Markets are looking more cautious in early moves today as the crucial vote on tax reform has been pushed back. Passing tax reform was never going to be a walk in the park. The Republican Senate leaders have delayed putting the bill up for a vote as key aspects of the bill still need to be tweaked to ensure the bill achieves the 50 vote mark in the Senate (vice President Mike Pence has a swaying vote). Markets are moving on the politics and it was on the news that Republican Senator John McCain (previously seen as obstructive) supporting the bill, that has increased the expectation of the bill passing. The US 10 year Treasury yield pushed back above 2.40% once more, seen as a key technical barrier, whilst Wall Street has simply run ahead like an excited child. The Dow has added over 600 points (c. 2.5%) and the S&P 500 c. 2% since the Senate Budget Committee passed the bill to the floor. The dollar has strengthened across the majors, with especially the safe haven yen coming under pressure (although notably the euro has held up well), whilst other less risky assets such as gold have also suffered. However, the slight delay of the vote into today has been understandably taken with a touch of caution today. If the bill is delayed further there could be a bit of a wobble, whilst if it even gets voted down, there would likely to be a significant correction and reduction in risk sentiment. Markets will also be watching for the manufacturing PMIs today with the China Caixin Manufacturing PMI already having been announced. A very slight miss to 50.8 (50.9 exp, 51.0 last) may have added to a early consolidation in the risk moves.
Wall Street closed strongly in all time high territory with the S&P 500 +0.8% but Asian markets have been a little cautious and are trading mixed (Nikkei +0.4%) whilst European markets are cautiously higher in early moves. In forex, markets look to be consolidating across the major pairs, with little real move other than on the Canadian dollar which has strengthened a touch as oil has been supported today. In commodities, gold is consolidating after the selling pressure of the past couple of days, whilst oil is looking cautiously higher in the wake of the OPEC agreement to extend the production cuts to December 2018.
The first trading day of the month is for Manufacturing PMIs. The final Eurozone Manufacturing PMI is at 0900GMT and is expected to be confirmed at 60.0 (which would be up from 58.5 last month). The UK Manufacturing PMI is at 0930GMT and is expected to tick marginally higher to 56.5 (from 56.3). Canadian GDP is at 1330GMT and is expected to be +0.1% for the month. The key data point of the day will be the ISM Manufacturing at 1500GMT. The market is expecting a very slight tick lower to 58.4 from 58.7 however, this would still be a strong number.
Chart of the Day – GBP/AUD
With the prospects of a positive outcome from Brexit, Sterling is on a huge run. As sterling has strengthened in recent days on the improved prospects for Brexit negotiations, a upside break has been posted on GBP/AUD. A move above the September 2016 high of 1.7795 has taken sterling to its highest level since the very early days of the Brexit breakdown. In effect the market has spent the past 16 months in a broad 2000 pip (2 big figures) sideways range between 1.579/1.7795. However the strong bull candles of the past couple of days have smashed through the ceiling of this band resistance and looks to be a decisive move in the long term recovery of sterling. There is effectively now very little resistance until 1.8300, although there is minor resistance from late June 2016 at 1.8180. Technically, momentum is very strong with the RSI, Stochastics and MACD lines all bullishly configured, and given the importance of this breakout, coming with three consecutive strong bull candles the outlook for further gains is strong. The RSI has been known to move into the mid to high 70s on previous decisive bull runs. The breakout now becomes supportive with a band between 1.7785/1.7795 initially to be watched. There is a band of support further back at 1.7415/1.7600, and on a medium term basis there is trend support at 1.7380 today. Near term corrective moves should be seen as a chance to buy.
Despite the strength of the dollar seen across several of the forex majors, the euro bulls still managed to win out the day yesterday. Having looked at one stage during the session as though the market was breaking down the three week uptrend channel, an impressive reaction has seen the bulls add over 100 pips and form a bullish candle to leave support at $1.1807 and continue the channel. The market has also broken back above $1.1880 which had also been acting as a basis of resistance again. On a technical basis this is a correction within an uptrend channel and in isolation looks to be a buying opportunity. The momentum indicators remain positively configured with the Stochastics turning up again, the MACD lines continuing to rise and the RSI turning higher above 60. It is also interesting to see on the hourly chart the market is now finding support around $1.1880 one more. The one main caveat will be the reaction to the tax reform vote in the Senate likely now today. The reaction of the euro so far would suggest that the market can withhold the dollar bulls. Support at $1.1807 is now key, with $1.1715 below. Resistance at $1.1960.
