Equities under pressure with ultra-loose monetary policy in its twilight

Market Overview

The selling pressure on the dollar has been a feature of recent weeks, seen to be accelerating in the past few sessions as major central banks have signalled that the Fed may not be on its own in tightening monetary policy for too much longer. However it now seems that equity markets are beginning to wake up to the fact that ultra-loose monetary policy may be in its twilight. European equities fell sharply into the close yesterday and Wall Street followed in a similar vein, with the early moves today showing a lack of buying intent once more. Could it be that this is merely end of the quarter profit taking though? The corrective phases in equities especially have not lasted too long in recent months. The dollar is also looking somewhat stretched, especially against the euro and this could also lead to some stalling of recent moves. The dollar is also yet to react to the steepening of the yield curve in recent days as longer dated Treasuries have been sold off in light of positive reflationary comments from ECB Governor Mario Draghi. The Fed’s preferred inflation measure, the core PCE will be in focus therefore today to see if the recent dip back inflation int eh US is also temporary. Overnight, Japanese core CPI for May improved to +0.4% whilst positive German inflation yesterday bodes better for the Eurozone inflation today.

Markets board

Wall Street closed sharply down last night with the S&P 500 -0.9% whilst Asian markets were also weaker with the Nikkei -0.9%. European markets are mildly lower again this morning. After recent selling pressure, the dollar is beginning to find s degree of support against the euro this morning, however with oil continuing to climb it is interesting to see the Kiwi and especially the Canadian dollar stronger (the Loonie has now strengthened to pull USD/CAD below 1.3000). Gold is also back lower again and the $1240 pivot remains under pressure.

Trades will be looking out for the inflation in the Eurozone and US to dominate markets today. However, first up is the UK data at 0930BST with the final UK GDP reading for Q1 which is expected to stay at +2.0% for the quarter, whilst year on year is expected to see a mild upward revision to +2.0% (from +1.9%). The UK current account is also at 0930BST which is expected to deteriorate to -£17.2bn (from -£12.1bn). The Eurozone flash CPI for June is at 1000BST and is expected to drop back to +1.2% on the headline (from +1.4%) whilst the core is expected to improve slightly to +1.0% (from +0.9% last month), however after German inflation surprised to the upside yesterday the expectation will be for the Eurozone data to potentially also surprise to the upside. Into the afternoon the market will be focusing on the Fed’s preferred inflation measure, the core Personal Consumption Expenditure which is expected to be +0.1% for the month which would be a dip to +1.4% for the year on year data. The final reading of Michigan Sentiment at 1500BST is expected to stay at 94.5.

 

Chart of the Day – DAX Xetra

The DAX suddenly looks to be under far more corrective pressure. The market has been dropping away for almost two weeks now but yesterday’s strong bear candle was the biggest down day for several weeks and really suggests that sellers are beginning to gain traction. However it was the nature of the candle with its early gains that got sold sharply into, leaving the largest daily range for months (the average true range prior to yesterday’s session was 124 ticks, only for a 310 tick range to be posted yesterday). The market also closed at a two month low whilst completing a downside break from the recent range 12,490/12,951. This comes with the MACD and Stochastics lines confirming a breakdown and the RSI at its lowest since 4th November.  Having seen several key supports fail with the breakdown, a confirmation move below the old key breakout at 12,375 would ramp up the corrective pressure even further. Rallies have been sold into in the recent sessions and this means that overhead supply is now between 12,490/12,620 and the bulls will struggle to re-assert at least for the near term. The hourly chart suggests that intraday rallies would allow oversold near term momentum to unwind and would now be a chance to sell. Initial resistance is around 12,530.

