The impact of politics is everywhere in financial markets today, much of which is leading to a broad sense of caution as currencies such as the euro and Kiwi come under pressure. Angela Merkel’s CDU has emerged from the German election as the leading party and likely to form a government but the result was not without its disappointment for Chancellor Merkel. Losing seats to the smaller parties and the rise of the hard-right AfD party will give her much cause for concern, whilst the SPD ruling out a @Grand [email protected] means Merkel’s options are limited. The euro dropped initially only the have latterly unwound some of the losses, whilst the early slip in the DAX also reflects a very cautious response from traders. In New Zealand, a fractious result means the ruling National Party has lost its majority and again the emergence of a hard-right anti-immigration “New Zealand First” will complicate the formation of the next government. The Kiwi has dropped by a percent on the result. And in the UK, as markets were still digesting a conciliatory Brexit speech from Theresa May, a UK credit rating downgrade to Aa2 from ratings agency Moody’s put sterling traders on the back foot, although losses are being unwound this morning. Add in the continued tensions in the Korean Peninsula and the general mood is rightfully one of caution.
Wall Street closed all but flat on Friday with the S&P 500 +0.1% at 2502, whilst Asian markets were broadly lower aside from the Nikkei that was +0.5% on speculation that Shinzo Abe was on the brink of calling a snap general election (adding further political factors into the mix). European markets are cautious lower in early moves, with the sterling rebound weighing on FTSE 100. In forex there is a mixed mood, whilst the dollar is tending to be supported today. This comes despite Treasury yields lower this morning. Politics is dragging on the Kiwi and the euro, whilst the yen is also weaker on the prospect of Abe calling an election. The dollar strength is hitting gold which is lower again, whilst oil continues its drift of the past few days.
On the economic data front, it is a quiet start to the final week of the third quarter. The German Ifo Business Climate at 0900BST is the only significant announcement and is expected to only move very slightly higher to 116.0 (from 115.9). There is a positive correlation between German growth and the Ifo, so Bund yields and the euro will be reactive to the data.
Chart of the Day – Silver
The broken uptrend channel and subsequent breach of support at $17.25 has turned the outlook negative again. This comes with the continued deterioration in the momentum indicators which suggests that rallies are now a chance to sell. The run of dominant bearish candles continues, with any hint of a positive session being broken once more to the downside. That should mean the support at $16.80 will come under increased threat now in the coming days and a downside break opens the next lower high at $16.55. The hourly chart shows that in the past couple of weeks the hourly RSI has been limited around 60 as rallies are being sold into, whilst hourly MACD lines struggle as they get back to neutral. There is initial resistance at $17.10 and now bolsters the new resistance of $17.25. The bears remain in control whilst the resistance at $17.40 is intact.
The euro is again struggling for upside traction today as the market has begun in rather cautious fashion. The bitter sweet result for Angela Merkel in the German election could weigh slightly on the euro today but for now the market remains strongly configured on a medium term basis. The five month uptrend continues to underpin the market and is rising as a basis of support today at $1.1855, whilst the initial support of last week’s low comes in at $1.1860. Furthermore, as long as the support at $1.1820 remains intact the bulls will still be reasonably happy. However, this phase of consolidation where the market in now coming up to two weeks and the momentum indicators suggest that the bulls need to step back in otherwise the trend will begin to look rather tired. This is reflected in the falling MACD lines. Also watch for the RSI dropping below 50. Resistance is back in around $1.2000 again, with $1.2030 protecting the $1.2092 key high.
The choppy ride on Cable continues. A late fall on Friday in the wake of not only Theresa May’s Brexit speech but also a Moody’s credit rating downgrade for the UK looked to be taking sterling lower. However the bulls have continued to defend the support around $1.3480 and the upside of the old uptrend channel. Subsequently the market has held on to its recent range $1.3450/$1.3655. The reaction of the European traders this morning to the rating’s downgrade will be interesting but for now the sideways consolidation continues. Momentum indicators are simply reflecting the consolidating market with the RSI and Stochastics just drifting slightly back, but barely suggesting anything decisive. The hourly chart also reflects a range play with the extremes on the RSI (between 30 and 70) a chance to play the range. A closing break of the range will drive a 200 pip target, but for now we away the next signal.
With the uptrend having lost traction on Friday the market is now beginning to put pressure on the uptrend of the past couple of weeks. However the market was always going to struggle to sustain the sharp trajectory of the trend and such a pause seemed likely. Having broken so decisively above 111.00, the bulls still retain control of this improving market and the bulls will now look to build on that basis, with Friday’s low at 111.65 initially supportive. The momentum indicators retain a positive configuration with the RSI still above 60, MACD lines still rising and Stochastics strong. The hourly chart shows a mild positive bias and higher lows continuing. The bulls will look to regain control and push higher back to the resistance at 112.70.
The confirmed breakdown below $1300 was key for the medium term outlook. It confirms that the bulls have decisively lost control and pressure is now mounting on a corrective phase. The old long term pivot band $1300/$1310 now becomes a basis of resistance as the downtrend of the last couple of weeks continues to build in a series of lower highs. The trend provides a ceiling today around $1305, whilst momentum indicators become increasingly corrective and rallies are being sold into. Friday’s positive candle could not break back above $1300 and the bulls now have a key period of trading ahead. Continued failure around the pivot will increase the downside pressure and build up resistance to gains. The hourly chart shows trending momentum building with rallies failing around 60/65 on the hourly RSI before going below 30, whilst the MACD lines are struggling to push above neutral. Initial support is $1287.60 which was last week’s low, however a breach would open the $1278, $1274 and $1267 supports left during the August rally. Initial resistance on the hourly chart is $1304 with $1316 now a key lower high.
The market remains supported with intraday corrections being bought into. However, it is interesting to see that whilst Brent Crude continues to rally ever higher, WTI is still languishing as the market struggling to break that shackles of the August high at $50.50. The three week uptrend is intact and today supports at $49.85 above the key near term support at $49.20. Momentum indicators are though still positively configured despite the brief consolidation, with the RSI above 60, whilst the MACD and Stochastics are rising. The hourly chart shows the hourly RSI continues to show a positive bias on unwinding moves to 35/40 and the MACD lines unwinding to neutral. Initial support at $50.07.
Dow Jones Industrial Average
The rally on the Dow has stalled in the past couple of sessions, however the outlook remains strong and corrections remain a chance to buy. The key breakout at 22,179 is now the main key support. Momentum indicators are just unwinding slightly but ultimately this is likely to be the precursor to the next bull leg. The upside target remains 22,675 whilst Thursday’s high at 22,420 is the initial resistance. Friday’s low at 22,300 is now a basis of support near term.