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Potential US/China trade agreement a boost to risk appetite


Market Overview

For so many things in life, timing is crucial. In trading, get your timing right and the profits are there, get it wrong and this can lead to substantial losses. Donald Trump is a businessman at heart, so the timing of news of a potential trade deal being drafted between the US and China, just before the mid-term elections should come as little surprise. Markets are responding too. If it is true that a “long and very good conversation with President Xi” results in a G20 meeting and potential trade agreement, then months of fear and uncertainties surrounding a potential trade war need to be re-priced again. Although nothing is ever that simple with Donald Trump, equities in Asia have bounced sharply whilst Treasury yields are higher, whilst gauges of risk appetite in forex (such as Aussie/Yen) are increasingly risk positive. There is a sense of consolidation on the dollar so far, perhaps given the sharp losses yesterday and the prospect of Non-farm Payrolls today. However, should the Chinese yuan continue to recover against the dollar, then this should help to mitigate dollar strength from rising Treasury yields. This may all change though this afternoon if the payrolls report reflects increasing wage growth, which would once more pull expectation of rate hikes forward. For now though the market is “risk on”, taking the positives for once out of relations between the US and China.

China and US flags

Wall Street closed strongly higher with the Dow over 1% higher and the S&P 500 +0.8% at 2758, whilst futures are ticking for similar gains early today. Asian markets were strong across the board, with the Nikkei +2.5% and Shanghai Composite also +2.5%. Gains are also being seen across European markets early today, following the sort of numbers seen on Wall Street higher. On forex markets there is a risk positive feel in front of payrolls, with the sizable gains on the Aussie and Kiwi again, whilst sterling is perhaps understandably catching breath after huge gains yesterday. The consolidation on the dollar today is seeing a consolidation across precious metal commodities, with gold and silver around flat, whilst despite the improved risk appetite a beleaguered oil is once again struggling.

With All Saints Day in Europe yesterday the continental PMIs have been delayed until today, with the final Eurozone Manufacturing PMI at 0900GMT which is expected to be confirmed at 52.1 again (flash 52.1, September final 53.2). However the main event on the economic calendar is the US Employment Situation report which is announced at 1230GMT (an hour earlier than usual in Europe as the US clocks are yet to go back). The headline Non-farm Payrolls are expected to be 190,000 which would be up from the surprisingly low 134,000 jobs growth for September. Watch out for potential revisions to the data too, given the impact of the hurricanes to hit the eastern seaboard. Unemployment for October is expected to stick at 3.7% (September was 3.7%) whilst U6 underemployment was 7.5% last month. The big focus will be on Average Hourly Earnings which are expected to grow by +0.2% on the month but due to a very weak October 2017 of -0.2% dropping out, the year on year reading is expected to jump to +3.1% which would be the highest earnings growth since mid-2009. Also watch for the labor force participation rate which was steady at 62.7 last month.

 

Chart of the Day – AUD/JPY

With risk appetite strongly improving yesterday there was a dramatic move away from the safe haven currencies, and the major cross that is a strong signal of risk appetite, the Aussie/Yen formed a key upside breakout. The move above 80.50 is an important move on AUD/JPY as this has been a pivot line for much of 2018 and is a line in the sand which shows that sentiment is improving again. The key reaction will now be how the market responds to this breakout, and initial gains today suggest a run that wants to continue. Given the strength of the run higher in the past few sessions, the bulls look set to maintain the traction for a test of 82.50, the October high. Momentum indicators have swung decisively positive, with the Stochastics and RSI are accelerating towards positive configuration whilst the MACD lines have posted a bull cross. This is the first bull cross since September when the market subsequently embarked on a decisive run higher to 82.50. With the hourly chart showing strong configuration on momentum, there is initial support 80.50/81.00 and now good support of a higher low at 79.80 above the 78.55/78.70 key support band. A move above 82.50 opens 83.25/83.90.

