track strengthening momentum indicators with the RSI now at its highest level since May 2015, MACD lines now positive and the Stochastics also very strong. With a series of higher lows on the hourly chart, there is little reason to suggest the oil price will not continue higher. With yesterday’s low at $36.10 the initial support, the previous consolidation band $34.40/$35.30 provides more considered support  which is also where the neckline of the breakout is at $34.80. The rising 89 hour moving average at $35.56 is also an excellent basis of support now.

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