11/07/2014: Markets settle down overnight after yesterday’s Portuguese jitters

Market Overview

Was yesterday’s sell-off a nice little buying opportunity or is this the start of something far more concerning? That is the question that global investors are weighing up overnight as global markets react to the prospect of a default on Portuguese bank Espirito Santo. Wall Street markets dropped around 0.4% lower overnight, but the bulls fought back intraday (the S&P 500 had been well over 1% lower at one stage). Volatility has made a comeback, with the VIX Index of volatility in S&P 500 options jumping over 8% yesterday. If the contagion spreads to other banks in Europe, expect the VIX to see further gains as traders rush to protect portfolios.

Asian markets were also fairly mixed overnight, although the Nikkei was around 0.3% lower as traders reacted to the stronger yen amid the flight to safety. After the initial decline yesterday settled down, the European markets seem to be quite stable once more today and with a lack of any real driving data today it will be interesting to see the reaction up until the US session.

After yesterday’s flight into safe haven assets, forex trading has been fairly calm as we move into the European session. It would be that traders will be assessing whether there are signs that the troubles in Portugal are a one-off or something more systematic. However currently it seems to be that the benefit of the doubt is being given. With German inflation data coming in line with expectations, there is now little data for traders to focus on other than Canadian unemployment which is due at 13:30BST and is forecast to remain flat at 7.0%.

Chart of the Day – EUR/JPY

The chart has been suggesting downside pressure for several weeks and that rallies should be sold into and this remains the case. Even though yesterday’s intraday breach of support at 137.65 did not hold on to the break into the close, the pressure is growing. Momentum indicators are firmly in bearish configuration with the MACD lines turning lower below neutral and the RSI consistently below 50. The intraday hourly chart shows a struggle to recover back above 138.00 now and rallies should be a chance to sell. In fact any sell signal that comes below 138.75 should be pounced upon now. The chart is shaping up for a retest of the February low at 136.30.

EURJPY   11072014

EUR/USD

The euro fell sharply lower yesterday as currency traders had to try and assess the impact of the troubles in the Portuguese banking sector.. The key level of support remains this band between $1.3574/$1.3585. Again this was tested yesterday and successfully held. However it does not appear as though that will be the end as already today the euro is drifting back lower again. Momentum indicators on the daily chart still suggest that ultimately the move will be lower and a test (with an ultimate breach) of this support will be part of that prior to a move back towards the $1.3500 support area. The intraday hourly chart shows the downside pressure has now increased significantly, with the rate trading below all hourly moving averages which are beginning to turn lower too. There is an area of resistance around $1.3620/$1.3650 which should be seen  as a chance to sell if there is a rally today.

EURUSD   11072014

GBP/USD

Perhaps it is a measure of how traders view sterling lately but Cable was hardly impacted by the flight to safety across global markets yesterday. The consolidation that has taken GBP/USD sideways now for almost two weeks continues. The support is still coming in around $1.7100 and the moving averages continue to catch up. The RSI and Stochastics momentum indicators are still in bullish configuration, but the MACD lines are now crossing over. Quite whether this signal on the MACD lines is something to get worked up about is unsure, it is the first weak signal on Cable for a while but is understandable after such a strong run higher hits a bout of consolidation. I am still of the view that weakness is a buying opportunity on Cable and that it would be very risky to go short into the strength of this uptrend. The support around $1.7060 would appear to be ideal.

GBPUSD   11072014

USD/JPY

Have talked several times about the closing level of 101.30 on Dollar/Yen seemingly being a key barometer. Although there have been several intraday dips below this level, the rate has not closed below 101.30 since 3rd February. I see this level then as a barometer for risk. Yesterday’s flight to safety swept global markets and Dollar/Yen dipped sharply, but it recovered to close at 101.31 and held on. This is another huge warning shot across the bows, and today the rate is lower again to once more put the pressure on the closing low. If we see this level breached then I would be inclined to turn from a neutral medium term view to negative. Momentum indicators are under increasing pressure but nothing drastic yet, while moving averages are all now in bearish decline. The intraday chart shows resistance now at 101.40 and this will be what the bulls will be looking to breach today to relieve some of the pressure.

USDJPY   11072014

Gold

After three weeks of a sideways trading band, yesterday we finally had a breakout. This move above $1332 now implies a target of $1358. The move is also now confirming the break of the primary downtrend which has bigger long term implications. This is also backed by the longer term moving averages now advancing, whilst momentum indicators are looking strong. The overnight dip is forming support at $1335, but any move back towards the support now at $1332 should be seen as a chance to buy. There is further support at $1325 which is back inside the sideways band and any correction below there would probably now be an indication of a rejection of the breakout.

Gold   11072014

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