- Markets are in need of a catalyst now. Looking across key forex, commodities and equities there is an array of markets stuck in consolidation ranges. The Bank of Japan and FOMC meetings have been unable to generate direction, will it be down to the US Presidential campaign and election to give us direction? Not if the reaction to last night’s first debate is anything to go by. Perhaps it will be a surprise output freeze that comes out of the meetings in Algeria between OPEC and Russia that drives market direction? Again, this is not expected. It looks like for the time being traders should be satisfied with trading around the edges. With trending moves lacking ever since the Brexit volatility calmed down, markets are in need of another big catalyst to jump start them out of their slumber.
- The next six weeks will be filled with debate over just who will be the 45th President of the United States, but also what the impact would be on financial markets. Hilary Clinton is widely regarded as having “won” the first debate, but it will be interesting to see if this is reflected in the polls, which are extremely tight. Initial market reaction to the news of Clinton’s strong showing was to buy the dollar and buy risk, suggesting that Clinton is the market’s preferred choice. But as markets have had time to digest this, there is more of a cautious attitude forming. I believe that the spectre of the Brexit result still haunts markets which priced in fairly confidently a Remain victory, only for the anti-establishment vote to win out in the end. The polls and pundits got it wrong and the Brexit debates did little to swing voters. In the US too, for the 2000 Presidential election, Al Gore was seen as winning all three presidential debates although lost the election to George W Bush. After Brexit the markets will be wary of pinning the rosette on the winner before 8th
- Can the secret meetings between the major players in global oil production at the International Energy Forum in Algeria lead to a sustainable agreement on oil production that would allow support for the oil price to rise again? I remain sceptical. The supply concerns remain a big issue for oil traders. The expectation of a deal remains low, with Iran seen as the major block to an agreement. Iran continues to increase production in the wake of international sanctions being lifted. However would Iran want to stunt this development (which has come amidst significant foreign investment in the country)? Not likely and it could easily be a repeat of what happened in Doha in April. Russia and Saudi Arabia are at or near the limit of production and so a “freeze” would not impact them too greatly. However, a production freeze could also be seen as naturally self-defeating as it would leave the way open for US shale to grab market share amidst a rising price market. Volatility in the oil price has ramped up in recent weeks and is choppy on a daily basis. No agreement on production limits is likely to be a base scenario but there would still be a break under $45.30 on Brent Crude and $43.00 on WTI. Below is a chart from the International Energy Association and their assessment of the demand/supply imbalance from earlier in 2016.
- Looking across the forex major pairs there is a stream of ranging markets. Now the Fed is not going to hike until December at the earliest, and already signalled the hike could be very slow, do not expect the dollar to go on any long bull runs for the coming months. Against the euro, sterling, and the commodity currencies there are a clutch of trading ranges. Performance against the yen will be watched as the gauge of market sentiment, however for now the pair remains supported above 100 yen. Sterling is coming under pressure again with the talk turning to “hard” or “soft” Brexit and the deal the UK could get from the EU. Key levels are closing in with $1.2800 on Cable, £0.8725 on EUR/GBP and 128.80 on GBP/JPY.
- Ranges are also present on precious metals with gold and silver very much stuck for the past few months. Both gold and silver seem to be attracted back towards their range pivot levels with $1330 on Gold and $19.20 on Silver. These medium term ranges are also present on equity markets which have become stuck ahead of Q3 earnings season.
- There is a fairly quiet week of data, but the inflation numbers on Friday could provide some volatility on G3 forex. Japan, the Eurozone release CPI numbers, whilst the US core Personal Consumption Expenditure will be watched by traders. There is an expectation for some traction finally being seen in the Eurozone inflation with an improvement to +0.4% and core data to improve to +0.9%, which would be some good news for Mario Draghi and the euro would also be supported. However the core PCE is also expected to pick up to +1.7%, although this is still seen as being fairly subdued.
- Watch for: OPEC/Russia announcement on oil production, inflation data for Japan, Eurozone and US
EUR/USD – Will inflation data drive a breakout?
- A strong showing for Clinton is a dollar positive move, but there is a lack of traction on EUR/USD as yet. Consolidation continues but the inflation data for the Eurozone on Friday could begin to show some traction on inflation. However will the core PCE show a similar, and therefore neutralising impact?
