Nervous markets tentatively find support for risk, but will it last? [Video]

Market Overview

Whilst markets have seemingly been hopeful (or should that be “duped”?) by the apparent signs of progress in the fiscal stimulus negotiations, as yet, there is nothing to show for it. We are now just one week before polling day for the US Presidential and Senate election (where 35 of the 100 seats are up for re-election). Despite the Democrat House Speaker Pelosi remaining “optimistic” there is an apparent fatigue setting in for market sentiment. Agreement will not happen before the elections and after that, it is open to significant uncertainty on the results. This lack of certainty on fiscal stimulus, coming as COVID-19 infections hit record levels in the US and the second wave takes full force across Europe, is leaving markets increasingly nervous. Equities felt the full force of these concerns yesterday as Wall Street fell sharply, also with the dollar gaining strength on a safe haven bias. There is a slight unwind of these moves early today, but how far this develops in the coming days will be shown through bond markets. A flattening of the US yield curve (which continues this morning with US 2s/10s spread narrowing) would reflect risk aversion. Wall Street futures have stabilised early today, but if bond yields continue to fall (and curve flatten), the dollar will climb and market sentiment will favour safe havens (such as the yen and the dollar).

Wall Street closed with strong losses yesterday (albeit off session lows) with the S&P 500 -1.9% at 3401. US futures have found some support early today (E-mini S&Ps +0.2%) which has helped Asian markets consolidate (Nikkei -0.1%, Shanghai Composite +0.1%). European indices seem to be looking supported too with FTSE futures +0.2% and DAX futures +0.5%, but can this last? In forex, there is little real direction to speak of, aside from a shade of USD underperformance (aligned to a tick higher in equities sentiment). In commodities, this USD slip back is helping gold to tick higher (+0.2% ) and silver (+0.7%), whilst oil is also rebounding (+0.7%) after sharp losses yesterday.

It is a big US theme to the economic calendar today, but don’t forget the US announcements are an hour ahead this week as the daylight savings time shift is not until next weekend. US Durable Goods Orders are at 1230GMT with core ex-transport good expected to increase by +0.4% in the month of September (after a +0.6% increase in August). The Case Shiller House Price Index for August is at 1300GMT and is expected to improve to 4.2% (after +3.9% YoY in July). The key data release for the day is US Conference Board’s Consumer Confidence at 1400GMT which is forecast to improve slightly to 102.0 in October (from 101.8 in September).

Chart of the Day – German DAX

The past week has seen a dramatic shift towards negative sentiment on equities. Selling pressure has ramped up and there has been a significant breakdown on the DAX. The late July higher low at 12,253 has been decisively broken. This is the first higher low of the recovery to be breached and now confirms that a reversal of the March to September bull run is underway. Momentum indicators are now decisively corrective, with daily RSI consistently failing under 60 for the past seven weeks and falling into the low 30s. This suggests an outlook of selling into near term strength. We see 12,253/12,540 now as an area of overhead supply and a near term sell-zone for any bounces this week. Futures are ticking higher today, so a failing rebound could be an opportunity. There is initial resistance at 12,405 and a gap from yesterday’s initial gap lower at 12,515. The last gap 12,975 proved to be a great sell signal when it was filled last week. Breaking down below 12,253 opens 11,955/12,095 as initial support but the June low at 11,597 is the next key support. It would need a move above 12,720 to at best neutralise this selling outlook, whilst the bulls need to break the October key lower high of 13,150 to regain more sustainable control.

 

Brent Crude Oil

Brent Crude remains in a seven week $5 trading range between $38.80/$43.80. After two weeks of consolidation above the mid-range pivot at $41.80, a near term corrective slide has formed. This accelerated lower yesterday to close decisively below $41.30 to open a test of $38.80 again. Momentum indicators confirm this slide and leaves a near term sell into strength outlook now in place. With an early tick higher today, this look to be an opportunity. Although the first lower high is at $42.80, initial resistance is around the pivot at $41.30 again, with the hourly chart showing resistance $41.30/$41.60.

Dow Jones Industrial Average

A decisive break below key support on the Dow has come with a ramp up in selling pressure. Closing below the support at 28,040 now leaves a far more near to medium term corrective lean to the outlook. The question is now one of how the market responds. There was an interesting rebound into the close last night where the market ended the session +315 ticks off the day low. Futures are ticking higher again early today, so the test that the bulls need to now overcome is a pull higher back above the old 28,040 support, which is now a basis of resistance. Technical indicators point towards selling into strength now for a likely retest of support at 27,340/27,380. The prospects for the Presidential election leaves this a difficult market to navigate near term but downside pressure is certainly far stronger for now.

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