Market Overview
After the “first shot” in the trade war was fired by the US last Friday (the $34bn worth of tariffs were quickly reciprocated by a similar move by China), Donald Trump has made good on the assertion that the US would ramp up the pressure with the prospect of a 10% tariff on $200bn of goods from China.
There will now be a two month consultation but history suggests that this will be enacted. That is unless China do something that their rhetoric suggests is unlikely, and back down. How will China react? Beijing has already suggested that they will have to retaliate again, but they will not be able to go dollar for dollar as this amount is now more than the total China exports to the US. The market reaction has been to take profits on recent gains and pull risk assets off the table, for now.
The usual moves in this scenario have been for global yields to fall, the yen and US dollar to be preferred in the currency markets, and equities to correct and all these factors happened in a knee jerk reaction overnight. However, Trump has already previously signalled his intentions for this move and this knee jerk could easily begin to dissipate. It will be interesting to see how far this negative move goes, as the shock impact seems to be lessening every time these trade tariff shocks are announced.
The yen strength has been limited (so far) this time around, and even the dollar does not seem to be getting too much traction as markets become more desensitised to the fears. Will this be able to sustainably push for renewed dollar strength again? Not yet.
Wall Street closed higher on the day yesterday with the S&P 500 +0.3% at 2794, however with futures looking strongly lower currently (S&P 500 futures -0.8%) with Asian markets suffering (Nikkei -1.2%) and European markets also looking sharply weaker in early moves, but will the selling pressure be limited.
Certainly, looking at the forex majors, in G4 currencies there is little move, although the commodities currencies, the Aussie and Kiwi are reacting lower. A degree of dollar strength is pulling gold lower, but this was already coming through yesterday, whilst oil has been pulled back slightly in early moves.
US inflation starts to take the focus today as traders get a look at the US PPI at 13:30 BST. Factory gate inflation in the US is expected to increase slightly to +3.2% on a headline basis (from +3.1%) and core PPI is expected to also tick higher to +2.6% (from +2.4%).
There is also the Bank of Canada monetary policy at 15:00 BST which is expected to see a rate hike of +25 basis points to +1.50% (from +1.25%). The EIA oil inventories are at 15:30 BST which expected to show crude stocks back in drawdown of -4.5m barrels (after last week’s surprise build of +1.3m barrels), with distillates building by +1.4m barrels (+0.1m last week) and gasoline stocks in drawdown by -1.0m (-1.5m last week).
Chart of the Day – GBP/JPY
The prospect of a recovery in Sterling/Yen has been building over the past couple of weeks and despite the political turmoil in the UK at the beginning of the week, the recovery is on track. On Friday the market closed above 146.65 which completed a small head and shoulders base pattern and implies 290 pips towards 149.50. The bulls had a bit of a wobble with an uncertain candle on Monday, but renewed upside momentum with a strong bull candle again yesterday which has continued the recovery uptrend. The improvement is highly evident on the momentum indicators with the break on the RSI above 50 to a ten week high, MACD lines accelerating higher and Stochastics also strong. The market is now quickly approaching the resistance at 148.10 which is the June high and a successful breakout would open the May resistance at 150.00. The hourly chart shows a strong momentum configuration meaning weakness is a chance to buy, with 146.80/147.20 a near term buy zone and 146.10 a key higher low.
The bulls have just taken a step backwards in the past couple of sessions. The market has now closed within a handful of pips in the last three sessions but technically the positive outlook in the recovery is increasingly questionable. A consolidation has now broken the two week recovery uptrend and the breakout support at $1.1720 is under ongoing examination. Yesterday’s intraday low at $1.1688 will certainly be a level to watch now, as having spent seven sessions posting daily higher lows, this run has been broken. A move below $1.1688 would question whether a new trend lower is forming. The momentum indicators are tailing off and the Stochastics are initially the indicator to watch for a sell signal. The hourly chart shows a band of near term support $1.1670/$1.1690 which could be the key to the near term outlook now as hourly momentum also begins to edge slightly more corrective again. Holding up above $1.1720 would be a positive today, with $1.1790 initial resistance now preventing $1.1850.