EUR/USD

The climb in the euro has continued apace throughout this week in the wake of comments from Draghi that were deemed to be a shift away from the standard dovish stance. The move decisively through $1.1300 completed a range breakout and implies 200 pips of further upside towards $1.1500. The strong bull candles of recent days suggest the euro is well on course to achieving the target. Corrective moves will now be seen as a chance to buy and with the RSI historically stretched over 70 this is a growing possibility. The early moves today show the market just beginning to stall a touch and this may give rise to some near term profit taking. However the breakout at $1.1300 is now a basis of support and would be seen as an ideal entry if a corrective move were to set in. The hourly chart shows a slight degree of negative divergence on the hourly RSI and MACD lines which needs to be watched as it could suggest a slowing of the recent buying pressure. Initial support is at $1.1385 and a breach could open a minor retreat. The hourly RSI falling below 50 would also be a signal. There is historic resistance around $1.1500 but little real resistance now until $1.1615.

GBP/USD

With the strength of the last three bullish candles, momentum is certainly behind a serious test of the multi-month high at $1.1347. The technicals also point to the continued improvement with the RSI rising into the mid-60s and Stochastics also rising into strong positive configuration. However, with over 500 pips of gains in the past seven sessions and a key level of resistance approaching, the temptation to take profits will be growing. Moving close to the $1.3047 resistance then will mean that today’s session could be interesting. There is nothing yet to suggest a serious loss of momentum, however it is notable to see the hourly RSI and MACD lines beginning to track lower over the past 36 hours. The hourly RSI falling below 55 would be a three day low. Having made the break above $1.3000 psychological support a close back below there today would also be a disappointment and would open $1.2955 initial support with $1.2920 a near term breakout support. Above $1.3050 opens a new phase of bullish medium term intent.

USD/JPY

Early in yesterday’s session it had looked as though the bulls had grasped control of the market, however an intraday correction has put an entirely different complexion on the market once more. A failed upside break has formed a corrective drift with the market again back into the pivot band between 111.55/112.20. There is nothing too sinister yet to overly concern the bulls on the momentum indicators and the current phase does look reasonably similar to the run of mildly corrective candles mid last week. However the bulls will be watching the more sensitive momentum signals such as the RSI (if it falls below 50) and the Stochastics (if they confirm a bear cross). The support around 111.60 will also be watched as the hourly chart shows that higher lows are now being breached. A failure to break back above 112.20 will add to the corrective pressure.

Gold

The gold price continues to trade broadly in a near term range between the two old pivots at $1240 and $1261. Having recovered its poise following Monday’s “fat finger” decline, the support around $1240 is holding, another intraday test yesterday bounced from $1239.10. There is though still a slight negative bias with the MACD lines tracking lower and RSI hovering around the low 40s. This suggests a tendency towards a test of the $1240 support, a breach of which would open the next pivot around $1216. The hourly chart also reflects this mild bear bias with a series of lower highs and pressure on the support. Near term resistance is $1253.20, $1254.60 below the more important $1258.80.

WTI Oil

The bulls have now posted six consecutive positive closes with the bullish candlesticks also racking up. A decisive move above the reaction high at $45.05 is an important moment for the bulls as the continued pressure above today now confirms the reversal of the downtrend channel and burgeoning recovery. The daily momentum indicators continue to improve with the bull cross on the MACD and Stochastics whilst the RSI pulling above 50 would be further confirmation of the momentum in the recovery. The next resistance is the key resistance band $46.70/$47.00 and with upside potential forming there is plenty of scope for the rebound.  The hourly chart shows strength in the hourly momentum and unwinding moves are being bought into. This means that there is near term breakout support at $44.40, with yesterday’s low at $44.65 adding to support now.

Dow Jones Industrial Average

The sellers seem to be ready to take control of the near term outlook with a close at a two week low on the Dow. A big bearish engulfing candle is the second strongly negative candle posted in the past three days and suggests that rallies are now being sold into. I previously noted that Monday’s high at 21,506 was a lower high in the offing and with another negative candle posting a lower high at 21,487 the outlook is turning corrective suddenly. The momentum indicators back this assertion with the Stochastics and RSI both falling at five week lows, whilst the MACD lines are falling having posted a bear cross. Yesterday’s low at 21,197 was into the old breakout support range 21,070/21,225 and this is now set to be tested with rallies seen as a chance to sell. The hourly chart shows resistance initially at 21,310/21,372 with yesterday’s high at 21,487 now key.


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