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Gold higher, yen outperforms as risk appetite struggles

Market Overview

There is very little to be positive about across major financial markets right now. The trade tensions show little sign of easing, whilst geo-political risk is elevated with the international condemnation of Saudi Arabia and President Trump ready to pull the US out of a nuclear arms treaty with Russia. Political risk in Europe is also a key factor with the Italian government standing firm over its populist spend increasing budget, whilst UK Prime Minister continues with (what I see as) the hardest job in politics, trying to deliver Brexit amidst pressure from both the EU and domestic fronts. The weakness and underperformance of both the euro and sterling subsequently continue. There is an appetite for safe haven asset plays right now and the US dollar seems to be the most popular. It seems as though there is a fine balancing act right now within this as the dollar is gaining against the (uber-safe) yen. This would suggest that whilst markets are risk averse, they are not in Armageddon territory. Treasury yields seem to be uncertain from a day to day basis, whilst gold remains stuck in a range, and reflecting this knife edge attitude to safety. However, today markets have begun to lean precariously over the edge again with the US 10 year yield dropping back, gold higher and the yen outperforming. As yet there are not decisive moves, but certainly reflect the risk averse feel to sentiment. Equity markets (a higher risk asset class) however remain under selling pressure as any intraday gains continue to be sold into. The significant fear driven sell-off of two weeks ago has settled down, but has now been replaced with a glass half empty mentality. With very little to be positive about in global financial markets right now, this does not bode well.

Safe haven

Wall Street fell into the close, with futures the S&P 500 -0.4% at 2746, whilst are showing even greater downside early today (currently around -0.9%). Asian markets have unwound much of their previous gains (especially in China) as global risk factors have weighed on the Nikkei (-2.6%) and the Shanghai Composite (-1.9%). In Europe, there is a continued negative sentiment, with the DAX especially at risk of another significant breach of support. In forex, today’s negative sentiment is being reflected in a risk averse position across the majors, with the dollar broadly stronger, but the yen being the significant outperformer. In commodities, gold is higher, whilst silver is weaker (all risk off), whilst oil is back lower once more.

It is another quiet morning for European traders looking at the economic calendar. Into the afternoon, the Eurozone Consumer Confidence comes out at 1500BST which is expected to slip further into negative at -3.2 (from -2.9 in September). This would be the sixth consecutive month of deterioration. The Richmond Fed Composite Index is at 1500BST and is expected to drop back to +25 (from a record reading of +29 in September).



Chart of the Day – EUR/GBP

Sterling is on the slide again, with political risk surrounding Brexit (both surrounding the rising prospect of no deal and the position of Theresa May as Prime Minister) being the main driver of underperformance. Certainly the euro is hardly having a walk in the park right now (Italian debt issues) but there has been a notable technical improvement in Euro/Sterling in the past couple of weeks. Posting three positive candles in a row has taken EUR/GBP to a new two week high, but has also now unwound the market back to the old key support at £0.8850 which is now a basis of resistance. The improvement in the momentum indicators is a real encouragement too for the continuation of a rally, with RSI unwinding back to 50, Stochastics posting a bull kiss in a rebound, whilst the MACD lines have posted the first confirmed bull cross since April. A close above £0.8850 would continue the rally, whilst also putting pressure on a seven week downtrend. There is a higher low support at £0.8750 above £0.8720 and intraday corrections now look to be a chance to buy.



Despite the occasional intraday rebound, the euro remains under pressure and rallies  remain a chance to sell. This was exactly what happened yesterday and it was telling that the market used the early morning gains to sell at $1.1550. Forming a lower candle with resistance in the band $1.1500/$1.1550 is a real concern that the pressure on the support at $1.1430 continues to grow. The momentum signals are negatively configured again and point towards downside potential, with the MACD and Stochastics tracking lower and the RSI at 40. A closing breach of $1.1430 would open $1.1300 and this is a move that is increasingly likely now. The hourly chart shows the old pivot around $1.1500 is still in play as initial resistance.



With Brexit and domestic UK political risk a main driver of underperformance on sterling, the technicals on Cable have taken a negative shift now. With yesterday’s decisive bear candle cutting over 100 pips off the price, there has been a decisive downside break of the nine week uptrend. Along with this there has also been a close below the $1.3000 (psychological) support and also below all the moving averages. This has opened for a test of the key October low at $1.2920 now. The momentum indicators are pulling the market lower to, with the MACD and Stochastics close to both becoming negatively configured, whilst the RSI is also close to a two month low. A breach of $1.2920 would open for a retest of $1.2800. The hourly chart shows negative configuration on momentum and that rallies will struggle now. There is initial resistance $1.3000/$1.3010 and then a minor reaction high at $1.3100.



With the support of the uptrend kicking in and the market starting to gather positive momentum once more, intraday and near term corrections are a chance to buy on Dollar/Yen. This comes with the market leaving support at 111.60 last week to post a higher low at 111.95 and now yesterday’s near term higher high. Subsequently, this early morning slip back should be seen as an opportunity for the bulls. The hourly chart shows a retreat into initial support 112.30/112.50 and this has unwound hourly momentum to levels where the buyers have tended to return. There is little reason not to expect the upside pressure to resume and to retest yesterday’s high of 112.85 before testing 113.50 and perhaps push 114.55. Below 111.60 would now abort the bullish outlook.



Yesterday’s broad dollar strength played out to drag on gold, but the recent mini range that has formed above the old $1217 pivot and below $1233 continues to play out. Within this range the market moves are simply noise, with the last six closes all being within $5 of each other. As the support of the breakout highs between $1208/$1217 remain intact then the underlying demand should continue to act as a near term source of support. Once more, this morning, to re-iterate the lack of direction, the market has rebounded again. Momentum indicators are positively configured but look a little tired and given yesterday’s negative candle, a slip back into $1208/$1217 should not necessarily be ruled out near term. It would though be the reaction around those levels that would be key to sustaining the medium term outlook of improvement now.



Intraday rallies continue to be seen as a chance to sell, as another negative candle formed yesterday and the bulls once more failed to make a lasting impression on the falling market. The recent selling pressure of the past three weeks is taking its toll on the outlook, with a test of $67.00 still preferred. Momentum indicators continue to deteriorate with the MACD lines accelerating lower, Stochastics decisively bearish and RSI falling below 40. With the market trading below all the moving averages there is an increasingly corrective outlook within the longer term trendlines on WTI, with the support of an 11 month uptrend channel around $66.90 today. The resistance at $70.00/$70.50 is growing by the day, whilst the hourly chart shows intraday rallies are limited to around 60 on the hourly RSI and around neutral on hourly MACD. It still needs a rally above $72.70 to sustainably improve the outlook again.


Dow Jones Industrial Average

Another disappointing session for the bulls, with a fourth consecutive lower daily high, a breach of a (tenuous) seven day uptrend and what is now the formation of a two and a half week downtrend. The bulls will point to the market being supported at 25,236 in the past week, but with momentum indicators swinging lower again and the negative pressure building, this support is unlikely to last long before a retest of the recent key low at 24,900. The Stochastics crossing back lower again, whilst the RSI is below 40 and the MACD lines continue to track lower, all does not bode well for the bulls. The hourly chart shows initial resistance now 25,583 under the 25,800 key lower high.

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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.