Market sentiment and the US dollar have taken on renewed selling pressure amid concerns over geopolitics of North Korea and the outlook for Fed monetary policy. In the wake of Sunday’s nuclear weapon test, Donald Trump has suggested that Japan and South Korea would buy a “substantially increased amount” of US military equipment, leading to traders on Wall Street moving sharply into safe haven plays, such as the yen, gold and US Treasuries. However the decline on yields was exacerbated by dovish comments from permanent FOMC voter Lael Brainard. Although historically one of the most dovish members on the FOMC, Brainard has suggested that inflation remains a real issue and would not support further tightening without signs of an inflation pick up. This puts the prospects of a December hike into further doubt. The 10 year yield fell back below 2.10% to its lowest level since 10th November, whilst the US yield curve continues to flatten, with the 2s/10s spread now at a 12 month low of 77 basis points. The US dollar has been hit hard from these moves, with Dollar/Yen closing in on its key April low of 108.11.
Wall Street closed strongly lower with the Dow over 200 ticks lower (-1.1%), whilst the S&P 500 was -0.8% at 2458. Asian markets have been broadly weaker whilst European markets are also lower in early moves. In forex, there is something of an early consolidation today as traders pause for breath. It is though interesting to see the Aussie mildly underperforming after Australian GDP came in with a very slight miss at +0.8% for the quarter and +1.8% YoY (+0.8% QoQ, with +1.9% YoY expected). In commodities, gold is consolidating its gains from yesterday, as is oil, with WTI continuing to tighten the spread with Brent Crude.
Traders will be looking mostly towards the US data this afternoon for any data driven moves. The US Trade Balance at 1330BST is expected to worsen slightly to -$44.6bn (from -$43.6bn last month) which would be slightly dollar negative. The main event is the US ISM Non-Manufacturing at 1500BST which is expected to improve to 55.3 after 53.9 last month which was an 11 month low. There will also be interest taken in the Bank of Canada monetary policy decision at 1500BST. Consensus is not expecting another rate hike from 0.75%, but after growth numbers for Q2 were significantly revised higher, the potential for a hawkish surprise is elevated.
Chart of the Day – Silver
The precious metals are performing well with the dollar back under pressure and the safe haven bias in the market. Silver is no exception to this rule and has now made a key upside break. The trend channel that has been pulling the market higher over the past eight weeks remains strong and this week the market has broken above the latest key resistance at $17.75 which was the June high. The market has also now used this old resistance as the basis of support for the past two sessions. Having broken out the bulls will be starting to dream of a move towards $18.65 which was the April high and key long term resistance. The contrarians will point to the RSI above 70, but this is a strong trending move with the MACD line accelerating higher and Stochastics bullishly configured. Near term corrections will therefore be seen as a chance to buy now with the trend supporting at $17.34. The doji on yesterday’s candle suggests that perhaps a minor technical correction should not be ruled out, but the hourly chart also simply shows a strong configuration on momentum and a solid band of support $17.25/$17.66.
The euro continues to build support above $1.1820 as the market seems to be biding its time for the ECB. One of the remarkable features of yesterday’s trading was the lack of intent. On a day where the dollar was getting hit from all sides, the euro made very little impression, only managing to gain 17 pips on the session. The momentum indicators are very neutrally configured on a near term basis as this consolidation of the past few days has formed. However, the medium term outlook remains strong and the intent remains one to buy into weakness. The support at $1.1820 comes in above the key $1.1660/$1.1710 band, whilst the uptrend is at $1.1700 today. The hourly chart shows initial resistance remains $1.1779.
Finally a conviction move on Cable to break the consolidation of the past week. A string of indecisive candles have been overrun by yesterday’s strong bull candle. The move has pulled the market sharply through much of the early August resistance, back above $1.3000 and above a reaction high at $1.3030. This comes with a significant improvement in momentum, with the RSI and Stochastics rising well above neutral at five week highs, and the MACD lines decisively picking up having formed a bull cross. These are near to medium term positive configurations now and suggest corrections are a chance to buy. The market is now leaving higher lows, with $1.2900 now above $1.2850 and the key medium term low at $1.2770. The bulls will now be looking for a push above the old key resistance at $1.3050 to re-open the upside towards the big August high at $1.3265 again. The hourly chart shows strong momentum configuration and that the bulls will look for an opportunity to buy. Immediate support comes in around $1.3000, with a near term buy zone of support $1.2965/$1.3000.
A strong bear candle has dragged Dollar/Yen below 109.00 and posted the lowest closing level on the pair since the April lows. This looks to be a decisive move that will now put 108.11 under increased pressure. The concern is that the momentum indicators are not only deteriorating once more but also have plenty of downside potential now. Previously this year, moves back into the band of support 108.10/109.00 have instantly found support to close back above 109.00, so this means that today’s session is incredibly important. A confirmation of the move below 109.00 would be telling that the sellers are taking the market control. The hourly chart shows the bear configuration of momentum and unwinding moves into 50/60 on the hourly RSI being a chance to sell. Watch for resistance on a technical rally into 109.00/109.20. Initial support is at 108.50 which is the overnight low. Below 108.11 opens 107.50 and further downside.
The bulls remain strong as the market pushes higher with further bullish candles and a move that is edging towards the big 2016 high at $1375. In yesterday’s analysis videos I discussed the gap from Monday’s open, and this gap was bullishly filled by yesterday’s intraday drop back to $1327 only to close well higher again. This shows the strength the bulls still have and the momentum indicators that retain a strong configuration. The reaction to the gap shows that the market is in a strong trend higher and a retest of the $1375 high is increasingly likely. Corrections are being bought into, with the move nicely hugging the upper 2.0 SD Bollinger Band (today at $1341). The hourly chart shows corrections being bought into and the support has been left at $1327/$1329. Yesterday’s high at $1344 is initial resistance before a minor reaction high from 2016 at $1353. Hourly momentum configuration remains strong.
With the dollar under pressure yesterday a huge upside break on WTI has engaged bullish momentum once more. A move through a significant amount of resistance has quickly taken the price to a three week high and changed the outlook. A third consecutive positive candle now means that WTI has rallied over 7% in three sessions now. Momentum indicators have taken a significant swing to the upside with RSI rising above 50, Stochastics strong and also a MACD cross buy signal today. The market has also gone above the pivot resistance around $48.50, whilst a close above $48.75 would now re-open the $50.43 key resistance again. The hourly chart reflects the improvement in momentum and shows a band of support $47.50/$48.00 for corrections to be bought into.
Dow Jones Industrial Average
The safe haven market bias resurfaced as yesterday’s session progressed, with initial signs of stabilisation in sentiment giving way to selling pressure. That has undone all the positive work from last week and driven what looked to be an upside break on the Dow into sharp reverse, but also proves how quickly markets can flip on geopolitical issues. The technical momentum has suddenly moved into reverse with a bear kiss on the MACD lines, the Stochastics crossing lower and the RSI back below 50. This is a volatile situation now with negative sentiment but equally if the geopolitical tensions begin to subside, the market could quickly renew its erstwhile improving outlook again. Today’s session beomes key now as the subsequent day’s reaction to a sharp move can either confirm or deny key direction. Suddenly the support of the reaction low at 21,673 comes back into view, with the August low at 21,600 increasingly key.