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Stability on euro as traders await Italian budget response

Market Overview

With bond markets shut it can be like a maverick co-pilot taking over the controls when the venerable pilot has a day off. Equities on Wall Street succumbed yesterday and sold sharply lower amid concerns over European political risk, Apple’s iPhone sales growth and no let up to the selling pressure on oil. The initial signs today are that bond yields have reacted lower initially but are off their lows of the day, with markets relatively stable as traders await news of the latest twist amidst the instability of European politics. The re-submission of the Italian Budget is due today although there is little suggestion of any ground breaking agreement over the populist Italian government’s spending plans being curbed. Add a sprinkling of domestic Brexit squabbles with negotiations on a knife edge and we see sterling remains a volatile play too. The euro broke sharply lower yesterday in what looks to have been an outlook changing move below $1.1300. The strength of the dollar has also weighed heavily on gold in recent sessions showing that even safe haven flows are being trumped right now (no pun intended) by the breakout on the greenback. There is an increasing outlook of selling into strength on European equities once more and in a risk negative market sentiment, the export heavy DAX is suffering on performance. Whilst these political uncertainties in Europe continue it will just be another reason to shy away from the euro and sterling, whilst equities will remain under pressure too.

Euro sign on fire

Wall Street closed hugely lower, with the Dow -602 ticks (or -2.3%) and the S&P 500 -2.0% at 2726. The futures have ticked a shade back higher early this morning, but Asian markets have been broadly under pressure (Nikkei -2.1%, although the Shanghai Composite was +0.9%). European markets are mixed around the open. In forex, there is a degree of calm that has come over the markets with Treasury yield off their lows, which is allowing a bounce on the euro and sterling, for how long though is questionable. The Aussie and Kiwi are also positive on reports in the South China Post of thawing trade tensions with the US. In commodities, gold is seeing a degree of respite from recent selling pressure, but oil is lower yet again.

The stream of key UK data points kicks off today with the employments stats. UK Unemployment is at 0930GMT and is expected to remain at 4.0% once more, however it is the UK Average Weekly Earnings which will be the focus here, with an expectation that wages will pick up to +3.0% (from +2.7% last month). The German ZEW Economic Sentiment at 1000GMT is expected to deteriorate to -25.0 (from last month’s -24.7) which would be a six year low. Then late in the evening is the Japanese Q3 GDP (prelim) which is expected to show a quarterly decline of -0.3% (from an upwardly revised +0.7% in Q2). There is also a Fed speaker to keep an eye on, with permanent voter Lael Brainard (leans dovish) set to speak at 1500GMT, with any hawkish surprise likely to be pounced upon.


Chart of the Day – EUR/AUD

The selling pressure through the euro has been seen through the major crosses, with EUR/AUD falling for the past four weeks. The top pattern completed below 1.5985 implied pressure on the old pivot which is currently supportive at 1.5600 which means that the pair is now approaching a key crossroads. Although the move has achieved its implied downside target yesterday around the pivot, a closing breach of the pivot would open renewed selling pressure. The concern is that momentum is very strongly negative now, but also give the late May sell-off which took the RSI to below 20 and Stochastics in strong bear territory below 20 for four weeks, there is further downside potential. There is a trend lower over the past few weeks which is a basis of resistance at 1.5660 today, whilst the hourly chart shows classic bear momentum levels, with rallies failing around 60 on hourly RSI and neutral capping the hourly MACD. Intraday rallies are a chance to sell still for ongoing pressure on the 1.5600 pivot, a move below which opens 1.5425 initially but a retest of the 1.5275 June low would also be implied.



The sell-off on the euro has now made an outlook changing breakdown. The move below $1.1300 has pulled EUR/USD to a new 17 month low and opened a new leg of weakness. The old floor at $1.1300 had become a key support in recent months, but having been breached, this area will now house a new band of sellers. There is overhead supply starting at $1.1300 and a sell-zone up to $1.1430 initially. Momentum indicators are negatively configured across the board, suggesting that rallies are a chance to sell. This means that today’s early rebound is unlikely to amount to much before the selling pressure resumes. The one caveat to this is if there is somehow an amicable compromise reached over the Italian budget, but in the absence of this then the way is open for a test of $1.1110, with yesterday’s low at $1.1215 initially supportive.



