Market Overview
It has not taken Iran long to respond to the US killing of General Qassem Soleimani. On the day of his funeral, Iran has fired rockets into US controlled bases in Iraq. With President Trump seeming confident that the attack has done little lasting damage or loss of life (according to western media), the question is whether this is the end of the proportionate response the market has been fearing, or just the beginning. If Iran, and more importantly, President Trump, sees this as an eye for an eye, then markets can begin to look beyond this conflict.
There are signs of this view being taken early today. What is more likely is that this reaction from Iran is a public, face-saving response, but behind the scenes they will presumably continue to ramp up its proxy wars with the US. If this is correct, then a line could be drawn under this issue for the time being. From a markets perspective, there has been a spike back towards safety and out of risk, but the move seems to be fading.
Treasury yields dropped, gold has spiked above $1600, oil rallied sharply and the yen strengthened. However, there are already signs of these moves unwinding. The United States 10-Year yield is already +9 basis points off its overnight low, whilst the yen has unwound overnight gains, gold is back -$20 off its highs and even US equity futures are recovering. Given that gold is now more overbought (on its technical momentum indicator, the RSI) than at any time for 20 years, this could be a key turning point for the contrarians?
Wall Street closed back lower -0.3% on the S&P 500 at 3237, with US futures -0.2% lower today. Asian markets got the full front of the overnight selling pressure with the Nikkei -1.6% lower and Shanghai Composite -1.2% lower. European markets are set for early declines but are again well off their overnight lows on futures, with FTSE 100 Futures -0.3% and DAX Futures -0.6%.
In forex, EUR and JPY are around flat on the day whilst sterling is performing well, along with NZD and AUD outperforming. In commodities, there was a big spike higher on gold overnight, but the market is already -$20 off its intraday high (still +1% on the session though). Oil is also around +1% higher (having been +4.7% higher overnight).
There are a number of December Eurozone indicators to keep an eye on with the economic calendar this morning, all coming at 1000GMT. The Eurozone Economic Sentiment is expected to see a mild tick higher to 101.4 (from 101.3 in November) which would be a second consecutive month of improvement (something not seen since the end of 2017). The Eurozone Industrial Sentiment is expected to also tick higher to -9.0 (from -9.2 in November), which would again be a second month of improvement. The Eurozone Services Sentiment is also expected to improve to +9.5 (from +9.3 in November) and reflect a potential bottoming.
The main US focus is with the ADP Employment change at 1315GMT which is expected to improve to +160,000 (from +67,000 in November), although given the massive divergence with payrolls last month, the impact may well be reduced. The EIA Crude Oil Inventories at 1530GMT are expected to show another drawdown of -4.1m barrels (after a draw of -11.5m barrels last week).
We also need to watch out for a Fed speaker today with Lael Brainard (voter, centrist) with a speech at 1500GMT.
Chart of the Day – USD/CHF
The corrective outlook of the dollar since early December has pulled USD/CHF back to the support of what is effectively a big broad trading band between 0.9660/1.0025 in place since May. However, the support of the band has been building around the lows and the question is whether this is another turning point within the range. So far no explicit reversal signal has been seen but the outlook is at a crossroads. Another bounce off the support 0.9645/0.9660 has been seen this morning and this support is strengthening. If a second straight positive candle can form today it would begin to see a more encouraging outlook forming for the bulls. A five week downtrend sit at 0.9735 today (above yesterday’s high) but a move above 0.9745 would also form a small base pattern (implying 0.9810). Watch the momentum indicators too. The Stochastics are threatening five week highs but need a push. The RSI is also showing early signs of improvement, but again needs a move above 40 (moving into the mid-40s would be a confirmation of a positive signal). How the bulls continue to deal with the support at 0.9645/0.9660 will continue to be the key factor here. The hourly chart shows at least more of a ranging configuration has formed in the past week or so, leaving the bulls holding the potential for another recovery. The key to the crossroads though comes with the 0.9745 resistance.
