Market Overview
There is a deterioration in risk appetite that has formed across financial markets today as equities on Wall Street tumbled last night and traders react to falling Treasury yields.
Fed is tightening monetary policy to rebalance the toolkit after years of hugely easy monetary conditions. However, the consequences are beginning to show, especially in rate sensitive sectors. Housing indicators in the US have been slowing down in recent months, however, yesterday’s sharp deterioration in the housing sentiment data from the National Association of Home Builders reflects what happens when interest rates rise steadily from such record lows.
Will this impact on Fed policy? The dovish comments from the FOMC’s Clarida and Kaplan (citing a need to consider the global economy and a need to be data dependent) last week were not entirely backed by the usually hawkish John Williams (NYSE:WMB), but Treasury yields have fallen strongly in recent sessions and a previously strong dollar is looking less steady on its perch. If the US 10-Year Treasury yield falls below 3.05% (around the October low) this would give traders something to think about.
However, it could be the dollar bulls are saved by events in Europe again, with the EU set to respond to Italy’s budget resubmission on Wednesday, whilst the Brexit storm is sure to whip up once more in the coming days.
The trade dispute rumbling on will also provide a backdrop of dollar volatility too. Plenty to ponder as the low liquidity period of Thanksgiving trading approaches.
Wall Street was hit by further pressure on the tech sector, leading to the Dow closing -395 ticks (-1.6%) whilst the S&P 500 lost -1.7% at 2690. Wall Street futures are also looking at further losses of around -0.3% at the open. This selling pressure has hit Asian equities (as has the arrest of the Nissan CEO) with the Nikkei -1.1% and the Shanghai Composite -2.1%. European markets are not as negative but are still showing losses in the early moves, with FTSE 100 futures -0.3%.
In forex there is a slightly risk negative outlook forming but with little real direction, although it is interesting to see the New Zealand dollar rising to the top of the performance board again.
In commodities, gold is consolidating, whilst oil is slipping back slightly in early moves.
The economic calendar is light throughout the week with further US housing data due and a focus on US Building Permits at 13:30 GMT. After a huge drop on the NAHB Housing Market Index yesterday, which looks at confidence in the sector, how will building permits fare today? Consensus expects an improvement to 1.27m (from 1.24m) whilst Housing Starts are expected to improve to 1.23m (from 1.20m).
There will also be a focus on the Bank of England’s Quarterly Inflation Report hearings in Parliament expected to start around 10:00 GMT where Governor Mark Carney will certainly be quizzed on the elevated uncertainty of Brexit. The Bundesbank President Jens Weidmann (hawkish on ECB Governing Council) is speaking at 15:00 GMT.
Chart of the Day –USD/CHF
The near term outlook has turned decisively corrective after two significant negative candlestick in the past couple of completed sessions. The first of these candlesticks was a big bearish engulfing which really got the ball rolling in the correction, whilst the second bear candle took the market below the pivot support at 0.9950. This breach of 0.9950 effectively completed a small top pattern that implies around 175 pips of downside towards 0.9775. The momentum indicators have also turned decisively corrective now.
With the Stochastics having been showing a small negative divergence with last week’s 1.0128 high. However the move below 0.9950 now opens a move to test 0.9845 which was the mid October low and would be around the 50% Fibonacci retracement of the big 0.9540/1.0128 bull run of September/October, around 0.9835. The market will now be looking to use intraday unwinding moves as a chance to sell, with resistance now in the range 0.9950/0.9990 (the latter of which is the 23.6% Fib retracement).
After weeks of euro weakness being the dominant theme on EUR/USD we suddenly find the tables have turned somewhat. The dollar is increasingly corrective across the majors and this is playing out on EUR/USD as a rally which has now posted five consecutive positive candles. Yesterday’s closing break above $1.1430 has not only moved the market through an old pivot band but also broken an eight week downtrend channel resistance. The move is taking on an increasingly positive outlook again. The key resistance to break is $1.1500 which was the high from two weeks ago but is also an old key breakdown which will house plenty of overhead supply. A move above here would really set up the move for an ongoing recovery. The momentum is increasingly positive now with the RSI rising above 50, MACD lines ticking higher and Stochastics rising strongly. The hourly chart shows support now $1.1390/$1.1430 to use for intraday corrections now. Above $1.1500 opens $1.1550 and more importantly $1.1620.
As the political turmoil in the UK seems to have settled down a touch, the volatility on Cable has reduced in the past 24 hours or so. Given that the Average true Range is still over 140 pips, yesterday’s 90 daily range session was an opportunity to draw breath. However, this is still likely to be a period of calm before the storm whips up again. Despite this, support formed last week around $1.2720 has held and is being built upon at yesterday’s low of $1.2795. However, the hourly chart shows that the market is just consolidating between $1.2825/$1.2885 for now as momentum consolidates too. It is likely that this will be a news driven catalyst that breaks the consolidation, so near term direction is difficult to call. There is still a negative bias to Cable and given the likely political uncertainty on the road ahead, sterling will remain pressured. Key support remains $1.2660/$1.2695.
Having broken below the support at 112.55, the corrective move back towards the near six month uptrend (today at 111.90) continues. Momentum indicators are decisively corrective with the confirmed near term sell signal on the Stochastics, a bear cross on MACD lies and the RSI falling below 50. A move on the RSI below 40 would be a three month low. However, this is still a move that has been seen on several occasions in the past six months, with the 89 day moving average (today 112.11) often seen as an area where the bulls look to reassert. The hourly chart shows overhead resistance now growing in the range 112.55/112.90, whilst anything that helps to unwind the hourly RSI into 50/60 is now being seen as a chance to sell, whilst the hourly MACD lines remain negatively configured.
Gold
The uptrend channel continues to gather positive momentum once more, with the turnaround on Stochastics and RSI ticking higher. The MACD lines bottoming out will also add conviction, were this to happen. However the market needs to continue to trade above the pivot at $1208/$1217 which is now a basis of support to maintain the improving outlook and with a fifth consecutive positive close, there is a continued sense that intraday corrections are a chance to buy. There is a very mild slowing in the intent of the recovery (perhaps Thanksgiving related), but the important pivot band $1208/$1217 is now supportive. There is initial resistance around $1225 which is protecting a move back to test $1236.
WTI Oil
Yesterday’s session shows just how tentative the bulls are in this market right now. The suggestion that Russia were against partaking in production cuts hit the price significantly on an intraday basis. A spike lower eyed a test of the crucial support at $54.75 only to rebound into the close. Forming a slight gain on the day in a doji candlestick is a difficult pattern to read decisively. However given that this is the third small bodied candle in a row, even though the market is rising, there is a lack of conviction that needs cautioning. The resistance at $58.00 is key, whilst the downtrend falls around $59.25 today. There is a confluence with the old primary uptrend too around $58.50 meaning that the recovery is becoming restricted. Momentum remains tentative too.
Trading Wall Street equities with a short term outlook is a difficult game right now. Just when it looked as though the market was stabilising with two positive candles, a decisive bearish candle has formed to drive the Dow to its lowest close in almost three weeks. Momentum indicators have been somewhat uncertain by recent trading, but are now edging with a negative bias. The resistance at 25,500/25,510 is building now, and given the negative bias to momentum, the November low support at 24,788 is being eyed. However, it would take a closing breakout above 25,510 or below 24,788 to really drive direction from a period of choppy consolidation.
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