Last updated: May 3rd, 2017 at 09:55 pm
There has been a sharp reversal of sentiment on equities that came late in yesterday’s session that now puts risk appetite under pressure again today. The minutes from the March FOMC meeting contained two aspects that traders are now factoring in. It has come as a minor shock that most Fed members are looking to start unwinding the Fed’s massive $4.5 trillion balance sheet in 2017, which seems to have be earlier than the market had been expecting. This means instead of rolling over the expiring Treasuries and Mortgage Backed Securities, the Fed would look to stop reinvesting the proceeds. This would be the continuation of winding down the QE programme and make the Fed less accommodative. Furthermore, “Some participants viewed equity prices as quite high relative to standard valuation measures”. With these two factors, equities in Wall Street took a hit and Wall Street sold off sharply into the close. Safe haven assets took a bid, with support also bolstered by the uncertainty of the meeting between Presidents Trump and Xi at the end of the week. With Treasury yields back lower, the dollar has also taken a bit of a hit. The US 10 year Treasury yield remains close to its multi-month low of 2.300%.
Having shown initial strength on the back of the strong ADP employment numbers earlier in the session, Wall Street closed lower with the S&P 500 -0.3%. Asian markets also closed sharply lower with the Nikkei -1.4%, whilst European equities are also under significant pressure today. Forex majors show a slightly corrective move on the dollar today with a safe haven bias of yen strength and Aussie underperformance. Gold and silver are lower slightly, but it will be interesting to see if this continues with equities under pressure. Oil is around half a percent lower again after the surprise EIA crude oil inventory build yesterday.
Today is the quiet day of the week with regards to economic announcements. There is little on the agenda other than the US weekly jobless claims at 1330BST which are expected to improve marginally down to 251,000 (from last week’s 258,000). Aside from that a speech from Mario Draghi in Frankfurt will be eyed for any hawkish hints from the ECB but given the recent disappointment on inflation, this is unlikely.
Chart of the Day – GBP/AUD
In the past week we have seen signs of a stronger sterling whilst the Aussie has come under pressure with a cautious outlook from the RBA, this is all adding up to a more positive outlook on GBP/AUD than has been seen for a while. The recovery is now back to testing the resistance of a six month downtrend. This downtrend was tested just over a week ago prior to a brief dip back that left resistance at 1.6555. The positive candles over the past week are racking up now and with the gains today the market is putting real pressure on the resistance at 1.6555 for a near term breakout. With the recent improvement seen in the RSI and also the MACD lines pushing above neutral for the first time since mid-January, the momentum is pointing to increasing upside pressure. The early intraday breakout above 1.6555 has taken the pair to a two month high and a closing breakout opens the key January high at 1.6750 which is a long term mid-range pivot. Today’s move is also above the falling 144 day moving average (c. 1.6501) which has been a basis of resistance to the key moves in the past 10 months. The hourly chart shows a positive momentum configuration and a support band between 1.6375/1.6515 as corrections are being bought into. There is near term pivot support at 1.6350 that the bulls would not want to break below.
The market has been trading in a sideways formation for the past few sessions. However, despite the lack of direction there is still an interesting battle for control going on. The momentum indicators may be a touch more benign than the corrective outlook of late March, but there is a consistent threat from the dollar bulls to retake control and drag the pair lower. The market continues to post lower daily lows, only for the buying to return late in the session to hold up the move. This was seen again yesterday in the wake of the Fed minutes which drove a 50 pip rebound from the low at $1.0632. However the overhead resistance is sizeable around $1.0680 and below the $1.0710 old pivot means that the outlook remains under pressure. The hourly chart shows a 70 pip range has formed now under $1.0700, for which it would need s closing breach to start driving direction.
It is interesting to see the market continuing to consolidate in a range of around 240 pips above $1.2375 support. The momentum indicators are increasingly benign, whilst yesterday’s bull candle with subsequent early gains today simply continues the recent choppy range play. This comes as the moving averages continue to converge, all of which reflects a lack of near term direction. This is also reflected on the hourly chart shows is also somewhat benign, having settled between $1.2420/$1.2495 in the past three sessions. However there is a marginal positive bias with the outlook on the medium term chart and the dollar weakness in the wake of the Fed minutes also helps to support the outlook with a low at $1.2445 now in place. Above $1.2495 opens $1.2557 initially.
The dollar bulls have once more failed to drive the market higher as yesterday’s initial intraday rally was sold into. This formed a very disappointing candle for the bulls with a long upper shadow and a close near the low of the session, reflecting a failure of the bulls. This came as the dollar suffered in the wake of the Fed minutes last night and with a safe haven bid, the stronger yen has continued today. This is now pulling the pair below the support of the long term uptrend since September and once more looks ready to test the key March low at 110.09. Momentum remains correctively configured and suggests that the bulls are continuing to struggle. The hourly chart shows another occasion where the pivot resistance of 111.60 has been a ceiling with yesterday’s high at 111.44. Rallies remain a chance to sell. Below 110.09 the next support is 109.35, the 50% Fibonacci retracement of 100.07/118.65.
The consolidation between $1240/$1261 consolidation is becoming somewhat messy now. Despite the small bodies on the candlesticks of the past couple of sessions, moves to test higher and lower have failed and the market does not seem ready yet for a breakout. Momentum retains a positive bias with the bullish configuration of the momentum, however momentum also looks a little tired and the market is struggling for direction. This is shown in the price action of yesterday’s session where the price was pulled back and forth only to start to fall away again overnight. There is a mild preference for an upside bias with the recent bull run higher but the outlook is very much in the balance, whilst there is key resistance at $1261 and $1263.80. Yesterday’s low at $1243.30 comes just above the $1240 basis of support for the range low.
The recovery on oil has been hit by the disappointment of yet another inventory build on crude stocks, when a drawdown had been expected. This has pulled the rally on yesterday’s candle lower and it will be interesting now to see how the bulls react to this little near term setback. There is a band of support now broadly between $50.00/$51.22 which will be viewed by the bulls as a prospective band of support and a potential buy zone if that support begins to build. The hourly chart shows a strong bearish engulfing one hour candle at the EIA announcement yesterday afternoon. However the mini trading band of the past few days between $49.90/$50.85 will now be key for the near term outlook as the market just unwinds.
Dow Jones Industrial Average
What a difference a couple of hours of selling can make. The market had been building strongly for an upside break earlier in yesterday’s session, but that has now been put on ice after a sharp intraday sell-off into the close last night. The Fed meeting minutes changed the intraday outlook and it will be interesting to see if they change the near to medium term outlook. Yesterday’s strong bear candle is now a significant near term chart feature leaving what could now be a false breakout of the range, at 20,887. Momentum indicators have reacted lower and this would now heap pressure back on the downside support at 20,518. The market is back inside the base pattern that has been forming over the past couple of weeks, but the bulls will be a bit more cautious now. The support at 20,518 now increases in importance as if it is broken then the potential recovery will have been breached.
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