There is an increasing sense that whilst the imposition of protectionist trade tariffs had previously concerned markets, this concern is now beginning to manifest into something far more negative. Comments from the White House administration are certainly not helping, as Treasury Secretary Steve Mnuchin (supposedly one of the more sensible talking heads) said that the US would focus its tariffs not just on China but on all countries. Wall Street did not like that. Having been relatively becalmed recently, the VIX index of S&P 500 options volatility spiked higher by over 25% yesterday (admittedly from a very low base of sub-14). Equities on the S&P 500 and Dow Jones Industrial Average broadly fell with the markets well over -1% lower. Treasury yields are also pulling lower and the yield curve is ever flattening (2s/10s spread now at 34bps), something that is pulling the dollar lower too. Although Peter Navarro (trade advisor) tried to mitigate the negativity by suggesting there would be no moves to restrict foreign investment on ownership grounds (such as Chinese companies investing in tech). This has settled market fears to an extent but there is a definite direction of travel that the market is now. This means that the main line of safety in forex is in the Japanese yen, whilst interest rate differentials are turning against the dollar now. For now though, sentiment has ticked slightly more positively this morning with the 10 year Treasury yield ticking 3bps higher in early moves. However, these sort of moves tend to be minor respite before the next wave of protectionist rhetoric emanates from the White House.
Wall Street closed sharply lower yesterday (albeit off the lows of the day) with the S&P 500 -1.4% at 2717, but futures are mildly higher initially today. Asian markets have rebounded from their lows and the Nikkei actually closed marginally positively (having been over 1% lower earlier). In Europe there is the prospect of an early rebound too, but the question is how far it goes before hitting another buffer. In forex, there is a relatively subdued look to moves, with a very mild outperformance of the yen still despite the bounce in sentiment overnight. In commodities, the fall back on gold has continued overnight whilst there seems to be a stabilisation on oil.
Traders will be on the lookout for some interesting pieces of US data in this afternoon. Starting with the S&P Case-Shiller House Prices Index at 1400BST which is expected to show prices remaining at 6.8% (from last month’s +6.8%). Then at 1500BST the Conference Board’s Consumer Confidence will be watched with an expectation that confidence will remain at an extremely high 128.0 (128.0 last month). After the Philly Fed disappointed on Friday there will be extra interest in the Richmond Fed Manufacturing which is expected to slip slightly to +15 (having improved back to +16 last month). There will also be a number of central bankers speaking today with the Bank of England’s Jonathan Haskel (centrist) at 1000BST and Ian McCafferty (hawk) at 1030BST; whilst the FOMC’s Raphael Bostic (voter, mild dove) at 1800BST.
Chart of the Day – USD/CAD
This chart may become an interesting one to gauge risk appetite in the coming days. In the wake of the hint of a dollar correction (and exhaustion signals) last week the pair posted a bearish engulfing candlestick (bearish key one day reversal) on Friday, which in isolation can be a powerful reversal signal. This has left key resistance now at 1.3380. Coming with the RSI peaking just over 70 and the Stochastics crossing lower in a sell signal (not yet confirmed) then the potential for a near term unwinding move has increased. Yesterday’s mild gains for the dollar may not have confirmed the reversal pattern but the resistance remains in place. This could also be a reversal within a two month uptrend channel whilst there is plenty of room to see an unwinding move back towards the breakout support band 1.3065/1.3125. The hourly chart shows that the bulls have just started to lose some of their control of the run higher and the support at 1.3260 is becoming the neckline of a near term top pattern that needs to be watched. A break below 1.3260 would imply around 120 pips of correction and would mean the 1.3125 support comes back into range.
The recovery on the euro continues to track higher and has now completed three decisively positive candlesticks in a row. The move continues to track higher within the trading banc $1.1505/$1.1850 of the past six weeks. Momentum indicators are also adding to the improved outlook with the RSI pushing towards 50 and at 2 month highs, whilst the MACD lines and Stochastics are also ticking higher. Moving clear of the $1.1640 resistance on the hourly chart completes a small intra-range base pattern giving around 130 pips of recovery upside towards $1.1770. The market is now tracking higher into the band of overhead supply in the range which starts around $1.1725 and it will now be interesting to see the credentials of the bulls and how they deal with this resistance. Hourly momentum configuration continues to suggest that intraday corrections are a chance to buy today. There is a good band of support now $1.1615/$1.1675.
