24/09/2014: Markets in consolidation as the US session approaches

Markets have been fairly settled this morning. With no real moves seen on forex pairs, indices have fluctuated around the flat line, whilst gold and silver have also seen their rebounds from yesterday stunted from continued recovery. The preference for safer haven assets, which was seen yesterday after news of air strikes being engaged against Islamic State, has just receded a little today. It seems as though the move was just taking into account the initial shock, however this adds a new dimension to the geopolitical tensions that could drive this safe haven trade and is something to now be aware of and ready to act upon.

The worse than expected German Ifo business climate data has passed seemingly unnoticed, despite a 5 month low at 104.7 which was below the 105.8 that had been forecast which was the lowest reading since April 2013. This continues a trend of disappointing German data after yesterday’s Manufacturing PMI showed continued decline throughout 2014. Traders are now looking towards this afternoon’s New Home Sales at 15:00BST which are expected to show a 4.4% improvement to 430,000.

As the week has progressed, forex volatility is certainly on the wane. A dearth of tier 1 economic data means that there is little to drive major pairs. Furthermore, with sterling volatility settling back down again after the Scottish referendum. The most significant move has been in the Japanese yen which continues to show signs of recovery against the dollar after a significant depreciation in the past few weeks.

Dovish comments (unsurprisingly) from FOMC voting member, Narayana Kocherlakota, on Monday which stressed a need for constraint in rate hikes with the path to 2% inflation still by no means certain added has been a contributory factor to the subdued performance of the US dollar in the past couple of days. There has been no major selling pressure on the Greenback yet, however the consistent dollar strength of the past few weeks is certainly being constrained. This has shown in the Dollar Index which has just dropped back in the past couple of days.

DXY   24092014

Equity markets are having a wobble in recent days. As it usually the case, the European markets have been hit worse than in the US, however today’s consolidation is giving a pause for breath. With back-to-back triple digit declines on the Dow Jones Industrial Average (the first time this has been seen since June), there has also been a three day decline on the S&P 500. There has not been a four day consecutive decline on the S&P 500 since the 4% correction in late July. The S&P futures are pointing to a slight 1 point rebound in early trading, whilst there is good support at 1978.

However, the sharp move higher (+9% on the day) in the VIX Index of S&P 500 options volatility suggests that portfolio managers are looking to take out some downside insurance on their long portfolios (i.e. through increased demand for put options) suggests there is a fear of a correction growing.

VIX   24092014

The FTSE 100 has already broken down and is targeting downside of 6640, which is only around 30 pips away from current levels around 6670. The DAX Xetra has also now this morning broken down below the key pivot level at 9600. Whilst there has been a bounce back, the breach suggests the support may be be as strong as it once was and suggests that downside pressure is still quite high. As already touched upon, the S&P 500 has support at 1978. The key support on the S&P 500 comes in at 1950 which is a confluence of the primary uptrend and the price support band 1945/1955.

 

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