Market Overview
Market sentiment has dumped after Donald Trump surprised everyone by announcing that the US would be ramping up tariffs on China. From 1st September the US would put a 10% tariff on $300bn of Chinese goods. This means that almost all of Chinese imports into the US will be subjected to tariffs. Apparently China has not been buying up US agricultural goods as it had promised and not enough progress has been made in moves towards an agreement. Well, this will certainly sharpen minds, but perhaps not in the positive sense. How China comes out of this situation with any face saving resolution is now incredibly difficult (if not impossible). The path towards the worst case scenario just became clearer. This has all caught markets massively off guard and sent traders scrambling into safe haven assets. Classic moves are being seen, with Treasury yields spiking lower, a huge shift into the yen and gold also climbing. The US 10 year Treasury yield fell by 13 basis points on the day and is now at record lows again, below 1.90%. Pricing for further Fed rate cuts in 2019 have strengthened once more. The dollar has been hit hard against the yen, Swissy and also to an extent versus the euro. Risk positive currencies such as the Aussie remain under pressure, whilst buyers of sterling remain illusive. However, traders will have little respite today as the tier one data keeps on rolling in. Non-farm Payrolls is on the agenda and with the Fed now highly data dependent, both headline jobs growth and wage growth will be key.
Wall Street saw a wild ride yesterday as the negative implications of Donald Trump’s tariffs drove markets sharply lower into the close. The S&P 500 closed -0.9% lower at 2953 but that does not tell the whole story, as it had been over 1% higher before Trump waded in. US futures are a further -0.1% lower today. Asian markets have understandably been under significant pressure with the Nikkei -2.1% and Shanghai Composite -1.5%. European futures are also under huge pressure, with FTSE futures -1.1%, whilst DAX futures are even worse -1.8%. In forex, the USD correction has stabilised to an extent but it is interesting to see JPY continuing to strengthen. Furthermore, GBP remains an anomaly on the majors are continues to slide. A by election defeat for the ruling Conservative Government has made Boris Johnson’s job of delivering Brexit without a General Election even harder. In commodities, the big swing higher on gold is just unwinding back to an extent today, currently -$11 lower. A similar unwinding move is being seen on oil which has bounced +2% after falling over 7% yesterday.
The payrolls report will be key for traders today, but the European session will first take a look at the UK Construction PMI at 0930BST. Although only representative of around 7% of the UK economy it could still be indicative for sterling,, with an expectation of an improvement to 46.0 (from a hugely weak 43.1 in June). The US Employment Situation report is at 1330BST and is expected to show headline Non-fam Payrolls just moderating back to 164,000 in July (down from 224,000 in June). Look also for any downward revisions to the June number which was a big positive surprise. The Average Hourly Earnings growth is expected to show +0.2% on the month which would maintain yearly wage growth of +3.1% (+3.1% in June). The US Unemployment rate is expected to hold at 3.7% (after ticking higher to 3.7% in June). Other important indicators to watch are the laborforce participation rate which ticked back higher to 62.9 in June but remains below the 12 month average (a shade above 62.9%), with the U6 Underemployment which was 7.2% in June. Aside from payrolls, the revised Michigan Sentiment at 1500BST will also be watched, with a slight upward revision to 98.5 expected (from 98.4 in the prelim).
Chart of the Day – EUR/CHF
One of the major crosses that retains a bearish configuration, with high conviction, is Euro/Swiss. Consistent breakdowns within a bear trend of the past three months, where old support becomes new resistance. This happened on the original breakdown below the old key floor 1.1160/1.1180 to become resistance in early July. And now, once more with the breakdown below 1.1055 (the old June low) the sellers use a technical rally to sell. With bearish candles again coming through consistently, a breach of the 1.0960 recent low has come today. A close below opens the next key support at 108.30 (from June 2017). Looking at momentum indicators there is still plenty of downside potential in the latest bear leg lower, with the RSI failing again around 40/45 into the low 30s, Stochastics bear crossing lower and MACD lines also again crossing lower. The falling 21 day moving average (today around 1.1055) and three month downtrend (today at 1.1065) are key gauges for any near term recovery, but the bears remain decisively in control and any near term or even intraday rally seems to be a chance to sell now. The hourly chart shows initial resistance at 1.1000/1.1020.
