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Safe haven plays in demand as North Korea tensions escalate further


Market Overview

Safe haven trades are back in demand once more as North Korea has further ratcheted up the geopolitical pressure once more. The pariah that recently flew a test missile over Japan has supposedly now successfully tested a hydrogen bomb at the weekend. The claim is that this successful test could now be mounted on a ballistic missile and threaten key targets in SE Asia. Financial markets have responded with a flight into safety early on Monday morning. Gold and the yen have gapped high at the open, whilst sovereign bond yields and equities are lower. Although the US have responded, with US Defense Secretary James Mattis warning of a “massive military response”, the UN Security Council is due for an emergency meeting to decide on the appropriate reaction. With the US markets closed for Labor Day public holiday, there are no Treasury markets or Wall Street to garner a response, so this could leave markets somewhat volatile.

 

Safe haven

 

Wall Street closed higher on Friday with the S&P 500 +0.2% at 2476, however, with events of the weekend taking over, Asian markets are all weaker today, with the Nikkei -0.9%. European markets are also negative in early moves. In forex, there is a safe haven bias, with the yen and Swissy performing strongly, in addition to a rebound on the euro (increasingly acting as a safe haven), whilst commodity currencies are weaker. In commodities, the gold price has jumped $13 or a percent higher to a 12 month high, whilst oil is weaker again as the volatility surrounding Hurricane Harvey continues.

It is a quiet start to the week with the UK Construction PMI at 0930BST really the only data that may cause a stir. Consensus forecast is for a mild tick higher to 52.1 (from 51.9) but accounting for around 7% of the UK economy, sterling will be little impacted. It is also Labor Day public holiday in the US on Monday.

 

Chart of the Day – FTSE 100 

The equity bulls looked to push on despite the weaker than expected Non-farm Payrolls on Friday. However with the early weakness today, the reaction of the bulls could be interesting. It had seemed as though a breakout was brewing and if the market can form some decent support today on the correction, then this will improve confidence for an upside break. FTSE 100 may be a heavy old steamer compared to the DAX’s bullet train in terms of volatility, but even FTSE is looking to breakout. Friday’s candle pushed the market to a three week high and above the medium term pivot around 7450. Having now broken above it once, this pivot is a key medium term indicator that the bulls will now be watching. It comes bang in the middle of what has become a trading range between 7300 and the all-time high of 7599 in the past few months. However, with the MACD lines crossing higher with a buy signal and Stochastics accelerating higher the momentum is moving to imply a breakout. This is the first MACD buy signal since early July but there is still a concern that the bulls could be tempered  by a market that has been beset by retracements in recent weeks. A decisive move above 7450 would break the shackles for a push towards the August high of 7552, with the pivot then becoming a basis of support. The hourly chart shows support around 7400 needs to hold otherwise the momentum in move more could be lost. The reaction to the early selling pressure today could be key for FTSE 100.

 

EUR/USD

The moves on the pair in recent sessions shows how the market is somewhat reticent of pushing too high with the euro rally, but the market still has an underlying support. As such corrections remain a chance to buy. Friday’s negative candle adds to the corrective slide of the past few sessions and also leaves a potential lower high at $1.1979 below last week’s key high at $1.2069. However the configuration across the momentum indicators suggests that this is merely an unwinding move that is likely to once more provide a chance to buy. The early support is coming in today and there is a band over underlying demand  still in place from the August consolidation that means there is solid support around and above the old key breakout of $1.1711. Last week’s low of $1.1820 also remains intact. Another positive reaction to hold support again today will build confidence for renewed upside, with support at $1.1850. A breach of the uptrend at $1.1690 is needed to change the outlook.

 

GBP/USD

Although Friday’s session was hardly packed with high conviction, the market has started to make gains and potentially pull clear of the neckline at $1.2930. The close above $1.2930 means that the bulls are starting to build traction, which is reflected in the momentum indicators which have ticked higher after a slight consolidation during last week. The crossover buy signal on the MACD, RSI above 50 and Stochastics pulling higher following a bull “kiss” are all encouraging signals. If the bulls can now build above the support on the hourly chart between $1.2900/$1.2930 then they can continue to push for a retest of Friday’s high at $1.2995. The psychological resistance at $1.3000 and then a key resistance of a lower reaction high at $1.3030 lie in wait but the bulls are gradually gaining in confidence once more. Support at $1.2850 is now key.

 

USD/JPY

Safe haven plays jumped higher at the open today after geopolitical risk surrounding North Korea ramped up yet again over the weekend. This has pulled Dollar/Yen sharply lower. However the move has already started to unwind and means that today’s trading will be key as the session develops. It is interesting to see the near term importance that the pivot around 109.80 is having on the technicals. This is a frequent turning point for candle lows and major day levels. The hourly chart shows how it provided a basis of support on Friday before becoming a basis of resistance during the Asian session today. The unwinding rebound is now testing around this resistance and a close above or below today will be seen as a minor victory for either the bulls (above) or the bears (below). The momentum indicators on the daily chart are tailing off in their recovery now and the disappointment for the bulls on a close below 109.80 could be key. The hourly chart shows there is little really decisive direction on momentum though. Support at 109.30 from today’s early low with Friday’s resistance at 110.40.

 

Gold

The safe haven appeal of gold is growing and it is also interesting to see how gold is holding on to its strength, whereas the yen has been less decisive in recent sessions. The market has opened strongly higher this morning, jumping above its 9th November high (where gold spiked to $1337.40 on the day of Trump’s confirmed victory). Next resistance is now from Q3 2016 with $1343.60 and $1352.60 whilst the major high to watch is $1375 from July 2016. There is a breakout gap that as yet remains unfilled at $1328.80 and this needs to be watched now. However, the strength of the outlook suggests that weakness is a buying opportunity. For now momentum remains strong with RSI pushing ever higher towards 80, Stochastics rising ad MACD lines accelerating. Friday’s low at $1316.20 is initially supportive.

 

WTI Oil

WTI is at a crossroads today and could be close to a recovery. Brent Crude has been testing a key overhead resistance, however the price of WTI has struggled to replicate this positivity. A trend lower in the past few weeks is though now being tested as Friday’s intraday recovery kept the renewed bullish intent in the market. Thursday’s bullish engulfing candle gives the market a positive bias suddenly, something that puts the downtrend under pressure today. The rebound back above the medium term pivot of $47.00 is also a key development, whilst a move back above the 38.2% Fibonacci of $50.43/$42.05 at $47.23 would re-open the 23.6% Fib at $48.45. This would also drive a break of the three week downtrend which comes in today at $47.30. The hourly chart momentum is also turning a corner and if the market can now build another higher low above $46.55 the bulls will begin to look more confident.

 

Dow Jones Industrial Average

The bulls have maintained their recovery of the past few days and continued the run of positive sessions that have broken the three week trend of lower highs. Momentum indicators are taking a decisive improvement with the RSI back above 60, Stochastics in a strong advance and the MACD lines close to a crossover buy signal. Leaving the 21,913 old resistance behind, this now becomes a basis of support and pushing back above 22,000 will be seen as another psychological breakthrough. The next resistance to test is the mid-August high of 22,085 which protects the all-time high of 22,179. The hourly chart shows a far more positively configured set of momentum indicators now, which suggests that intraday weakness will be seen as a chance to buy. Having cleared the 38.2% Fib retracement of the correction from 22,179 to 21,600, the next barrier is at 23.6% Fib at 22,043. The market is closed today for Labor Day and the technical could change significantly at the open tomorrow in light of North Korean tensions today.


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