The recovery on Cable is not as decisive as it is on EUR/USD but there was still a positive reaction yesterday as the market dropped back to find support at $1.3220 which was above the pivot around $1.3200. If the market can now move to close above Friday’s high at $1.3315 then this could legitimately be considered to be a higher low in the recovery. Momentum indicators are though somewhat tentative in their move higher and this is still an uncertain rally (reflected in yesterday’s doji candlesticks). On the hourly chart there is a mildly positive configuration on momentum, whilst the resistance at $1.3345 looms overhead still. A move back below $1.3200 would now seriously question the prospect of a recovery. Above $1.3345 opens $1.3500.
The market may have rallied off the day lows but this may just be an intraday reaction higher with the sellers remaining in control. The three month uptrend which was broken yesterday on an intraday basis seems to be seeing further confirmation now. Subsequently the early moves today have been back lower again and the momentum indicators continue to deteriorate. The RSI is now decisively below 50, whilst the MACD and Stochastics lines are tracking lower now. However until the initial support at 109.15 is broken then the market will not have confirmed the shift to a more corrective outlook, as this would be below the early June low and re-open the range low of 108.10. The hourly chart sees corrective configuration on momentum indicators with intraday rallies being sold into, whilst resistance begins at 109.80 and strengthens up towards 110.25. Expect further pressure on yesterday’s low at 109.35
Considering the broad safe haven bias and eventual negative slant against the dollar yesterday, the fact that gold posted a negative outside day session and failed to ignite the bulls is a real concern. All conditions were set up for a gold rally, but nothing came about. The market closed lower and remains under pressure today, with the market now eyeing a retest of the support around $1260. Momentum indicators remain negatively configured (albeit subdued) but this does not look like a market set up for a recovery. Holding on the support at $1260 is a must now for the bulls. A breach of $1260 opens $1236 which is the December low but also the medium term downside implied target. Yesterday’s high at $1272.50 is now initial resistance which protects overhead supply coming in around $1282. The hourly chart does to make happy reading either for the bulls with hourly RSI consistently failing around 60 and MACD lines failing around neutral.
Given the volatility on Brent Crude yesterday it was remarkable how stable the WTI breakout was. Coming in the wake of Friday’s strong bullish upside break, holding on to the support at $67.15 is the first key task for the bulls. This is the neckline of a small base pattern that implies around $3 of upside towards $70.15. However, given the market drifted lower into the close yesterday with a mildly negative candle, the bulls need to respond positively today otherwise the doubts over the breakout will creep in. There is now a small band of support $67.15/$67.70 which is now a near term buy zone. The improvement in the momentum indicators is encouraging with the MACD lines now recovering strongly, Stochastics rising decisively and the RSI above 50. The hourly chart also reflects a positive configuration where corrections should be seen as a chance to buy now. Initial resistance around $69.45, with the May high of $72.83 still key resistance.
Dow Jones Industrial Average
With the eight session sharp downtrend continuing to track the market lower, after a brief respite on Friday, renewed selling pressure has taken hold. The corrective outlook has now broken below the key late May low of 24,248. Furthermore, the market has also hit the 23.6% Fibonacci retracement of the 26,616/23,345 sell-off at 24,117. Although the market has bounced from 24,084 there is nothing to suggest this was an exhaustion move and we can expect further pressure on the 23.6% Fib level. The concern for the bulls is that this move has now taken the RSI decisively below 40 (a 12 week low), whilst the Stochastics are negatively configured. The move from the upper Bollinger Band back to the lower Bollinger Band (closed yesterday at 24,170) is also continuing and again is an indicator which is likely to be hugged in the coming days. The 38.2% Fib at 24,595 is now a basis of resistance for a rebound, whilst the downtrend comes in today at 24,435 and rallies are increasingly a chance to sell.
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