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Italian yields fall sharply to support euro and risk

Market Overview

It seems as though major markets are on something of a knife-edge at the moment. There are a plethora of reasons that should illicit fear and caution, with tensions over relations with Saudi Arabia (and how this could impact on the oil price), the US/China trade dispute, the Italian budget and the impasse for Brexit negotiations to name but a few. This is leading to a move towards renewed dollar strength. Treasury yields continue to tip toe higher, and this is allowing the dollar to nudge ahead on performance, whilst equity traders remain on edge. However, if any one of these geopolitical tipping points is reached then, things could quickly turn sour again. Yields would fall, the yen would be a strong performer once more, and gold would make a renewed break higher. In all of this, the biggest move would likely be saved for a fall on equity markets, with an outlook now that seems to be far more nervous than we have seen for at least six months (at least on the VIX). However, this morning, there is mood of positive risk with some good news to focus on (for a change). On a quiet day of data, the immediate focus is on the Italian budget this morning and news that credit ratings agency Moodys has decided its outlook on Italy is “stable” from negative watch. Italian yields have fallen over 20 basis points and with the Italian government ready to discuss its budget with the EU, there is a rare air of positivity now, helping the euro perform better today. With Chinese equities sharply higher this morning, there is an early positive start to the week, but can it last this time?

Euro in focus

Wall Street closed nervously on Friday (S&P 500 -1 tick at 2768 whilst futures are marginally higher. Asian equities were much stronger overnight, with China Shanghai Composite leading the way 3.8% higher. European markets are marginally positive today with Eurozone markets likely to outperform on the improved Italy debt story. In forex, the euro is gaining ground whilst the yen is the main underperformer. For commodities, gold is around flat, whilst oil is also supported.

There are no key economic releases due on the calendar today.


Chart of the Day – AUD/JPY

Aussie/Yen remains a very good indicator of risk appetite and with markets seemingly in the balance again, this could be an interesting market to use as a gauge again. It would appear that the old pivot at 80.50 is one more a barrier to the recovery. However, what could be seen as an encouraging sign is that momentum is showing signs of improving again. The RSI pulled to a two and a half week high on Friday and suggests a potential upside break above 80.50. The MACD lines are also bottoming out too. It is though important to say that a recovery is forming and there is still an ongoing medium term bear bias to the market (ever since the breakdown below 80.50). This is reflected in the fact that the moving averages are all in bearish decline still, so any recovery would be counter-trend. However, the hourly chart shows that above 80.60 would complete a small base pattern and imply around 150 pips of recovery towards 82.00, but give this would be a bear market rally, the weight of overhead supply (next resistance at 81.30) and trading against the trend may restrict any recovery momentum. There is a minor higher low at 79.50 as support now.



The outlook remains negatively biased, however the euro bulls are not giving up without a fight. Friday’s positive candle helped to prevent a breakdown to a two month low and has helped to increase the support of what is now the October lows at $1.1430. With a gain of 60 pips on the day, this now needs to be followed by another positive candle today, otherwise the momentum in the move could quickly dissipate. The daily momentum indicators continue to suggest there is a continued negative bias that rallies will be sold into and will pull the price back towards the support again, so the initial resistance $1.1500/$1.1550 needs to be overcome to restrict this. Furthermore the resistance at $1.1610 is key near term as a break higher would signal a near term base pattern.



A technical rally on Friday has enabled the support of the nine week uptrend to be sustained and the bulls continue to fight for a recovery. Holding on to the psychological $1.3000 support certainly helps to build a picture of corrections being bought into at higher levels, however the importance is growing, with a breach now also meaning that the market would be trading below all the moving averages. The momentum indicators retain their medium term positive configuration, but there is a less decisive position now. The hourly chart shows a need to move above $1.3110/$1.3130 to improve the outlook now.



The prospect of a renewed positive outlook on Dollar/Yen was tested on Thursday, but a positive reaction from the dollar bulls on Friday has pulled the market back higher once more. This is helping to build on the reaction low of 111.60 with a higher low at 111.95. The bulls will now be looking for a positive candle today with a close above the near term resistance at 112.70 which would set the recovery up well. Momentum indicators are gradually looking to improve too now, with the MACD lines bottoming around neutral, whilst the support of the now seven month uptrend is today at 111.90.



The consolidation on gold continues. The last four sessions have all been characterised by small candlestick bodies around similar levels within the $1217 breakout and under the $1236 next key resistance. To re-iterate this, there was Friday’s candlestick with a real body of less than $1. Within this though there is still positive momentum configuration on Stochastics and MACD lines whilst the RSI remains around 60. The breakout support of the old highs between $1208/$1217 means there is plenty of underlying demand still and the bias is for an upside break as the next move. Above $1236 opens $1266, but for now we await the next catalyst.



After the recent selling pressure, a session of respite on Friday has formed a degree of support around $68.50 and helped delay what still looks to be a retreat to the September low and medium term pivot support at $67.00. Momentum indicators remain correctively configured and despite the positive candle on Friday there remains negative configuration on MACD lines and Stochastics. The key as to whether this is anything more than a blip in the sell-off is how the bulls respond today. There has been an initial move higher, but this currently lacks conviction. There is now a band of resistance between $70.00/$70.50 which is in place and will be seen as capping any attempted recovery. The hourly chart shows the momentum has now unwound to levels where the sellers have looked to resume their control (hourly RSI around 60, hourly MACD lines around neutral) and that this is simply an unwinding move that will be seen as another opportunity.


Dow Jones Industrial Average

The near term outlook remains distinctly uncertain for Wall Street equities. After the strong bullish candle at the beginning of last week failed to push on, the outlook has taken a renewed air of caution. A run of either uncertain or outright negative candles is now forming, lending momentum indicators to deteriorate back again from levels where the medium term outlook is concerning. Thursday’s low at 25,236 is now the initial basis of support and needs to be held for any positives to be taken from a distinctly luke-warm session. The hourly chart shows the rebound failing around levels where the bears are eyeing opportunities too (around 60 on hourly RSI and around neutral on hourly MACD). Furthermore, all the hourly moving averages are in bearish decline too. This reflects a continued negative bias for selling into strength. It would need a close above 25,818 to improve the outlook in a sustainable way now.

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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.