Market Overview
Market sentiment may still have an underlying focus on trade tariffs and protectionism, but at least one potential stumbling block for the bulls has been removed overnight. The political risk in Germany has been elevated recently as Angela Merkel’s coalition partner leader, Horst Seerhofer, had threatened to resign over her liberal stance on immigration, a move that could have ultimately brought about her downfall as chancellor. However, an agreement struck overnight to build border camps and tighten up the Austrian border has alleviated the threat from Seerhofer and Merkel is seemingly safe (at least for now).
This relief of reduced German political risk has stabilised the euro again and is allowing German equities to rally as market sentiment has improved. Major bond yields have ticked higher this morning and there is a degree of risk recovery. How long this lasts for is uncertain, as the prospect of further escalation in various trade tariffs disputes involving the US, including the prospect of the implementation of the $34bn of US tariffs on Chinese goods on Friday, still looms large.
Early this morning, the Reserve Bank of Australia kept monetary policy unchanged with rates at 1.5% (no change expected, +1.50%), suggesting progress towards lower unemployment and higher inflation was continuing but was gradual, with wage growth remaining low.
Wall Street rallied into the close last night with the S&P 500 +0.3% and futures showing further rebound gains this morning. Asian markets have been mixed this morning with the Nikkei down slightly at -0.1%, whilst the European markets are showing gains today, with the DAX likely to outperform.
In forex, there is a degree of consolidation and mild yen underperformance, whilst the Australian dollar is performing well in the wake of the RBA monetary policy statement.
In commodities the sell off on gold shows little sign of reversing yet, down another $1 today. Oil has regained some of its impetus as the supply disruptions in Libya have resulted in a force majeure (a temporary freezing of supplies).
In terms of the economic calendar, today is the quiet day of the week, with the UK Construction PMI at 09:30 BST with 52.4 expected (a shade down from the 52.5 last month), but unless there is a significant surprise, given that construction is only around 7% of the UK economy, it should not impact on sterling too much.
Into the afternoon the US Factory Orders for May are expected to show growth of just +0.1% for the month (after falling by -0.8% for the April data).
Chart of the Day – NZD/USD
The outlook for US dollar strength and Kiwi weakness remains strong all of which continues to pull NZD/USD ever further lower. Having broken below the band of support $0.6825/$0.6850 last week, the market also broke below the key November low at $6780 and has continued with a downtrend channel of lower highs and lower lows (today the top of the channel is at $0.6810). Yesterday’s bearish engulfing candle failed around the old November low again which is now resistance and simply reflects the tendency for the market to sell into any near term strength as it drops to its lowest since May 2016. The next support of any note is at $0.6675, however the next real support is around $0.6550 and then the key low around $0.6350 from January 2016. Momentum indicators may be looking stretched with the RSI into the low 20s (between 22/24 tends to be the limit of extreme moves over the years), but the Bollinger Bands are holding a trending move and any technical rally that renews downside potential is getting pounced upon. The hourly chart shows a band of resistance now $0.6735/$0.6790.
The euro managed to avert much of the selling pressure yesterday (that could have arisen from the increased German political risk) and posted a candlestick almost akin to a “long tailed doji” on the session. The momentum indicators continue to improve albeit on a very marginal basis. Coming into today, the market remains steady and there is a sense that it is in wait and see mode. The resistance is growing at $1.1720 with yesterday’s reaction high just a shade under $1.1700 but equally, the bears are unable to get a substantial grip on control. The hourly chart has become very neutrally configured across broadly flat moving averages and stable momentum. The support around the pivot at $1.1600 is still holding. This is a market once more waiting for a catalyst.
Cable continues to trend lower, with yesterday’s bear candle reasserting the trend of the past two and a half weeks. The concern is that the market is building resistance now around the old key low at $1.3200 whilst momentum indicators struggle to make any positive headway. Friday’s high at $1.3213 is important now and the bulls need to close a session above here to suggest a recovery may be on. Yesterday’s negative candle was an “inside day” to Friday’s bull session and so is effectively a consolidation move. Coming with today’s early consolidation this morning, the market is waiting. However with the trend lower, the market still has a selling into strength mentality for now and the bias would be for a test of $1.3050 and the November low at $1.3025 remains open.
There have now been five almost identical positive candles in a row to pull Dollar/Yen above resistance at 110.90 and look for a challenge of 111.40. Although the bull run still has a tentative look to it, there is still a push higher that is being seen, but for how long? I remain a very unconvinced bull of this market, waiting for potential reversal signals to appear. As yet the daily chart is positive, with the RSI edging into the low 60s and MACD lines ticking very marginally higher. The stochastics have ticked into positive configuration too. The hourly chart is where the signal will come, with the uptrend into a sixth day but now beginning to just slow a touch as little breaches of the trend are seen. The hourly RSI is still positively configured but has lost some of its impetus, as has the hourly MACD. Hourly RSI below 45 or MACD lines below neutral would be a signal now. Support at 110.50/60. A close above 111.40 would open the next key resistance area 113.40/113.75.
Gold
The gold bulls continue to suffer as another decisive bear candle has dragged the market to within sniffing distance of the key December low and implied medium term target of $1236. This is in fact also a confluence of support with a long term uptrend that dates back to December 2015 too! This means that the market is now back to a crucial crossroads. A confirmed breach of $1236 opens the next support at $1204 but also seriously questions the long term recovery on gold. Momentum is decidedly negative across the indicators, but the RSI remains stretched. This is reflective of a trending market but also one that could snap back very quickly. In these extreme situations, traders need to be mindful of this with stops to protect gains on short positions. The hourly chart shows resistance initially at $1245 but then $1255 is more considerable now as the first lower high.
WTI Oil
Having posted a consolidation candle as the first response to potentially negative fundamental newsflow (Trump trying to nudge Saudi Arabia to increase supplies), how the market responds today could be key to the longevity of the recent push to multi-year highs. The initial move back higher suggests that the bulls remain firmly in control. Momentum has been strong but still looks a touch stretched with the RSI at 70 and interestingly the Stochastics are slowing their advance. The support band of yesterday’s low at $72.50 and the old breakout at $72.85 will be key near term now as this should be a basis of support. If the market starts to break below this band it could begin to usher in a phase of profit-taking. A retreat into the support band $69.55/$70.25 could then result. For now though the rally keeps going, breaking out again this morning to multi-year highs which has re-opened the upside once more, with the 61.8% Fib retracement around $76.50 and little real resistance until around $80.
The market has developed into a very choppy and uncertain phase of trading. Although Wall Street continues to look relatively well insulated to the sharp selling pressure seen in European markets, a real variety of candles have formed on the Dow in recent sessions. Intraday gains sold into on one day, only for losses to be bought the next. Although the negative aspects of Friday’s “hanging man” have yet to decisively play out, yesterday’s strong bull candle has effectively negated the selling pressure. Ultimately, the market is ranging now between the 23.6% Fibonacci retracement (at 24,117) and 38.2% Fib (at 24,545), with the key low at 23,997 from last week also intact as support. There is a negative bias to momentum and this suggests to expect further pressure on the supports as rallies are increasingly being sold into. The key near term resistance is now in place between 24,510/24,570.
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