Risk aversion growing ahead of Trump meeting Xi

Market Overview

Global financial markets are beginning to take on increasing risk aversion ahead of a key meeting between President Trump of the US and President Xi of China later this week. In the run-up to the meeting, Trump has signalled that he believes it will be a difficult meeting, implying that the US trade deficit will be a key factor. That will mean perhaps even more focus on today’s US trade balance data, however, Trump’s recent assertion that the US could go it alone over North Korea will also be concerning investors. There was risk aversion in trading sentiment last night on Wall Street with selling pressure mounting on equities. Although equities rebounded into the close, there is a nervousness amongst traders now. This is reflected in the 10 year Treasury yield falling sharply and closing in once more on the crucial 2.300% key floor. Safe haven plays such as the yen and gold have also started to strengthen again.

Wall Street closed only marginally lower last night (S&P 500 -0.2%) with the Asian session also showing selling pressure with the Nikkei down -0.9% with a stronger yen. European markets are mixed to slightly lower in early moves. The forex majors show yen outperformance amidst dollar strength, whilst the Aussie is also weaker in the wake of the Reserve Bank of Australia monetary policy decision keeping rates on hold at 1.5% but also cautioning over labor market conditions and inflation. With gold also stronger and oil price lower the theme is certainly risk off in the initial exchanges.

Today is one of the quieter days this week for economic data releases. The UK Construction PMI at 0930BST is expected to stay at 52.5 but rarely gets too much interest given that it accounts for only around 7% of the economy. The US data will be more in focus, with the US Trade Balance for February at 1330BST which is the first whole month of Donald Trump’s presidency and is expected to improve slightly to a deficit of -$46.0bn (from -$48.5bn in January). US Factory Orders are at 1500BST and have been improving steadily over the past 18 months and are expected to show another +1.0% gain for the month and reflect the continued improvement in the manufacturing sector.

 

Chart of the Day – DAX Xetra

The DAX has been six positive sessions out of the past seven and the move has taken the market to within sniffing distance of the all-time cash high at 12,390 again. This has come as the market has been hugging the upper limits of an uptrend channel that has been in place for the past 9 months. Subsequently, there has been very little that the bulls can be upset with recently. However yesterday’s session is a touch concerning for the bulls and could be the precursor to a corrective move. The session opened over 60 ticks higher only to spend almost the entire day retracing lower with a negative close over 50 ticks down and within a tick of the low of the day. This formed a strong bear candlestick that looked to poke above the uptrend channel only to close back within it, suggesting that the bulls have lost their impetus. Does this now open the DAX for another near term correction? The breakout support at 12,156 would be the prime corrective support for the first pullback. RSI hit a high just shy of 70 as it has done since February and on each occasion entered into a period of correction back towards 50/55.The Stochastics are also crossing lower too. The early move is only marginally weaker and the hourly chart shows support at 12,180 protects a move back to 12,080/12,156.

EUR/USD

The recent selling pressure has taken a pause with a very mild positive candle posted yesterday. There is little indication yet as to whether this is merely a consolidation in the bear leg or the beginning of another reversal. With today’s continued move sideways, the daily momentum indicators are just beginning to look a bit more benign once more with the RSI flattening around the mid-40s and the MACD lines also plateauing just above neutral. The hourly chart shows the support of an early March pivot at $1.0640 has helped to prop up the market but the support grows around $1.0600. Hourly momentum is still negatively configured but less aggressively so. The bulls would need to break through the resistance between $1.0680 and the old pivot around $1.0710 to begin a serious recovery. For now though the outlook remains corrective with a bear bias for a test of $1.0600 and perhaps the key lows at $1.0500.

GBP/USD

The sterling rally post triggering Article 50 is already being questioned as a strong bear candle yesterday has been followed by early sterling weakness again today. An intraday move below minor support at $1.2430 has re-opened last week’s low at $1.2375 again and this would be a level to watch that could complete a small top pattern if breached. The momentum indicators are beginning to turn lower and if the RSI starts to move below 50 this could be a signal. The MACD lines are beginning to roll over and the Stochastics are also primed for a potential bear signal too. The momentum on the hourly chart along with the big bear candle early in the European session today is putting pressure on sterling already, with resistance around $1.2500 initially that now protects Friday’s high of $1.2557. Below $1.2375 completes a small top that implies $1.2200 and the bear move would be confirmed  on a move below $1.2345.

USD/JPY

Safe haven plays seem to be gaining strength once more and this is reflected in Dollar/Yen breaking its mini recovery run and looking to retest its recent lows again. The market has now closed with two solid bear candles and looks set up for a third today. This has driven a deterioration in the momentum indicators with the RSI and Stochastics turning lower and what could even be a “bear kiss” on the MACD lines. On a long term basis, the big uptrend dating back to September 2016 which had held on the rebound from 110.09 last week is now back under pressure and is creaking again. The hourly chart shows now instead of posting higher lows and higher highs, the market has posted a lower high at the key pivot of 111.60 whilst also breaking the previous key high low at 110.70 and hourly momentum has flipped to one of selling into rallies. Another lower high in the 110.70/111.10 resistance band would be a bearish move and add to pressure on 110.09. A breach of the key support would open 109.35, which is the 50% Fibonacci retracement of the big bull run.

Gold

Another sign of risk aversion back in the market is gold performing better. The rebound in the last two days has posted two bullish candles that have had closing levels towards the highs of the day and which have broken a corrective sequence over the past week. Further gains in the early move today and the bulls will be looking at resistance levels once more. This move has maintained a recent trading range of around $21 between $1239.50/$1261.00. The hourly chart shows a move above $1254.60 which re-opens the $1258.40/$1261 highs today. However, I still view gold as a medium to longer term range play and with the key resistance overhead at $1263.80 and the long term downtrend at $1271 today there is still much to overcome on the upside.

WTI Oil

After last week ended with four days of strong gains, there was a negative candle for the first trading day of the month. The bear candle has been followed by early weakness today and the band of support now at $49.60/$50.00 will be considered key to the continued improving outlook. However, the hourly chart suggests a bit more caution if there was a move below the reaction low at $49.90 (Friday’s low) whilst in conjunction with the momentum indicators deteriorating. The concern for the near to medium term recovery could also be that the resistance band of the $49.60/$51.22 old February lows has not been cleared and therefore is still an area of overhead supply that may now begin to prevent the continuation of a recovery.  That means that the next couple of sessions  could begin to take on greater importance for the near to medium term outlook.

Dow Jones Industrial Average

Once more it would seem that the Dow has been unable to continue the rally as the market has backed away from the 20,757/20,777 resistance. However the ensuing candlestick formation which showed only a minor loss on the day but a long lower shadow is a difficult candle to get a definitive read from. On the one hand, the upside momentum seems to have been lost and the bears are testing lower, however the rally into the close will give the bulls some hope. It means that today’s candle is even more important. Daily momentum indicators seem to be losing the impetus of a recovery with a second negative candlestick formation in a row. The hourly chart shows an unwinding bounce but the continuation of the recent lower highs. A closing price below 20,625 would be disappointing for the bulls, whilst a retest of the support now in place at 20,517 would add to deterioration and bring the key support at 20,413 back into view.