The dollar and Treasury yields are beginning rise and regain ground again in front of a raft of potentially outlook defining risk events in the days to come, with tax reform and the Fed on the agenda today. On this one occasion though traders could be forgiven for looking past the Fed. The Republicans are expected to reveal their tax reform bill today and this flagship piece of legislation could be set to drive expectations of inflation and growth for the US economy. Treasury yields have been pulling higher and lower in recent days on a number of major factors, but tax reform could be the one key driver in the coming weeks and months. If done right and passed successfully, tax reform could be a game changer for US Treasury yields and the dollar. It is a rare occasion that the Fed meeting could be a “blink and you missed it” moment, but with expectations so strong for a December hike and the lack of anticipation for today’s meeting would suggest that the market impact could be minimal. The usually tries its best to convince that every meeting is “live”, but the only real interest is likely to come from how the Fed frames the impact of the hurricanes on inflation.
Wall Street closed marginally higher but still shows sign of a consolidation, with the S&P 500 +0.1% at 2575, whilst Asian markets were looking positive on improved risk appetite (Nikkei +1.9%). European markets are also looking positive today. In forex there is a hint of dollar strength coming through with the underperformance of the yen. The big outperformer of the day is the New Zealand dollar which has bounced on the wake of positive employment numbers. In commodities there is a rebound in the precious metals with gold and silver both higher, whilst oil is also positive once more.
The first trading day of the month is always a day for manufacturing PMIs, however focus will also come much later in the day with the Fed rates decision, even if it promises to be somewhat uneventful. Major Eurozone countries such as Italy and France are on public holiday for All Saints Day so the Eurozone PMIs are delayed for a day and the first key announcement comes with the UK Manufacturing PMI at 0930GMT. Consensus expects a slight dip back to 55.8 (from 55.9 last month). The ADP Employment change is at 1215GMT and is expected to show a growth of +200,000 jobs, up from 135,000 last month, however with the wild differentials between ADP and Non-farms last month, the markets are unlikely to read too much into the data. The ISM Manufacturing is at 1400GMT and is expected to dip slightly to 59.5 from a lofty 60.8 last month. The EIA oil inventories are at 1430GMT this week, with the crude oil stocks expected to be in drawdown by -2.7m barrels (+0.9m last week), distillates in drawdown by -2.4m barrels (-5.3m last week) and gasoline stocks in drawdown by -2.3m barrels (-5.5m barrels last week). The big focus though will come with the FOMC rates decision at 1800GMT. With expectations almost entirely baked in for a December hike, and with no press conference or economic projections this month, do not expect any fireworks, with the Fed funds range expected to stay at +1.00% to +1.25%. A slight tinkering to the FOMC statement could be seen in light of the legacy of the hurricanes impacting on inflation but nothing excessive is anticipated.
Chart of the Day – Silver
The gold and silver charts tend to move fairly similarly, however it is noticeable that silver tends to trade like gold on steroids. That is why it is interesting to see that whilst gold has held up relatively well in recent sessions, the silver price has still been trending lower. The rebound this morning is putting that trend under pressure but it is still likely that the market will be viewing rallies as a chance to sell. Closing yesterday at a three week low the market continues the trend of lower highs and lower lows, whilst using rallies as a chance to sell. The momentum indicators are tracking lower again, with the RSI confirming the three week low, MACD lines having crossed lower and the Stochastics also negatively configured. However the key technical aspect of this chart seems to be the old pivot at $16.90 which has acted as a consistent directional gauge for several months now and this has capped the upside in the past couple of sessions and maintains downside pressure. Today’s rally has added over a percent but the resistance of the downtrend and the pivot confluence around $16.90 will be tempting for the sellers. With the bears still in control of the near to medium term outlook, expect the selling pressure to resume to retest this week’s low at $16.58. A retest of the October low at $16.30 could easily be seen if the low from last Friday at $16.58 sees a sustained breach. Above $16.90 the resistance is $17.03/$17.14.
