Safe haven flows have increased as news has broken of a seriously provocative move by North Korea that looks to flare up the geopolitical risk once more. A ballistic missile has flown over Japan in an “unprecedented, serious and significant” threat, according to Japanese Prime Minister Shinzo Abe. This will surely provoke a response from US President Trump who previously suggested the US would react with “fire and fury” at any escalation of threat. This move has impacted financial markets, with risk appetite being hit. The main safe haven trades, such as gold, US Treasuries and the yen have all strengthened, whilst the US dollar and equities have been casualties. Exactly how Trump responds to this threat could be crucial to the sustainability of key breaks on the likes of gold which has broken above major resistance at $1310 this morning. However, Trump has other things on his mind, with Tropical Storm Harvey causing devastation along the Gulf of Mexico coastline. The US dollar is also still reeling from the perception of a dovish Janet Yellen on Friday at Jackson Hole in which she avoided any discussion of rate hikes or balance sheet reduction.
Wall Street closed broadly flat last night, with the S&P 500 just 1 tick higher at 2444, whilst Asian markets have been impacted negatively from the increased geopolitical threat in the region, with the Nikkei -0.5% lower. European markets are also strongly lower by over half a percent. In forex, the risk averse sentiment is clear, with the yen outperforming, the dollar generally weaker, whilst the riskier commodity currencies of the Aussie and Kiwi are the big underperformers. In commodities, gold is $11 or just under a percent higher, whilst oil is also half a percent higher due to the perception of negative supply impact from the storm in southern US.
It is a quiet morning for European announcements today, so we look to the US session, which starts with the S&P Case Shiller House Price Index at 1400BST. Expectation is for a slight drop back to +5.6% (+5.7% last month). The big focus will be on the Conference Board’s Consumer Confidence reading at 1500BST. The strength of the consumer is always a key component of the US economy which is 70% consumer driven. Confidence is expected to 120.3 (121.1 last month).
Chart of the Day – EUR/JPY
The market has been building a trading range for the past eight weeks between 127.55/131.40 but the bulls seems to be gaining control once more and it now looks as though the resistance could be tested once more. The momentum of the bullish candles is building strongly and this is coming as the MACD lines are set to cross higher again from neutral which would be a strong signal in a move similar to one seen during the bullish breakout of June. This comes as the Stochastics are rising strongly and the RSI is back into the 60s with upside potential. Yesterday’s bull candle broke above the initial resistance at 130.40 which now clears the ways for a test of the key August high at 131.40. The market has been steadily posting higher lows in each of the past six sessions, meaning yesterday’s low at 129.97 is key today. The hourly chart reflects this run of strength with increasingly positive near term momentum set up and intraday corrections being bought into. The hourly chart also shows that 129.60/130.00 is now the basis of a near term pivot support as the initial reaction lower this morning has bounced. Look to use this weakness as a chance to buy for pressure on 131.40. An upside breakout opens the next resistance at 132.25.
The euro has once more broken out to a new high dating back to January 2015 and a move above the psychological $1.2000 has been seen this morning. Two consecutive solid bullish candles in the wake of Jackson Hole have seen the euro bulls back in control after a period of consolidation. Technically this looks to be a breakout to back too, with the confident close to yesterday’s session (closing near the high of the session, in addition to strong momentum. The Stochastics are rising strongly, the RSI is rising in the high 60s and the MACD lines have crossed higher above neutral. The market is positive again today but any weakness will now be seen as a pullback to be bought into. The previous resistance at $1.1909 will now be seen as a chance to buy. The hourly chart shows that the market has already come back to find support at $1.1915 on an intraday basis yesterday. A close above $1.2000 psychological resistance means the next level of resistance is not until $1.2245.
It looks as though the bulls have returned to the market to find support at the long term breakout of $1.2775 again. With Friday’s strong bullish candle followed by another close to the upside yesterday, the momentum in a recovery is once more building after three weeks of correction. The next question is whether this will be a sustainable move. The market was consistently finding lower highs and lower lows but in the move above $1.2930, this sequence has been broken. The bulls need to now build a higher low above the $1.2770 left from last week to then begin to build a new uptrend. The momentum is certainly improving, with the Stochastics tracking strongly higher now, and the RSI back up to 50. The MACD lines are also on the brink of crossing higher again. The hourly chart shows a far more positively configured momentum now and the support at $1.2878 will be a key near term marker for the recovery. Holding above the near term pivot at $1.2840 will also be key. The bulls will be looking at the resistance at $1.3030/$1.3050 as the next challenge.
The consolidation of the past week has threatened to break lower once more this morning and it increasingly looks as though this phase of trading could be crucial to the medium term outlook. An initial intraday breakdown below 108.58 looked to be threatening the crucial April low of 108.11 but the bears appear to be having second thoughts. As European and US traders become more involved, a failure to breakdown would be interesting. Until this morning, it had looked as though the bears were struggling with these supports, with momentum indicators losing impetus for the sellers. The longer this support holds the more likely it will be that the market can sustain the test. The hourly chart shows the initial drop this morning but no significant build-up of bear momentum. Resistance is now at 108.80/109.00 today and this is a barrier for the bulls now. A move back above yesterday’s high of 109.45 would suggest the bears are really struggling. Today’s low of 108.32 is initially supportive. A close below 108.11 would be strongly bearish.
The gold bulls have really taken hold of the market once more in the past few days. The support of the seven week uptrend kicked in once more and the market has shot through a major resistance area between $1300/$1310 this morning. This takes the market to its highest level since gold spiked to $1337.40 on 9th November on the back of Trump’s electoral victory. Technically the move looks to be strong and a closing breakout above $1310 today would be a bullish signal. The next move will be for whether the market now starts to use the old $1300/$1310 resistance band as a basis of support. Momentum is strong in the move with the RSI pushing above 70, MACD lines bull kissing higher and the Stochastics also picking up. The hourly chart shows traders consolidating the move overnight with initial resistance being the $1322 overnight high. A move back above here would open the November high of $1337.40.
The market had been consolidating for several days up until a negative break on Monday. A bear candle which included an intraday move to a new multi-week low shows the mild bear bias which is also being reflected on the momentum indicators. This comes with the Stochastics turning lower again and MACD lines tracking back to neutral. A run of lower highs comes with yesterday’s failure at $48.20 which adds to the overhead resistance now in place as rallies increasingly seem to be sold at lower levels now. A close below the previous August low at $46.45 would continue the developing bear trend and open the downside for the next low at $45.40.
Dow Jones Industrial Average
It seems that the momentum of the latest rebound has once more been drained away. This has resulted in a run of consolidating closes but with mildly negative appearance to the candles. Subsequently the market has been unable to break through the 21,913 resistance of the past few days and the potential for this to be a second lower peak is growing. It is also interesting to see that the latest potential lower high came on the underside of the previous three month uptrend. This increasing corrective outlook is also reflected in the momentum indicators which are tracking lower highs and lower lows. Therefore the risk is for a retest of the August low at 21,600, and the potential for this to be seen would increase if the near term support at 21,765 were to be breached.