Market Overview
There is a mixed feel to markets today as the risk positive intent of recent sessions has begun to ebb away. With US pharma giant Johnson & Johnson (NYSE:JNJ) pausing its COVID-19 vaccination trial there is a jolt to recent bullishness. Pausing trials are common practice (the Astra Zeneca trial saw a similar pause for a few days about a month ago), but this has just given the bulls an excuse to pullback slightly. As US Treasuries resume trading after a Columbus Day break, yields are ticking lower and the dollar is feeling the benefit once more. Markets have been viewing the US fiscal support negotiations with a glass half full mentality, however, with a lack of traction there could also be some fatigue setting in. We are seeing this today, with US index futures rolling back from a strong recent run higher. With Q3 earnings season starting in earnest today too, this adds another factor into the mix too. A stronger dollar has weighed on the precious metals, whilst for oil, increasing second waves of COVID are a threat to demand at a time where supply is also looks to be increasing in Libya. UK unemployment levels are now beginning to increase, although they are still at artificially low levels in light of the government furlough scheme. Sterling is relatively unmoved, with Cable focused more on dollar price action today.
Wall Street closed decisively higher with the S&P 500 at +1.6% to 3534. This is being tempered slightly today with E-mini S&P futures -0.4%, which has just pulled the reins on an Asia rally (Nikkei +0.2%, Shanghai Composite +0.1%). European markets are also mixed, with FTSE futures +0.1% and DAX futures -0.1%. In forex, there is a basis of USD strength this morning across the majors. The big underperformer is AUD whilst NZD is bucking the trend with mild outperformance. In commodities, the dollar gains are weighing on gold (-0.3%) and silver (-0.9%). After two days of declines, there is a slight rebound on oil today, but is it enough to turn a tide of correction?
There are a couple of important data points to watch out for on the economic calendar today. The German ZEW Economic Sentiment is at 1000BST is expected to decline to 73.0 in October (down from 77.4 in September). This would be driven by a deterioration in the current conditions to -60.0 (from -66.2 in September). Then into the US session, US CPI inflation for September is at 1330BST, with headline CPI expected to see an increase to +1.8% (up from +1.7% in August), whilst core CPI is expected to also tick higher to +1.4% (from +1.3% in August).
Chart of the Day – AUD/USD
We see the dollar has been under pressure recently but the greenback managed to claw back some lost ground yesterday, and this has continued today. This move lower on AUD/USD leaves the market intriguingly poised. Friday’s bull move stopped around 0.7240 which was not only an old breakout level from August, but also now strengthens a six week downtrend. How the bulls react to the disappointment of this renewed decline will be key. There is now a developing uptrend of the past couple of weeks, forming higher lows and higher highs. We have seen momentum improving, with Stochastics rising at five week highs, but MACD lines are still struggling slightly under neutral, whilst the RSI has again rolled over under 60. There are big question marks over the outlook still. The bulls need a strong reaction to this decline to really suggest they are developing again. A pick up from an early low at 0.7165 is encouraging (the tentative uptrend comes in at 0.7130 today). Continuing to close above 0.7190 would add confidence for a market that needs to closing decisively above 0.7240 to open the upside once more.
Even though the pair is trading clear above 1.1750 again, the outlook is still not decisively positive. A new uptrend formation is in place (today at 1.1780) but a negative close yesterday and another early slip lower today is testing the trendline. The improvement in momentum indicators is also being tested as MACD lines just tail off around neutral and RSI slips back towards 50. Resistance is in place at Friday’s high of 1.1830 now and the bulls will be mindful that this needs to be broken to continue the run higher. First and foremost though, is holding the trendline. A failure below 1.1750 would again seriously question bull control, whilst below 1.1725 (the first real higher low) would neutralise the outlook again.
A second positive candlestick clear above 1.3000 is building on the improving outlook on Cable. Where 1.3000 was once a ceiling, this resistance has now turned into a basis of support. The market has also closed above 1.3050, meaning that the old August lows (which have been a basis of overhead supply) are now being overcome. A continued improvement in momentum is coming, with Stochastics above 80, RSI hovering around multi-week highs, whilst MACD lines continue to advance. It points towards using weakness as a chance to buy. A mild early turn lower today could be such an opportunity, with 1.3000 now a basis of support. The market is now edging higher in a mini trend channel, but the more interesting upside target is still the +330 pips from the breakout of a month long range/base pattern. This implies 1.3330 in the coming weeks. It is likely that a positive outcome from the Brexit trade deal negotiations will be needed for this though. Below 1.3000 would be a disappointment now, but further support arrives at 1.2970 and 1.2920.
On a day of light volumes, a second solid negative candle once more dragged the market lower yesterday. The move has decisively broken an arguable recovery trend and means that a retreat towards a test of 104.90 could now be seen. It comes with the renewed deterioration of momentum indicators, with Stochastics leading the way lower. We still see a continuing medium term consolidation, between 104/107 in place now. However, there is a mild negative bias within this range (reflected in MACD lines consistently under neutral and RSI consistently failing under 60) which leaves us to prefer a test of 104.90. Resistance is building up around 106.00 again. It would mean that we look to use this early rebound today to see a selling opportunity. The hourly chart shows resistance between 105.50/105.80 will likely be where the next lower high is seen.
It is clear that the bulls still have some work to do before they can be confident that they can run the price higher on gold. Although Friday’s decisive move higher took the market to a three week high, there is still a stuttering feel to this renewed rally. Yesterday’s negative close has been followed by early downside today. With the market closing on Friday above $1926 there was a feeling that weakness would become a chance to buy. We will now see how positive the market has become. The hourly chart shows that a shallow uptrend channel can be derived, which reflects well the renewing positive run higher. However, holding above the old floor of $1902 would still be an important signal. Holding on to today’s early low of $1909 would be a positive response, especially as hourly indicators are back around important buying opportunity levels. The bulls will be looking to move back above a near term pivot at $1920 with resistance now at $1933. This is an important early test for the new positive outlook. Closing back under $1902 would be disappointing.
As Brent Crude has swung lower in the past couple of sessions, the one month consolidation rectangle range has continued to play out. Trading between support of the low at $38.80 and the resistance of the high at $43.80 it is interesting to see that the mid-point at $41.30 continues to also play an important role. The level which was where the market found an old floor in July has become a pivot over the past month. Trading above the pivot this is supportive, and once more yesterday this helped to hold up a sharp decline from accelerating further. A close below $41.30 effectively would re-open a test of $38.80/$39.30 again. For now though, $41.30 is acting as a near term floor and the market is consolidating. Whilst this $5 range continues to play out, we remain neutral on oil.
The bulls continue to pull Wall Street higher, with the Dow rallying to within a strong session of testing the 29,200 September high. Momentum is increasingly positive as the RSI rises into the 60s (at a five week high), MACD lines accelerate above neutral and Stochastics are strong above 80. A two week uptrend comes in today at 28,420, with the recent breakout support at 28,365. This all suggests that any near term unwind in the coming days would be another chance to buy. Futures are a shade lighter this morning and this may provide an opportunity. The hourly chart shoes decent support initially around 28,520/28,675. We look to use weakness as a chance to buy for a test of 29,200 with the all-time high just above at 29,568.
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