Can the bulls hang on to the outlook of improvement? After Monday’s political upheaval in the UK which left the sterling rally under scrutiny, there was a degree of welcome stabilisation yesterday. The general outperformance of the dollar today is though continuing to prevent any sterling recovery as the two week uptrend comes under further pressure. With the improvement in the momentum indicators beginning to tail off there is a likelihood that the trend will be broken, in the least, perhaps due to simply the continuation of a consolidation. However the support to watch is around $1.3200 still. This has been a near term pivot which broadly survived Monday’s political risk (an intraday spike low to $1.3188 was quickly bought). However, the hourly chart shows that this pivot now marks the neckline of a possible near tem top pattern which if decisively broken would imply around 140 pips and a likely retest of the $1.3050 key low once more. The market effectively comes into the European session in consolidation mode with little direction on the hourly chart. A move above yesterday’s high at $1.3300 would though improve the outlook once more, with a close above the old resistance at $1.3315 being a key gauge for renewed recovery momentum.
The general underperformance of the yen (pretty much across the majors) continues, and it seems to only be the intermittent bouts of safe haven flow arising from newsflow on trade tariffs that is preventing a decisive move against the yen. Yesterday we saw Dollar/Yen pushing above 111.15 to a seven week high. Although a slip back into the close has prevented a breakout above 111.40, the pressure is still building on a price basis as the dollar has again looked positive this morning. Momentum indicators are positive (to an extent) with RSI above 60 and Stochastics rising above 80. I remain a cautious bull due to the sluggish MACD lines, but perhaps it will be the Bollinger Bands that call a decisive breakout (a close above tightened bands with the upper band at 111.16 today could be the trigger). Initial support is now today’s low at 110.75 to maintain the momentum in the bull run and for now intraday weakness remains a chance to buy. A move below 110.25 would confirm a loss of bull momentum.
Gold
The gold bulls could never get that confirmation move above $1261 resistance and it now looks as though the market is on the brink of pulling back lower again for a retest of the recent low at $1237. After yesterday’s intraday low at $1246.80 the market rebounded into the close. However another negative candle is forming today and a close below $1250 would really be a signal to suggest renewed weakness (confirmed below $1246.80). This comes as the recovery in momentum indicators is now rolling over. The hourly chart reflects this renewed sense of correction, with the MACD lines negative and RSI failing in the mid-50s. The bulls need to move above $1256 to prevent a run of lower highs continuing on the hourly chart, whilst a close above $1261 remains the key move needed for a recovery signal.
WTI Oil
The consolidation on oil continues as a second candlestick in a row on the daily chart posts a very neutral (almost doji) candle. Although there remains a very mild positive bias with another positive close yesterday, the early move lower today is again tempering the bullish enthusiasm. The support at $72.15 has been bolstered by price action over the past couple of sessions. With the momentum indicators now consolidating but in a positive configuration, there is a feeling that the prospects of a correction back towards the low 70s are waning. The hourly chart reflects the consolidation with oscillating hourly momentum but it is also interesting to see the market failing around $75 on several occasions in recent days. A close above $74.15 has again not materialised and is a resistance to note.
Wall Street has moved back into rally mode once more in the past few sessions. Having had the shackles of the consolidation symmetrical triangle broken last week, the bulls are posting a run of strong bull candles. The 50% Fibonacci retracement of the 26,616/23,345 sell off comes in at 24,980 and is the next target area and having gone straight through the 38.2% Fib level previously, the potential for consolidation around 24,980 is elevated. However the bulls are running and momentum indicators are accelerating higher, with the Stochastics are especially positive, with the MACD lines having crossed higher. This means that it will be very interesting to see how the market reacts to the overnight slip in the futures (due to renewed tariffs threat). The prospect of an unwinding move is technical elevated due to the market looking increasingly stretched on the hourly chart and this could give rise to a near term unwind. There is support in the range 24,680/24,800 with the 38.2% Fibonacci retracement at 24,595 and also a near term breakout support at 24,570 meaning this could be a level the bulls look to renew their control.
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