The market is clearly putting great near term significance on the neckline resistance of the large three month top pattern at $1.1660. Since the breakdown in the wake of the ECB decision last week, the market has been struggling at a ceiling of $1.1660 in each of the four subsequent sessions. The overhead supply of the top pattern is in place now and there is a resistance band between $1.1660/$1.1730. The momentum indicators remain correctively configured on the daily chart, whilst the hourly chart shows similar traits. The hourly RSI is failing around 60 whilst the hourly MACD lines are rolling over around neutral. For now the market is consolidating but the sellers may just be biding their time now for the next move lower. Expect a lower high in the band $1.1660/$1.1730 before a further decline to retest of the $1.1575 low and beyond in due course.
The range between $1.3025/$1.3335 is into its fifth week now and is an increasingly interesting consolidation. Yesterday’s strong positive candle now means that the market has rallied around 190 pips in just two sessions. However the overhead resistance of the range is now coming into play and seems to be ready to restrict the rebound today. Resistance between $1.3280/$1.3335 is now being tested and this is likely to be the first of two sessions that is outlook defining. Technical momentum indicators are just beginning to tick higher again but by no means decisively yet. This means that coming into the next few days containing a flood of massive fundamental announcements and newsflow, there is a slight positive bias to the range. A closing breakout above $1.3335 would complete the moth long base pattern and would be a target for the bulls. This would then imply around 300 pips of upside. The hourly chart shows $1.3190/$1.3230 is supportive and a breach would re-open the range lows again.
Coming after two strongly corrective candles we saw the a reaction from the bulls yesterday to maintain the control of the outlook. Despite temporarily losing control of the push higher the bulls responded well to build support at 112.95. This has now negated what looked to be a near term slip and now means that the positive outlook for a push back on the highs has been restored again. The resistance at 114.50 of the July high is back in play. The momentum indicators are looking to settle down and restore the positive configuration as the RSI pops back above 60 and Stochastics look to turn up again in the mid-60s. Buying into weakness has been the outlook for Dollar/Yen for several weeks now and the moves in recent sessions show now difference to this. The hourly chart shoes minor support at 113.60 whilst 113.25 has become a near term pivot.
Gold broke the two week downtrend at the beginning of the week and this suggests that a degree of caution needs to be taken with the outlook of selling into strength now. Yesterday’s negative candle looked to be restoring the outlook after Monday’s rebound, however another early pull higher today clouds the near term outlook. In isolation the gold chart is at risk of being neutralised by this downtrend break and with the momentum indicators flattening. The question is whether gold is a lead indicator. Looking at the outlook on Treasury yields (which are pulling higher) the yen (which is weakening again) and silver (which remains in a downtrend), the likelihood is that gold is something of a lone wolf that is likely to struggle on its own. There has been no outlook changing breaches of resistance, with the near term resistance $1282/$1284 intact and then up at $1291. The medium term configuration remains negatively biased with the MACD lines struggling below neutral and RSI struggling under 50. My expectation is that this is a rebound this morning that will fail again and retreat to test $1263.30 again and I also believe that the $1251/$1260 medium term support band will also be tested.
The day after a doji candle (open and close at the same level) it looked for much of the session that uncertainty would continue, however a late rally saw the market closing strongly and to continue the pull higher towards a test of the key 2017 resistance $54.95/$55.25. The market has used the support of the breakout at $53.75 as the basis of support for an intraday correction to push higher from. This further bolsters the breakout support between $52.85/$53.75 which will now be seen as a near term “buy zone” for any corrections. Hourly momentum indicators have used the consolidation to unwind momentum back to levels that brings the hourly indicators back to levels that the bulls are interested in again. The intraday high of $54.85 from yesterday is unlikely to be the peak. A move above $55.25 would be a high dating back to July 2015 with the next real resistance at $56.80.
Dow Jones Industrial Average
A consolidation continues on Wall Street as the market continues to drift back towards the seven week uptrend. The impetus has just seeped out of the bull run for the time being and this is beginning to pull the momentum indicators lower. The MACD lines are on the brink of a bear cross and this is certainly a red warning light against complacency for the bulls. Whilst the market is drifting sideways there is little real danger, but the support is at 23,251 and the uptrend support comes in at 23,240 today so the bulls need to be careful not to linger too long. The hourly chart shows the waning momentum, which is not back around key levels. Should the hourly RSI drop consistently under 40 and the hourly MACD lines consistently under neutral whilst the hourly Stochastics move into negative territory these would also be warnings. There is minor support protecting 23,251 at 23,329. Resistance overhead is between 23,429/23,485.