An intraday bounce into the close on sharp dollar weakness has resulted in a rebound on EUR/USD. This brings the pair back to a key crossroads again. Formation of what can be interpreted as a “bull hammer” candlestick should be a one day reversal pattern. However the medium to longer term implications of the breakdown below $1.1100 are significant. This is now an area of key overhead supply. We would be looking for a technical rally to fail between $1.1100/$1.1200 for the next lower high. Already it seems that resistance is coming in at $1.1100 this morning. There is a very negative near to medium term (and beyond) configuration on momentum and as such rallies are a chance to sell. Although the market has picked up off $1.1025 yesterday, we do not see this as a key low in place and expect further weakness in due course. A retreat towards $1.0850 is certainly possible still once any unwinding technical rally has played out. Payrolls will create intraday volatility today.
The performance of sterling into the close last night will have the Cable bulls really concerned. Even in the face of a sharp dollar correction, sterling did not make any ground in a recovery for Cable. The outlook remains extremely weak. The only positive (for now) is that $1.2100 is holding as support on a closing basis. Any intraday rallies continue to be seen as a chance to sell. The resistance left by Wednesday’s high at $1.2250 is a key near term gauge but for now the market is still looking lower. A close below $1.2100 (which was the March 2017 low) opens $1.1980 which is the critical low that Brexit has been reached during normal trading conditions (ie. not a flash crash) post Brexit. Momentum is extremely negative but arguably looking stretched. It is still difficult to see Cable as anything other than a sell into strength.
A massive bull failure on Dollar/Yen and the biggest bearish candlestick on the pair for years. Yesterday’s intraday breakout above 109.00 sold off sharply from the day high at 109.30, only to fail to close above 109.00, breach pivot support at 108.40 and form a massive bearish engulfing candlestick (bear key one day reversal). Incredibly the market has also breached the key higher low at 107.20 and even had a look at 106.75. The technical implications of this one day sell-off are huge. Confirming a close below 107.20 today, the yen bulls will be eyeing what would be a crucial breakdown below 106.75. Momentum indicators are show this is a significant bull failure and has formed a bear cross on Stochastics, that last of which was in early July on the previous failure at 109.00. The RSI has failed around 60 again and is back below 50 which is a near term negative signal too. There is now initial resistance at 107.20 but 107.60/80 is a further barrier to recovery. Rallies are a chance to sell now.
Gold
We have been a buyer of gold into weakness and have often talked of the importance of the pivot at $1400. Despite the slip on the Fed meeting from Wednesday, the bulls were happy to support at $1400 again yesterday. And that was before the tariff announcement which sent safe have assets soaring. A massive intraday rally into the close has seen gold burst through resistance at $1433. The key is now for the market to close above $1433 and an intraday slip back below today (from an early high of $1446) is asking some questions. We remain constructive for upside on gold but it is a volatile period given the massive fundamental and news driven events. Payrolls today will just add to the noise. Look for support to build again as the dust settles. Closing consistently above $1433 opens for upside on the multi-year highs again at $1452 and likely beyond. Momentum indicators have unwound and are close to posting renewed positive signals again.
WTI Oil
A huge one day sell-off on oil. WTI fell almost 8% yesterday in a move that will have technical reverberations to come. A breach of the seven week recovery uptrend and also the key reaction low support at $54.70. This changes the outlook to a market in decline one more. The market is looking to unwind some of this wild sell off today but there is now overhead supply at $54.70/$55.30 as an immediate barrier. We would be looking for an unwinding move to lose momentum and form another lower high now. Technical signals are reflecting this, with Stochastics crossing back lower under neutral and similar the MACD lines.
The outlook is turning increasingly corrective now. A big bearish candlestick on the Fed meeting was one thing, but to be followed by the intraday rebound and subsequent sell-off yesterday, could have wide a reaching impact on sentiment. An initial rebound came on the hope that the Fed would cut rates further, but then on the announcement of further tariffs from Donald Trump, Wall Street traders dumped again. A close below the higher low from early July at 26,665 may look like a bit of an innocuous breach, but it is actually the first higher low of the June/July bull rally to be breached. That means the Dow is now in a new downtrend phase. We are now looking at lower highs and lower lows. The momentum indicators are turning increasingly sour. The MACD lines are still above neutral but are accelerating lower at a rate of knots. Similarly the Stochastics, whilst the RSI is accelerating under 40. Rallies are now a chance to sell. Judging the volatility of the past couple of sessions, we view the 300 tick band between 26,665/26,965 as a resistance zone to look for the next lower intraday high. Next support is 26,465 and then the old pivot at 25,960.
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