EUR/USD
The uptrend channel of the past five weeks continues to underpin the market despite the latest setback for the bulls yesterday. Note the basis of support lent by the rising 21 day moving average (today at $1.1140), whilst the channel support is at $1.1120. The broad positive outlook for EUR/USD comes with these supports now arriving above the old $1.1100 pivot. However, the bulls need to somehow regain their control once more as four of the past five sessions have been under bear control. For now there has been little real impact on momentum indicators, and the latest unwind should help to renew upside potential. The RSI has held above 48 since early December, whilst bull opportunities also look to be there on MACD and Stochastics. Support is decent around $1.1125/$1.1130 now and the bulls will be ready to make a move. A close under $1.1100 would though really shift the emphasis of the outlook again.
GBP/USD
We remain broadly positive on Cable above $1.2900/$1.3000. The positive medium term configuration on momentum indicators should mean that near term weakness is a chance to buy. However, there is a degree of uncertainty on the near term outlook for now which is hampering renewed recovery efforts. Despite this, there is an uptrend of the past two weeks coming in at $1.3100 today which is a basis of support above last week’s low of $1.3050. It is a spluttering start to the year, reflected on the hourly chart which is exhibiting ranging characteristics. Initial resistance at $1.3140 is restrictive coming into the European session, below yesterday’s high of $1.3210 which has added to the resistance around the 23.6% Fibonacci retracement (of $1.2192/$1.3515) around $1.3200.
USD/JPY
We have been looking at a more encouraging showing from the bulls in the past couple of completed sessions. Posting the first decisive positive candlestick for a couple of weeks on Monday, the bulls followed this up with another gain yesterday. The question is whether the spiking and volatile overnight move (on further geopolitical developments between the US and Iran) have changed the outlook again. Given the sharp bounce back from 107.65, the initial indication is that it does not. The bulls are still happy to support the market on declines back towards 107.85 (now with the support and 107.65/107.85). Resistance of yesterday’s high at 108.60 takes on an increasingly important near term significance for a potential recovery. A closing recovery now through the overhead supply around 108.40 will encourage the bulls and open 108.85 (the first lower reaction higher).
As Iran has struck back at the US quicker than expected, the gold bull run has found renewed momentum again. A breakout above $1582.50 (the previous high of earlier this week) has taken the market above $1600 for the first time since March 2013. We have been looking for signs of potential exhaustion on gold, but once more the market goes with rocket fuel. The RSI is now in the high 80s and at its highest level since September 1999. So suffice it to say, the bull run is stretched. It is at this point where chasing gold higher becomes increasingly risky, for the potential of a sharp pullback is elevated. The overnight high was $1610 and is resistance initially. We are increasingly cautious of this gold bull run. The hourly chart shows support around $1583 and then back around $1555/$1557. The problem with a run higher like this, if sentiment turns, the price could be back lower in the blink of an eye.
WTI Oil
The next step in the geopolitical tensions in the Middle East have pulled oil sharply higher again. However, the move has not lasted and retraced quickly. Whilst there is still a bid for oil, the signs in the past few sessions and that the run higher may be becoming a little tired. The Stochastics have been falling away through the past week, whilst the latest intraday move higher to be sold into will also concern the bulls. The RIS and MACD lines still look decently positive and the market is still trading higher on the day today. However, with the reaction of the market in recent sessions, a degree of caution needs to come with chasing the market higher now. Support is at $62.10 with a five week uptrend t $61.30 today. The overnight spike has left resistance at $65.65.
Dow Jones Industrial Average
The strong reaction from the bulls on Monday helped to bolster the support of the higher low at 28,376. However, there is still clearly an uncertain feel to the market outlook as yesterday’s negative candle reflects. Given that US futures are currently pointing to another weaker open today, we have to consider trading on the Dow since late December turning into a small head and shoulders top pattern. A closing breach of 28,376 would complete the pattern and with the Average True Range of 179 ticks, it would not take too much of a negative session to make the move. Momentum seems to be very tentative now, with even yesterday’s only minor negative session dragging a Stochastics sell signal and RSI below 60. Both of these indicators are suggesting the Dow could now be set to fall back. Resistance of 28,708 needs to be broken now to help settle the bulls again.
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