 

EUR/USD

After yesterday’s strong bull candle, the euro stands on the brink of a near term upside break. A combination of dollar weakness and the euro being dragged on the coat tails of a resurgent sterling formed a bull candle which added almost 100 pips yesterday. This move breached the resistance of the two week downtrend and is now testing the key near term resistance of the old mid-October lows at $1.1430. This is a pivot which the bulls will be eyeing for an upside break. For now the momentum indicators are just beginning to get going with a recovery but are not yet the driving force behind the move. It needs the RSI above 50 and decisive cross buy signals on MACD and Stochastics, none of which have yet been seen. A close above $1.1430 would though continue the rally and then open $1.1500/$1.1550 as the next band of resistance. It is also important for the bulls to now build support above $1.1300. Non-farm Payrolls will be  key factor in determining the near term outlook and needs to be watched today too.

 

GBP/USD

If there was any doubt over the ability for the Brexit negotiations to impact on sterling, the addition of 245 pips in one session (on the improved prospects of agreed terms) should swing the argument. Cable has now decisively swung positively through a swathe of resistance factors to look in a far better state once more. Technically the momentum indicators have swung positively (not surprisingly) with the Stochastics crossing higher and RSI above 50. The push through $1.2920 now means this becomes a basis of support now and the bulls will be looking to build a position once more above $1.3000. An early consolidation today is understandable and given that it is payrolls today a slight unwind of yesterday’s gains would not be a surprise either. The next resistance is at $1.3090. The move yesterday shows that staying close to Brexit newsflow is a must in the coming weeks.

 

USD/JPY

After two slightly negative candles in the previous two sessions, the bulls will be looking at trying to regain some sort of control. There is still a sense that the buyers are stronger on Dollar/Yen, but attempts to find traction are so far failing. Given the initial pull higher this morning, the low at 112.60 now takes on added importance. Coming around the highs of the previous mini range of the past two weeks, there is now a band of underlying demand 112.60/112.85 to work from. Momentum indicators are in a position where the bulls could be set to take off with upside potential now, but they just need that catalyst for a sustained run. Perhaps this might be a strong payrolls today? Resistance at 113.40 would be eyed and a breakout opens the high again at 114.55.

 

Gold

Significant dollar weakness may have been a key factor, but the gold bulls have jumped back into the driving seat with an $18 decisive positive candle yesterday. The important feature of this move is that the buyers supported the corrective move in the band $1208/$1217 to leave what is now potentially a key higher low at $1214. However, once more the resistance of the old long term pivot at $1236 is being tested. The market was unable to decisively breach this pivot last week so this is a key test again. An initial consolidation today reflects the importance of this level. Momentum indicators are positively configured, but a touch tentative at the moment. The payrolls report today could tip the balance and therefore needs to be watched. A closing breakout above $1243 opens $1266. Below $1214 would now be a disappointment for the bulls.

 

WTI Oil

As the sell-off has continued, WTI now sits on the brink of a significant downside break. Another strong bear candle was posted yesterday with the market accelerating lower once more, breaching key supports of $64.50 (the old August low) and $63.60 (from the old June low). However, the breach of $63.60 was not held into the close and is therefore yet to be confirmed. The key will now be how the market responds, as the bulls will be concerned by this breach and there will now be overhead supply between $63.60/$64.50 and a failure to quickly reclaim above this trading band would increase the pressure. The bulls are really up against it now as there is the resistance of the three week downtrend at $65.90 and momentum indicators are deeply negatively configured. This suggests that technical rallies such as the early bounce today, will be seen as a chance to sell. On a medium term basis a two day close below $63.60 would open the next key reaction low at $58.00 (the February 2018 low) whilst initial support is $61.80 and then $60. Resistance is at $65.75.

 

Dow Jones Industrial Average

A third consecutive positive candle has continued the improvement in sentiment this month after such a precipitous sell-off throughout October. This comes with a close above the near term resistance band 25,235/25,300 and with a decisive improvement in momentum indicators. The Stochastics are accelerating higher, whilst the MACD lines are close to a bull cross now. A move on the RSI above 50 would add to the sense that there is an increasingly positive near term outlook. However, it will be how the bulls respond to the first wobble in the recovery that will be key. There is a basis of support now around 25,000/25,100 and with the hourly momentum indicators now more positively configured, can this position continue. The hourly RSI remaining above 50 will be important as a signal near term. The bulls will be looking to use a correction to be bought into and then to push on towards  a test of the first key resistance, at 25,818.


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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.