With the triumvirate of the US, France and the UK looking to bomb supposed chemical weapons plants in Syria over the weekend, geopolitical tensions have increased significantly in the region. This includes tensions with Russia and Iran. Under normal circumstances, financial markets would respond by a flight to safety, whilst higher risk plays would suffer. However, whilst the true success of the sorties are yet to be determined, it seems as though the highly targeted nature of the mission has perhaps come to mitigate the impact on markets. Early on Monday morning there has not been a huge reaction and markets look cautious but stable despite the rising geopolitical risk. There has been a degree of yen outperformance, but gold has failed to gain ground, Treasury yields are actually a shade higher, and Wall Street futures are currently signalling a positive open. A sigh of relief from traders that perhaps it could have been a lot worse? Perhaps so, but there is still plenty of time for the geopolitics to deteriorate further. This should help to support the safe havens, even if they do not shoot higher for now. Markets look cautious and it could take a number of days for this to play out. For now the reaction has been relatively well contained, but for how long?
Wall Street was lower into the close on Friday with the S&P 500 -0.2% at 2656, but with futures pointing mildly higher in early moves today there has been a mixed session in Asia, with the Nikkei +0.3%. European markets are also cautiously higher in early moves. In forex, there is limited reaction today with slight dollar outperformance and the yen only marginally stronger. The mixed reaction is also seen in commodities, with gold lower by $1 whilst oil is trading just under a percent lower after the US rig count rose again on Friday.
For a Monday this is a pretty action packed start to the week for the economic calendar. Although the European morning will be quiet, the week kicks off with a bang with US Retail Sales (ex-autos) to be announced at 1330BST. Consensus forecasts are pencilled in for another +0.2% month on month rise (+0.2% last month). The Empire State Manufacturing (New York Fed) is also at 1330BST and is expected to remain strong at 19.8 although this is a mild tick lower from last month’s 22.5. The NAHB Housing Market Index is at 1400BST and is expected to improve a shade to 71 (from 70 last month). Finally traders will be on the lookout for comments of the Atlanta Fed’s Raphael Bostic (voter, mild dove) who speaks at 1815BST.
Chart of the Day – EUR/NZD
Yet another major cross to show the euro under pressure comes on Euro/Kiwi. The pair has been busy breaking long term uptrends in recent weeks but also now has broken decisively below a key near term support at 1.6745 which has been a key floor over recent months. This has opened the low of a five month trading band at 1.6520. In the past two weeks the market has been trending lower with a run of lower highs, whilst the momentum indicators confirm the breakdown. The RSI had been previously supported above 40 but has been dragging to price lower over the past week, along with the MACD and Stochastics which are falling in increasingly negative configuration now. Friday’s slightly positive candle has pulled the market back towards the two week downtrend, which is being further tested today. However, whilst the resistance at 1.6830 remains intact this will continue to be a deteriorating chart. The hourly chart shows the rebound on Friday helped to renew the downside potential and merely unwound to a resistance band 1.6800/1.6830 which is a sell-zone now. The bulls need to pull above 1.6910 to change the corrective outlook around.
The market continues to struggle for real direction. Friday was the smallest daily traded range on EUR/USD since Christmas with just 41 pips (Average True Range of 65 pips currently). In the early moves today, despite the geopolitical news in Syria over the weekend, there is yet to be any semblance of direction. The daily chart is particularly lacking intent, with the momentum indicators increasingly neutralised whilst the 21 and 55 day moving averages have been all but flat for the past week. The hourly chart shows $1.2345 increasingly becoming a near term pivot, currently a barrier to gains, protecting last week’s high of $1.2395. The support is initially at $1.2300 above another mini pivot at $1.22260. Even the hourly momentum is neutrally configured. The wait for a catalyst seemingly continues.
Having broken out above $1.4345 the bulls would have been disappointed with Friday’s close. Losing over 50 pips back from the day high to only close 15 pips up on the day will have felt a touch unfulfilling and leaves a few questions unanswered coming into the new week. The momentum indicators have been positively configured but are beginning to look a touch tired again near term. The bulls will be looking to continue the run higher but today’s opening move has been indecisive and the hourly chart is threatening to roll over. Friday’s low at $1.4220 is supportive but also marks a six day trend channel support on the hourly chart. Watch for the hourly MACD lines going below neutral, whilst 40 is supportive on the hourly RSI. Breaching these levels could signal a near term slip back in the bull run. Subsequent support is $1.4145 and $1.4100. A move above $1.4295 re-opens the key January high of $1.4345.
The geopolitical tensions in surrounding Syria have pulled traders back towards the safe haven yen once more. Friday’s mildest of positive sessions for Dollar/Yen has subsequently been unwound as European traders return to their desks on Monday morning. There is subsequently more pressure on the now three week uptrend support, whilst also bolstering the band of resistance between 107.50/107.90. Momentum indicators are still positively biased but it is interesting to see the RSI and Stochastics losing their impetus. This is reflected on the hourly chart and if the support around 107.00 is breached then the market would likely begin to position for a retest of the 106.60 pivot support again. The reaction on Dollar/Yen in the coming days will be an interesting indication of how market sentiment is likely to respond to the increased geopolitical risk.
The likely push back into gold on the increased geopolitical tensions has yet to decisively materialise and the resistance band between $1356/$1366 remains intact. There is though a positive bias now within the medium term range that suggests the pressure on resistance is growing. The support of Thursday’s low at $1333.50 is growing as the pivot at $1321 has been bolstered now. There seems to be an underlying demand for gold and trading above the moving averages along with mild positive momentum configuration gives a sense of increased upside intent, but as yet the bulls have been unable to break free. A close above the 2018 high at $1358 would help.
The market continues to consolidate the breakout, with three consecutive closes now above the key January high at $66.65. However, the market still seems tentative and it is interesting to see oil actually falling early Monday despite the increased geopolitical tensions in the Middle East over the weekend. Perhaps it is a case that the market feared more of an escalation? There is still time for that to happen and this should help to underpin the price to an extent, een if there is a near term slip. The daily momentum indicators remain positively configured, but are threatening to roll over. The bulls are still in control whilst the near term support band $65.64/$66.65 remains in place but even if this is breached there is plenty of support initially around $65.40 and then the old pivot around $64.10. The resistance is at Friday’s high at $67.75 and an upside break (especially on a closing basis) would open towards the psychological $70 area once more.
Dow Jones Industrial Average
The bulls tested the water of a breakout above the near term confluence resistance on Friday but could not maintain the move. The resistance at 24,650 caught the high on Friday before the bulls pulled back to form a negative candlestick. Reaction to the increased geopolitical tensions in Syria will be key but currently futures are positive and there is still a trend of buying into weakness in recent weeks. The momentum indicators remain on the recovery trail and the market retains its two week uptrend (which comes in today around 24,330. The resistance of a 10 week downtrend was initially breached on Friday and again adds further strength to the position building of the bulls. The reaction to Friday’s negative candle will though be important today and needs to be followed by a supportive candle in the least in order to maintain the trend of improvement. The reaction low at 24,150 is the first higher low and is key to the continuation of the near term rally.
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.