The sterling positivity is accelerating now, with a third candle that is strengthening in magnitude to the upside. The market added around 120 pips yesterday. The Average True Range of Cable is around 95 pips and is now within another positive session of the resistance at $1.3595 and possibly even the key September high at $1.3655. Momentum indicators are accelerating higher with the MACD lines advancing strongly in positive territory now and the RSI and Stochastics both strongly configured. The outlook remains strong but the early move today is a touch more cautious and it will be interesting to see whether the bulls can sustain this sort of buying pressure into a fourth session. The hourly chart shows support in the band $1.3440/$1.3480 is key near term to the continuation of the move.
The dollar bulls are decisively turning the outlook around now. A third consecutive strong bull candle was posted yesterday to break the downtrend of the past few weeks. This improvement is reflected in the momentum indicators with the by signal confirmed on the Stochastics a couple of days ago, whilst the RSI is now back above 50 and the MACD lines are on the brink of also showing a bull cross. The next test today is a push and close above 112.72 resistance and then a challenge of 112.95. This 25 pip band of resistance will be key to the continuation of the recovery. Tax reform progress will be the rocket fuel for the push. Above 112.95 the way is open for 113.90/114.00. The support is building at 111.70 now and intraday corrections are a chance to buy.
There has been what looks to be a decisive shift in sentiment in the past couple of sessions. Gold is under pressure once more after two strong negative candles have been posted in a row. This is the first time this has been seen since the price started to fall again in mid-October and comes with a deterioration in momentum indicators. The Stochastics are now falling away and the RSI is at a four week low. This comes as the run of lower highs built up over recent weeks is being taken apart. Support around $1270 is now under pressure and although the market has held on so far, the deterioration across hourly momentum indicators suggests that rallies are now a chance to sell. The market is into a band of resistance $1275/$1280 and expect the RSI to fail in the 50/60 region once more. The one main caveat to this position of gold lower is if tax reform fails. That would drive a recovery. However if tax reform passes today then expect a move below $1270 to test the $1263 low and beyond.
The market seems to be fairly settled in the wake of the OPEC decision to extend production cuts for a further 9 months, something that was widely expected by the market. The question is whether this fundamental move will continue to pull prices higher over the coming weeks. Initial signs are that the market is consolidating, reflected in yesterday’s a near perfect doji candle. However, the medium to longer term technical outlook remains strong. The multi-month trend channel clearly remains intact and the importance of the $54.80 reaction low will grow in the coming days as the trend channel support continues to rise. The momentum indicators also remain in their multi-month uptrends with the RSI and MACD lines clearly defined in this move. However the last few candles have been reflecting a near term slip back within the channel and if this continues then the momentum indicators will begin to wane. Watch for the market to break back above $58.30 again as this could become a lower high. An uptrend since the October support at $50.70 is also being tested now, coming in today around $57.05.
Dow Jones Industrial Average
Wall Street continues to pull strongly higher as the breakout on the Dow shows little sign of stopping having pushed decisively above 24,000 for the first time. Another upside gap breakout at the open and another positive candlestick. The momentum indicators continue to improve with the MACD lines rising and the RSI into the mid-70s now. The bull run that went throughout October had the RSI above 70 for over 5 weeks, whilst at its peak it got to the high 80s, so there is still plenty of room to run in this move. It would seem that trading for a second day entirely outside the 2.0 SD Bollinger Bands is also not limiting the bulls either (even though the last time this happened, in April, the market then became corrective over the next three weeks). Equity bulls are really running ahead of a successful tax reform vote in the Senate. Let’s just hope for their sake that it goes through as there could be a significant disappointment if it fails. Initial support is at 23,960 on the hourly chart and then 23,873.