- Technically the near term rally is testing resistance around $1.1300 but this is an overhead resistance area and downtrend. Momentum indicators point to a continuation of the ranging conditions.
- Watch for: Eurozone CPI, US core PCE
GBP/USD – Further sterling weakness towards the medium term range lows
- The underperformance of sterling is an issue on forex once more, with the dollar strength from Clinton’s showing in the debates adding fuel to the recent bear move. Concerns over how the Conservative government could result in a “hard” Brexit have also weighed on sterling.
- Will there be a test of $1.2800? Probably but whether the support will be broken is a whole different issue. It could depend upon the quality of UK data as the dollar still seems to be fairly rangebound. Technicals are near term negative but are not screaming out for a breakdown.
- Watch for: US core PCE
USD/JPY – The pull towards 100 yen continues
- Since the BoJ and FOMC decisions the pair has been under consistent pressure for a test of the key support at 100 yen. The suggestion from a former BoJ official that Japan could handle 95 to 100 yen could convince traders for a move below 100 yen will be tolerated by the BoJ. .
- Longer term technical remain bearish and rallies towards 101.20 are a chance to sell. A two day close below 100 yen would be bearish with supports at 99.53 and 99.08 initially, but little real support beyond there until 96.50.
- Watch for: Japanese CPI, US core PCE
Gold – The long term bullish arguments could be seriously questioned
- Gold under pressure from Clinton’s strong showing could be a sign of how the swings will go in the coming weeks, with any suggestion of Trump doing well in the polls supportive for the safe haven of gold, but a risk positive Clinton victor would be seen as gold negative. A pick up in US inflation would be gold negative near term.
- The range continues between $1300/$1375 but the resistance has been falling away and is now $1352. Technicals point to further ranging market.
- Watch for: US Presidential polls, US core PCE
Oil – Volatile, choppy with no clear trend
- The oil price will move directly with the outcome from Algeria. The suggestions are that Iran will not play ball and this leaves the likelihood of a deal very low.
- Support remains near term at $43.00 on WTI and $45.30 on Brent Crude. These will be seriously tested if Iran declines a deal.
- Watch for: Algeria meeting for OPEC/Russia
Indices – Will the ranges continue?
- S&P 500 – The selling pressure has solidified the range but the support at 2120 needs to hold. News out of the Algeria meeting, and fallout from the Presidential debate will drive volatility but the key levels will drive the outlook. Resistance is the all-time high at 2193.
- DAX Xetra – The DAX remains a key proxy for market sentiment but the selling pressure has been accentuated by the plight of Deutsche Bank. Support around 10,260 is key near term and the technical are increasingly corrective and a breakdown opens the long term pivot at 10,120.
- FTSE 100 – The FTSE 100 is better supported than the DAX and has a fairly solid trading range still intact. The support at 6612/6653 remains strong, however the rallies continue to fail below the 6955 August resistance now.
WATCH OUT FOR THIS WEEK
Tuesday 27th September
- US – S&P/CS House Price Index
- US – Flash Services PMI
- US – CB Consumer Confidence
- US – Richmond Manufacturing Index
Wednesday 28th September
- US – Durable Goods Orders
- US – Crude Oil Inventories
Thursday 29th September
- US – GDP (Q2 Final)
- US – Weekly Jobless Claims
- US – Pending Home Sales
Friday 30th September
- China – Caixin Manufacturing & Services PMIs
- Japan – CPI
- UK – Current Account
- UK – GDP (Q2 final)
- Eurozone – CPI (flash)
- Canada – GDP
- US – Personal Consumption Expenditure
- US – Michigan Sentiment (revised)
Monday 3rd October
- China – on public holiday all week
- Eurozone – Manufacturing PMI
- UK – Manufacturing PMI
- US – ISM Manufacturing PMI
Tuesday 4th October
- Australia – RBA monetary policy
- UK – Construction PMI
Wednesday 5th October
- UK – Services PMI
- US – ADP employment change
- US – Trade Balance
- US – ISM Non-Manufacturing PMI
- US – Factory Orders
- US – Crude Oil Inventories
Thursday 6th September
- US – Weekly Jobless Claims
Friday 7th October
- UK – Manufacturing Production
- US – Non-farm Payrolls
- US – Unemployment & Average Hourly Earnings