The first trading day of the second half of the year sees risk appetite back under pressure, with domestic German politics and trade wars flaring up again. Supposedly the unified outcome of the EU leaders summit was meant to help stabilise what had threatened to be an increasingly fractious migration issue. Angela Merkel would have been happy to leave the summit with a sense that the leaders could agree on a way to push forward. However selling it at home would always be difficult and it seems that she is still politically vulnerable as the leader of her CDU’s sister party, Horst Seerhofer of the CSU, has threatened to resign. This is undoing the recovery on equities that was seen on Friday and leaves German politics, perhaps also Eurozone politics, on a knife edge. There is now a degree of safe haven bias back into the market once more, with bond yields falling. The German 10 year Bund yield is at a five week low whilst US Treasury yields are also lower. Trade wars are still in focus with Canada and the EU suggesting increased tariffs on US goods over the weekend. Furthermore, today’s data out of China has not been positive either, with China Caixin Manufacturing PMI dropped to 51.0 as expected (51.0 exp, 51.1 last month), but with fears over falling exports orders this has also played into the risk off sentiment today. In the forex space, the currencies which have been preferred during a safety bias, the yen and the dollar, are performing well, whilst equities are under significant strain.
Wall Street scraped gains into the close but way back from the highs of the session, with the S&P 500 +0.1% at 2718 whilst US equities futures are around -0.4% lower in early moves. This has driven losses on Asian markets with the Nikkei -2.2% and European indices looking around a percent lower initially. In forex, the reduced risk appetite is seeing the euro slipping back whilst sterling is also under pressure. The yen and dollar are the main performers of strength today. In commodities, the renewed dollar strength is hitting gold lower again as the market continues to be impacted more by dollar moves than safe haven flow. Oil is slipping back as supplies from Saudi Arabia are expected to increase as Donald Trump again waded into the OPEC supplies issues on Twitter over the weekend.
The first trading day of the month is a day for manufacturing PMIs. The final Eurozone Manufacturing PMI is at 0900BST which is expected to be conformed of the flash reading at 55.0 which would be marginally lower than the 55.5 from last month. UK Manufacturing PMI is expected to drop back to 54.0 (54.4 last month), whilst the US ISM Manufacturing PMI is expected to tick lower to 58.3 (from 58.7). The Eurozone unemployment reading will also be watched in the morning at 1000BST and is expected to show the level remaining at 8.5% for a second month.
Chart of the Day – EUR/CAD
The rising oil price has finally had a positive impact on the Canadian dollar (especially on USD/CAD) but with the euro finding support on Friday, has this now just given another chance to buy EUR/CAD? The uptrend channel on EUR/CAD has been pulling the pair higher for the past month with a run of higher lows and higher highs. The move has come following the near term breakout above 1.5360 which completed a turnaround, but there is a band of support between 1.5315/1.5360 which the market has just corrected back to. There is a confluence of support the trend channel, the 1.5315/1.5360 band and also the rising 21 day moving average (currently 1.5322) which means this is a crucial crossroads for the correction. An early slip back today is questioning the trend channel but the neckline support around 1.5360 is holding. If the bulls can hang on to this confluence support then this will prove to be another excellent buying opportunity. A close below the channel support at 1.5315 today would question how strong the bulls are now. Momentum indicators are rolling over too, with the MACD lines beginning to cross lower.
Another staunch defence of the key floor at $1.1505 was seen to end last week with a big bullish candlestick that was the largest positive session for a month. The move came in the wake of the seemingly positive outcome of the EU summit, however political developments in Germany over the weekend may now look to unwind some of the gains. The market opened this morning lower and has remained stuck in Asian trading. Technically it is all a bit of a mess, with little real direction on RSI, MACD or Stochastics lines to go on, only that the market remains stuck in a negative medium term configuration but near term there is a neutral configuration. The resistance at $1.1720 from last week’s high remains in force, whilst $1.1640 is still a pivot to take note of on the hourly chart. A move below $1.1600 would be a concern again for the bulls.
Cable advanced 130 pips on Friday with a strong bull candle, but this now needs to be backed up with further gains today in order to suggest that perhaps the bulls could string together a few positive sessions of note to get the recovery back on track. The early signs are not great, with an early slip today. The RSI is again back towards 40, where the rallies of recent weeks have failed, whilst the MACD lines show all but nothing. There is an old pivot around $1.3200 which still needs to be decisively breached whilst resistance at $1.3315 is a key lower high. Given the trend of lower highs and lower lows, the rallies still need to be treated as a chance to sell again, but we will know a lot more about what the bulls are made of after today’s session. Initial resistance at $1.3213.
The pull higher on Dollar/Yen is a curious bull move. A run of gains in the past four sessions, but candlesticks that really lack conviction. The RSI has ticked up to 60 and Stochastics edged higher too, but the MACD lines are lacking intent. Friday’s initial move above 110.90 failed to close the breakout, whilst an early move higher today also lacks the drive. This move has the feel of the bulls on a run higher up a sand dune, a run that is exhausting. The key resistance remains 111.40 and there could be further gains to be seen, but it seems to be a real effort. The hourly chart shows a solid uptrend and positive momentum configuration. Watch for the RSI beginning to fail below 45 and MACD lines below neutral. Initial support at 110.45 breaking would also be a signal.
Gold remains corrective and the target back towards a test of the medium term downside target of $1236 is still preferred. However, Friday’s positive candle has just questioned the strength of the selling pressure and broken a two week downtrend. Momentum indicators remain negatively configured and as such rallies are still a chance to sell though. The hourly chart shows a series of old near term supports that have become overhead supply of the initial rebounds, around $1275, $1270, $1260 and now potentially at $1255. The market needs to begin to breakdown these resistances in order to suggest a sustainable near term rebound could take off. With hourly momentum again rolling over a retest of the recent low at $1245 is likely now.
The bulls have broken out to multi-year highs and look in control. This is clearly a strong trending move but the run of higher lows and strong candles may just be on pause with an early slip back today. This comes with technical signals being stretched (RSI around 70) and could now be a key crossroads for the oil price, whether a near term exhaustion signals could impact. The hourly chart show momentum could be waning now and is on the limit near term of turning corrective. So today’s session will be key. Support around $72.25/$72.50 needs to be watched, whilst the daily chart shows a close below the breakout support at $72.85 could begin a correction. Overhead supply is limited with the market unwinding such a precipitous sell-off, but the 61.8% Fibonacci retracement of the huge bear market $107.75/$26.05 comes in around $76.50 and is a potential consolidation point. Failing that we are looking at $80. Friday’s high at $74.45 is resistance.
Dow Jones Industrial Average
There is clearly bull/bear battle going on between the Fibonacci retracements at 23.6% (24,117) and 38.2% (at 24,595). Friday’s bullish break higher looked to be eyeing the 38.2% Fib level having broken the mini-correction move of recent weeks but a slip into the close questions this. A negative “hanging man” candle puts the bulls on the back foot today. However with the mixed candles of recent sessions, momentum looks far less negative now and the market could be entering a choppy phase, potentially between the Fib levels. Closing the gap at 24,308 puts 23.6% Fib under pressure again at 24,117, with Thursday’s low at 23,997 now key near term. Friday’s high at 24,510 is resistance.
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