Market Overview
The announcement of Donald Trump’s long awaited tax reform has been welcomed by the markets with Treasury yields and the dollar higher.
So is the “Trump trade” back on again? The Republicans are proposing a reduction in the corporate tax rate from 35% to 20% along with changes to the personal tax bands, simplifying them from 7 bands to just 3 which includes reducing the top rate of tax from 39.6% to 35%. The plan also includes a one off repatriation tax to encourage US firms to bring back profits held overseas. The announcement does though have its critics, saying that it favours higher earners and big corporations.
As ever with this President, the key will e getting the legislation through Congress, and with healthcare floundering this is by no means a guarantee. Despite this, the market is positive and Treasury yields are pushing higher due to the impact it could have on growth and inflation. It is interesting to note that the 2s/10s spread has now widened to a one month high on the announcement. This is strengthening the dollar once more as yield differentials are pulling in the dollar’s favour. This is also driving gold lower once more, whilst equity markets are more positive. Over the coming days and weeks, a steepening yield curve and strengthening dollar will determine the market’s belief in the return of the “Trump trade”, and it will all depend on the deals done in Congress, but initial signs are there.
Wall Street turned higher into the close last night with the S&P 500 +0.4% higher at 2507, whilst Asian markets were mixed to cautiously higher too (Nikkei +0.5%) and European indices are also taking the lead off Wall Street and showing mild early gains.
In forex, the dollar strength continues to outstrip the majors, although the move is slightly less pronounced today, but the Kiwi is feeling the strain again after the RBNZ held rates steady last night.
In commodities, the dollar strength is hitting gold, but the overnight losses are not quite so severe going into the European session. Oil is continuing its consolidation following a mixed set of EIA inventories yesterday.
Traders will be looking out for the Bank of England’s Carney speaking, German inflation, and the final reading of US Q2 growth.
The hawkish hints from the Bank of England has recently driven sterling higher and the market will be subsequently looking for hints over monetary policy moves from Governor Mark Carney when he speaks at a conference at 09:15 BST.
German inflation is released throughout the morning from the various states, whilst the countrywide German CPI is at 13:00 BST and is expected to stay at +1.8% for the year.
The final reading of US Q2 GDPgrowth is at 13:30 BST and is expected to be confirmed at +3.0% (which is how the second reading came in). The comments from FOMC’s Stanley Fischer (centrist voter) will also be of interest at 15:15 BST.
Chart of the Day – EUR/GBP
Euro/Sterling has been in decline for the past few weeks, but the move accelerated lower as the hawkish hints from the Bank of England started to suggest a move towards tightening monetary policy might come sooner than expected.
A consolidation in the correction had held up the bears, but the move seems now to be gaining traction once more for another downside break. A close below £0.8770 completes a small range break and opens for 130 pips of implied downside in the coming week. This comes as a long term of support of an uptrend of almost two years is being seriously tested. Previously all the talk had been of parity but now sterling is testing support that on a breach would be a three month low, as the support at £0.8740 is being threatened.
A close below £0.8715 would open downside for the June low at £0.8650. The momentum indicators are putting pressure on the downside with the bear candles racking up, the RSI stuttering around 30, the Stochastics falling in bear territory and the MACD lines in decline well below neutral. Intraday rallies are now being sold into, with hourly momentum negatively configured and lower highs being left under the key resistance now at £0.8900. There is now a near term “sell zone” between £0.8770/£0.8815.
With three bear candles in a row the outlook has decisively shifted. The completed top pattern below $1.1820 implies a retreat at least towards a test of the key support at $1.1660 and possible to $1.1550. This comes with the momentum indicators that continue to deteriorate. The RSI is now below 40, whilst the Stochastics are below 20 and the MACD lines are accelerating lower towards neutral. Rallies are now a chance to sell on the euro, with the neckline of the top an area of a pullback rally that would be another chance to sell. There is a sell-zone now at $1.1820/$1.1860. The hourly chart shows negatively configured momentum with unwinding moves on the hourly RSI finding resistance around 50, whilst the MACD lines and Stochastics are bearishly positioned. Initial support of yesterday’s low at $1.1715 is unlikely to last as the bears eye $1.1660 which is a key support.
The bearish candles are now racking up as the corrective move gathers momentum. Yesterday’s decisive close below $1.3450 completed a small top that implies $1.3250 and a test of the key August breakout at $1.3265 is increasingly likely now. The momentum indicators continue to deteriorate with the Stochastics in reverse, the RSI falling and the MACD lines now ready to cross lower. There is initial minor support at $1.3330 which may hold up the selling pressure but with lower highs and lower lows now forming on a daily basis the downside pressure is growing. The hourly chart shows any unwinding moves towards 50 on the hourly RSI or towards neutral on the MACD lines are a chance to sell.
The bulls are in full flow now for the dollar as a second completed bullish candle has closed above 112.70. The early move today has continued this push higher as momentum remains strong. The RSI remains in the high 60s, MACD lines are accelerating higher and the MACD lines are strong above 80. Breaking out above 112.70 means the market is on for further gains with a mini-range upside break implying 125 pips of gains towards 114.00, whilst the key July high at 114.50 is well within sight again. Corrections are a chance to buy now, with the hourly chart showing a near term buy zone at 112.35/112.70. The support at 111.45 is now key near term.
Two strong negative candles have once more turned the outlook decisive in the favour of the bears now. The support at $1287.60 has been decisively breached and the market is now back to test the August support zone $1267/$1278. The concern is that the momentum indicators are increasingly bearishly configured with the Stochastics showing clear bear positioning, whilst the RSI is falling below 40 and MACD lines are also dropping sharply to neutral. A breach of $1267 would open the next higher low within the old uptrend at $1254. Rallies are certainly now being seen as a chance to sell with $1287.60 now a basis of overhead supply near term. Any rally that fails under $1300 will be seen as a selling opportunity now.
WTI Oil
Although gasoline stocks were higher than expected, the bigger than expected drawdown made the EIA oil inventories mixed and should remain supportive for the breakout on the oil price. On a technical basis, the market subsequently continues to consolidate the strong breakout above $50.50 which has opened the upside towards a test of the $53.75 key April high. Momentum indicators remain strongly configured and any retreat towards the breakout at $50.50 will be considered a chance to buy. This comes with the recent 4 week uptrend support today coming in at $50.65. The hourly chart continues to see the hourly RSI supported around 50 and MACD lines above neutral which reflects positive momentum configuration. Initial support is now at $51.45 and a move above Tuesday’s high at $52.45 would re-open the upside.
The market looks to be positioning for the next breakout move as a positive session has halted a run of three negative closes. However, the candle was not decisively bullish and suggests that the buyers were still not quite ready to muster a move for another new all-time high at 22,420. Despite this though, momentum indicators remain strongly configured and a drift back has allowed the upside potential to be renewed. The key buy zone between 22,039/22,179 is still above the support of the five month uptrend channel which is today at 21,960. The hourly chart shows a corrective drift is underway rather than anything more bearish and corrections remain a chance to buy. It should only be a matter of time before we see the Dow breaking new high ground again.
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