The selling pressure through sterling has been strong in the past three sessions, however, unlike the euro, there is no significant outlook defining breakdown seen on Cable, yet. The key reaction lows of August and October between $1.2660/$1.2695 remain firmly intact. The market has bounced this morning to leave yesterday’s low at $1.2825 as initial support, and other than a deterioration within the four month trading range, nothing has overly been seen yet. Brexit related volatility makes it hard to trade sterling in any one direction for long as the newsflow changes with the wind at the moment. Subsequently, for now this is all noise within the range $1.2660 towards $1.3300. The hourly chart shows a slowing of the bear momentum now developing and this could help to build the support at $1.2825, but the near term pivot at $1.2950 needs to be broken to generate recovery momentum now. Stay close to the news in the coming days as it could be a choppy ride.



Although a second rather questionable candle was formed yesterday (which restricts the bulls) there is still a positive outlook that shows corrections remain a chance to buy. However, the immediate implications of yesterday’s long upper shadow doji candlestick could be construed as threatening a corrective move. The uptrend of the past couple of weeks comes in to support at 113.65 and has been tested early today, but even if this were to be breached there is still a decent band of breakout support at 113.15/113.40 within which to hold up a corrective move. Momentum indicators are still positively configured for now, but given the near term corrective signal, there could be an unwinding move that provides with a better buying opportunity as there is a threat that this could begin to roll over. The hourly RSI shows that this move is a near term unwind but there is little to suggest that the bulls are going to be in sustainable retreat. The band of support 112.55/112.90 is a strong basis of support and any weakness remains a chance to buy. Initial resistance at 114.20.



With gold closing decisively below $1208, the bulls have certainly now lost control. A seventh consecutive negative close and the market is under increasing bear pressure now. The psychological $1200 level is under real threat and a closing breach would mean that the sellers are in the driving seat and the market would be on course for a retest of the $1180 September low. Gold is now trading under all the moving averages and momentum indicators are increasingly negatively configured. Overhead supply is also building up once more, with the $1208/$1217 band now a basis of resistance overhead again, whilst the hourly chart shows the previous low at $1211.50 is resistance. Hourly momentum indicators are negatively configured and any unwinding move towards 50 on the RSI seems to be a struggle for the bulls.



For much of yesterday’s session it looked as though a recovery was forming, but the selling pressure grew to leave another negative session and a continuation of the bear market run lower.  The weekend’s meeting of OPEC and friends has, it would seem done little to shift the constant negative flow. Momentum is incredibly bearish and even though is extremely stretched (RSI at 18 has not been seen since June 2012), there is little sign of a recovery yet. The problem for traders is that the prospect of a sharp snap rally is growing, but in the meantime the market continues to fall. There is support at $58.00 and the confluence of a long term uptrend at $58.30 today which might encourage the bulls. There is room for a technical rally too. The four week downtrend comes in at $62.15 today as a basis of resistance, whilst there is plenty of room to unwind the market back to the overhead supply between $63.60/$64.50.


Dow Jones Industrial Average

Whilst Friday’s negative close had hinted at a loss of upside momentum, there was little to prepare traders for a 600 tick move lower yesterday. Given the public holiday there may have been a degree of thinner trading (but not excessively so at all). What the move does is continue the significantly higher degree of volatility on an intraday basis and maintain the hyper-vigilance that has been a feature of trading equities in recent weeks. The momentum indicators have rolled over, with the bear cross (not yet confirmed) on the Stochastics. Support levels did not seem to want to count for much yesterday, but there is now a sense that 25,590/25,800 is now a resistance zone, whilst the next support is 25,079. Rallies are now likely to struggle for traction.

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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.