Hopes of a Brexit deal driving moves on major markets [Video]
|Market Overview
The improvement of risk appetite from the middle of last week, looked to be dissipating at the lack of progress towards a US/China trade agreement and reality taking over hope in the search for a Brexit deal. However, could it be that European politicians might actually cobble together a workable deal on Brexit that might put an end to (admittedly just the first stage of) this Brexit soap opera? As European trader get back to their desks this morning, news of overnight progress is awaited. Another spike higher on Sterling yesterday (+175 pips in an hour versus the US dollar) reflected growing anticipation that some sort of workable deal could be given the green light for the EU-27 to debate at this week’s EU Council meeting. Michel Barnier (EU chief Brexit negotiator) is the man whose hands lie the hopes of a deal. It was notable yesterday that major markets really took reaction to this too. A move out of safe havens and into higher risk. Weakening yen and gold were clear underperformers, whilst bond yields shot higher. It appears that Germany is the area to focus on for this, with 10 year Bund yields at two month highs and big gains on the DAX. FTSE remains a stock by stock play as domestic focused stocks jump at the expense of foreign revenue production. With around 70% of FTSE 100 earnings generated abroad, the spike higher on sterling remains a drag on the large cap index as a whole.
Wall Street closed strongly higher with the S&P 500 +1.0% at 2996, although there is a slight degree of caution back in the early US futures moves (-0.3%). Asian markets were broadly positive early today, with the Nikkei +1.2% whilst Shanghai Composite was -0.3%. European futures are looking a tad cautious with FTSE futures -0.4% and DAX futures -0.2%. In forex, there is a marginal risk negative but also USD negative move initially, although little real conviction. GBP has unwound slightly from yesterday’s spike gains, but nothing to suggest any direction. In commodities the mild risk negative and dollar negative move is helping to lend gold a degree of support whilst oil is consolidating.
Although it may not be at the forefront of traders’ minds, the UK tier one data keeps on rolling today, with inflation in focus. UK CPI for September is at 0930BST and is expected to show headline CPI increasing by +0.2% on the month which would take year on year to +1.8% (from +1.7% in August). Core UK CPI is also expected to tick higher in September, to +1.7% (from +1.5% in August). Inflation is also in focus for Eurozone data, with the final reading of September Eurozone HICP at 1000BST which is expected to remain at +0.9% (+0.9% flash). Final Core Eurozone HICP is expected to be confirmed at +1.0% (+1.0% flash, up from +0.9% final in August). The US consumer is again the key today with US Retail Sales (ex-autos) at 1330BST which is expected to grow by +0.2% for the month of September (after a flat 0.0% in August).
Chart of the Day – German DAX
A massive rally on DAX in the past week has now seen a breakout (on an intraday basis) to new 2019 highs. It seems that the prospect of a Brexit deal has the DAX bulls all giddy, resulting in another strong bull candle as a breakout above 12,655 has come. Although futures are a shade lower initially today, intraday weakness is being bought into now. There is technical upside potential too, with the momentum indicators accelerating into strong configuration. The daily RSI into the mid-60s, whilst a bull cross on daily MACD and Stochastics pushing above 80. A 950 tick two week rally in late August shows that the buying pressure can take the DAX on a big run once momentum takes hold. The bullish filling of another gap from yesterday’s open reflects the strength in the market now. The next step is to close a breakout above 12,655, however, initially today, the hourly chart shows 12,590/12,655 is now a near term support band that the bulls will want to hold. Holding above the old gap at 12,511 (and previous breakout at 12,495) will maintain near term bull control. Above 12,655 opens 12,740 as initial support but the July 2018 high of 12,887 is the next key resistance.
WTI Oil
After the prospects for a recovery had been building last week, the selling pressure of the past couple of sessions shows how difficult the bulls continue to find the oil market. Losing -3.5% this week has flipped an improving outlook completely on its head and once more an old pivot of a couple of weeks ago at $52.85 is being tested. A decisive closing breach would re-open the crucial lows at $50.50/$51.00 again. The hourly chart shows initial resistance at $53.80 whilst negative configuration on near term momentum shows strength being sold into again.
Dow Jones Industrial Average
A broadly positive start to earnings season and the traction towards a Brexit deal served up a healthy helping of gains for the Dow yesterday. A decisively positive session added +0.9% to again test the resistance around 27.045/27,080. Although a break above could not be held into the close there is strong enough momentum to suggest that the bulls are in a good position to push through now. As the Stochastics push into bullish configuration and RSI into the high 50s, a bull cross on the MACD lines at neutral is a strong signal. The previous bull cross on MACD came in late August prior to a decisive two week rally. With the market running a burgeoning two week uptrend now, there is a confluence of support around the old pivot 26,655/26,695 which is underpinning the recovery now. The two week uptrend support is at 26,730 today. Resistance overhead comes in between 27,270/27,310 whilst the all-time high is 27,399. The hourly chart shows initial support 26,875/27,000.
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