The politicians on Capitol Hill have finally got their act together and come to an agreement that can bring to an end the US Government shutdown. And the bulls on global equity markets love it! The news resulted in yet another burst of buying pressure through US equities and a reduction in the volatility on S&P 500 options (the VIX). So all is now resolved, at least for a few weeks until the deadline extension runs out on 8th February. The euphoria has not really stretched to the bond market, with the yield on Treasuries dropping this morning, but it is interesting to see that the dollar has found a degree of support again within its recent consolidation this morning. The Bank of Japan monetary policy meeting has passed with little incident. No changes to rates of -0.1%, the yield curve control (around zero on the 10 year JGB yield) whilst its inflation forecasts were also held steady. The BoJ will be mindful that the yen has been stronger on market expectation of possible moves towards a less loose monetary policy, but this is likely to drive caution in the coming months.
Wall Street stormed higher in the wake of the agreement in Congress leaving the S&P 500 sharply into all-time highs +0.8% at 2833 and closing around the session highs. This strength has moved into the Asian session with broad based gains, as the Nikkei was +1.3%. In Europe, markets are also positive with the DAX challenging its all-time highs. In forex, the rebound on the dollar that has been seen early in the European session is helping to drive mild outperformance across the major pairs, with the Aussie underperforming. In commodities, the rebound for the dollar has not prevented gains for gold which is around $3 higher, whilst oil is also higher by around half a percent.
Traders will be looking out for the UK public sector net borrowing level at 0930GMT which is expected to show +£4.4bn (marginally higher than last year’s +£4.2bn for December), whilst the German ZEW Economic Sentiment is at 1000GMT which is expected to improve marginally to a still decent +17.8 (from 17.4). The Eurozone Consumer Confidence is at 1500GMT which is expected to improve very slightly to +0.6 (from +0.5 last month) which could continue to be the highest level recorded since January 2001. The Richmond Fed manufacturing index is also at 1500GMT and is expected to dip very slightly to +19 (from +20) but remain around multi-year highs.
Chart of the Day – German DAX Xetra
The huge bull candle posted on Friday broke the market out to a new ten week high and brings the all-time high back into range once more. There is a definite run of higher highs in that ten week period, however also littered with disappointment. The bulls have seen moves like this before only to see a false break and subsequent retracement. That means that the days in the wake of the breakout will be vital. The previous key breaks of resistance have lasted maybe two days before a move to take profits, which drove the market almost 600 ticks lower in December and almost 300 ticks earlier this month. Could the strength of the momentum indicators on show this time mean it is different? The RSI is well above 60, whilst the MACD lines recently bull kissed higher and the Stochastics have also crossed up. Yesterday’s gain helped to hold on to the breakout above 13,425 but there is now a band of support 13,340/13,425 to watch if the market begins to drift lower. The importance of this support band grows on the hourly chart and will be key to the continuation higher for a test of the all-time high at 13,525. With the positivity around global markets running higher, the all-time highs are being threatened today. A closing breakout would be a key signal, but can the market prevent another false break?
The consolidation of the past week continues on the euro, with the market moving in a tight range between $1.2165/$1.2322. The bearish engulfing candle of last Wednesday certainly stopped the bulls in their tracks but has simply driven a consolidation rather than a serious degree of profit-taking. The momentum indicators are reflecting this pause for breath, with very similar configurations on the RSI and Stochastics settling around 70 and 80 respectively. The small candlestick bodies of recent days also add to the sense of consolidation and a market in need of a catalyst (the ECB monetary policy meeting is only two days away now). A break either way above $1.2322 or below $1.2165 will derive direction and imply around 160 pips. For now we wait.
Given the consolidation on EUR/USD, the consistent run higher on Cable is remarkable. The week has begun with another strong bull candle adding over 130 pips on the session and the next resistance at $1.4000 is now being tested. The bulls are in full swing as the run continues to retrace the Brexit related sterling losses and now the market is breaching $1.4000, the next target on the horizon come in with the 76.4% Fibonacci retracement of the Brexit sell-off at $1.4195 and then minor resistance at $1.4350, however these are very must historic levels now. The momentum of the run is equally remarkable, with the RSI into the high 70s and MACD lines racing higher. The hourly chart is configured to suggest continuing to buy into weakness, with a basis of initial support $1.3915/$1.3945 and then at $1.3835. At some stage there will need to be a correction, however the market remains firmly in a bullish mood for now.
The selling pressure seemed to abate again yesterday as the market built above Friday’s low around 110.50 and form a positive candle. The support of the bullish engulfing candle remains a feature of the recent market moves as the market continues its consolidation between 110.20/111.50. The Bank of Japan monetary policy meeting has passed with little surprise or incident and the market seems to have stabilised once more above 110.50 with little real impact to the recent consolidation. Daily momentum indicators are settling down and although there is clearly still a negative bias to the outlook, the market is waiting for the next catalyst to an extent. This is reflected on the rangebound hourly technical indicators. As we move into the European session there is an improvement in the outlook as the market picks up again above 111.00 but it needs a closing break above 111.50 to hint at a near term recovery. Subsequent resistance is around the old December lows at 112.00.
The corrective move from last week seems to have been steadied as the market begins to inch back higher again. The market may have broken the five week uptrend but the support of the old breakout around $1325 is an encouraging sign for the bulls. Although the market continues to languish under the resistance of the old uptrend, whilst momentum indicators have notably lost their bullish impetus, there is a sense that the market is at a crossroads now on a near tm medium term perspective. A breakout above $1344 resistance will drive a move to test the key September high at $1357.50. However a failed rebound from $1325 would then begin to question the strength of the bulls in this medium term rally phase. The early move higher today is a positive but can the bulls hold the move with a ranging configuration now present on the hourly chart. Losing $1325 support now would re-open a retreat towards $1300/$1310.
The market has drifted back in the past week as the resistance at $64.90 has firmed and the contract has moved to rollover. With a new front month contract today, the support has been built and the market is building above last week’s low at $62.85. However there needs to be a consistent response from the bulls, with momentum indicators threatening near term corrective signals. This comes as the RSI hovers around 70 and the Stochastics have crossed lower. The MACD lines are also threatening a near term move to the downside as the support of a 5 week uptrend is tested. The hourly chart shows a positive start to trading today but a move above $64.35 is needed to generate upside traction again.
Dow Jones Industrial Average
Consolidation continues to be seen as a chance to buy on the Dow. This comes as the US Government shutdown provided a little (and emphasis on the word little) intraday weakness that has been an opportunity prior to the announcement of an agreement in Congress. The bulls are back in the game. This remains an incredibly strong run higher, with momentum indicators extremely positively configured. The acceleration higher in the bull run means the market is leaving a succession of ever sharper bullish uptrends, with the latest being a three week trend which is supportive at 25,960 today. The all-time high from last week is at 26,153 has now been broken as the market all but closes at a new all-time high. The hourly chart shows how there is still the hint of a negative divergence on the hourly RSI which is the only slight caveat, but the bulls continue to come in around 50. A breach of 50 on the hourly RSI would certainly be a warning shot for the bulls, but for now there seems to be little to worry about.
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