Risk turns positive despite US and China being 'miles apart'
|Market Overview
The normal course of events would be that any rhetoric out of the White House that play down the prospects of the US and China reaching a deal will be met with risk aversion on financial markets. US Commerce Secretary Wilbur Ross suggested that the two sides were “miles and miles apart” on coming to an agreement. Despite this, we see positive moves on markets today with Treasury yields ticking higher, the yen continuing to drift off and the dollar is underperforming, oil is bouncing and equity futures also higher. Perhaps there is no one single factor today. Sterling is up on press reports of potential for the DUP to give conditional support for Mrs May’s beleaguered EU deal, however it is interesting to see UK equities underperforming on the strength of sterling. Oil is finding support on the prospects of sanctions on Venezuelan oil supplies. Positive earnings in the US are helping equities find support. Although the euro has bounced after a choppy session lower yesterday, the concerning trends in the Eurozone and the ECB seeing risks to the downside once more leaves an increasingly difficult path towards tighter monetary policy in 2019. This could continue to weigh on the euro now.
Wall Street closed mixed last night with the Dow a shade lower and the S&P 500 +0.1% at 2642. However with futures gaining ground this morning by half a percent, this is helping Asian markets higher (Nikkei +1.0%, Shanghai Composite +0.4%). European markets look set for a mixed open, with DAX futures higher by +0.6%, however, FTSE futures are flat as the negative correlation with a strengthening sterling continues to play out. In forex, there is a mild euro rebound, the yen continues to underwhelm, whilst the big gainer is sterling on positive Brexit chatter. The dollar seems to be suffering across the board. In commodities, there is support for gold as the dollar has slipped back, whilst oil is also trading higher by around a percent.
After disappointing flash PMIs and the ECB cutting a cautious tone yesterday, the big focus for the economic calendar today comes with the German Ifo Business Climate at 0900GMT. There is a strong correlation to German growth in these numbers which are expected to continue to deteriorate to 100.6 (from 101.0 in December) which would be the worst reading since August 2016. It is all quiet on the US front today.
Chart of the Day – FTSE 100
Equity markets have been in strong recovery mode through January, but it is interesting to see the bulls just losing their way a touch now. FTSE 100 seems to now be on the brink of taking a bearish lurch lower again. Perhaps Brexit related (a negative correlation between GBP and FTSE 100 is still in play) but the near term support at 6800 is increasingly key. After moving back below the old pivot support band 6850/6910 yesterday the market bounced off 6800. This is the second time in two weeks this support has held. However, the four week recovery uptrend has been broken in recent days and looking at the momentum indicators, there is an increasing potential that this is a market ready to break down again. The Stochastics have already posted a sell signal and are accelerating lower, the RSI has already broken to three week lows, whilst the MACD lines are close to a bear cross lower around neutral. If this cross is completed, it would be simply to the cross of October when the market subsequently fell sharply. A close below 6800 could open the floodgates to complete a 200 tick top pattern. The pivot band 6850/6910 is now a resistance band.
After a few days of consolidation the euro has taken a sharp lurch lower. The worrying drop in the flash PMIs and the subsequent cautious ECB response has seen the euro underperform to fall 75 pips on the day. This move lower means the market is teetering on the brink of a decisive negative outlook again. The support of a floor around $1.1300 has been consistent in recent months and this is now being tested. A closing breach opens $1.1215 as the next support, but would be a considerable shift in sentiment. The support survived yesterday’s move (just) but momentum is negatively configured now with the deterioration in the Stochastics into bear territory and MACD lines below neutral. If the RSI went below 40 it would be another negative signal. The hourly chart shows there is overhead supply $1.1335/$1.1350 initially today and intraday rallies are going to be considered a chance to sell. It now needs a move above $1.1380/$1.1400 to even consider a move positive outlook.
Despite yesterday’s doji candlestick (which denotes uncertainty), the market continues to rise. All technical indicators are pointing towards a continued rally. Another positive response today has come in the early moves as the market again breaks to new two month highs and now within sight of the key November high at $1.3175. Having broken out above $1.3000 the market left a good band of support behind at $1.2815/$1.3000. This is shown on the hourly chart with a couple of dips back into support yesterday to find a low at $1.3010 before taking off again. Weakness remains a chance to buy. A move above $1.3175 opens $1.3260/$1.3300.
There is still a positive bias that is creeping through Dollar/Yen that is seeing the market edge higher. This comes in the momentum improvement, as the RSI ticks above 50, MACD lines continue to rise and Stochastics remain in positive configuration. The pressure is on the upside towards 110.00, and with the market supported above the near term breakout at 109.10 there is an upside target of 110.40. However, the hourly chart suggests this is still a recovery with the handbrake applied, with hourly momentum still fairly consistent with a ranging configuration. Near term positioning is to buy into weakness at 109.40 initial support. The next resistance above 110.00 does not really come in until 111.35. A move back below 109.10 would now be disappointing.
The bulls are hanging on to the support of the trading range between $1276/$1298. However the threat of a breakdown is still prominent. An intraday breach of the now eight week uptrend suggests the bulls are under pressure. Momentum indicators have spent much of the past couple of weeks in near term deterioration, with the RSI and MACD lines tracking lower. This all points towards a corrective move potentially coming, but would be a move that would be the source of the next buying opportunity. The hourly chart shows a pivot within the range at $1286 which, being resistance, lends a negative bias to the range. Intraday rallies are being seen as a chance to sell, whilst anything around 60/65 on the hourly RSI now shows the bulls struggling. However, whilst the support at $1276 hangs on, there is still a consolidation at play. The pressure is though mounting.
WTI Oil
The consolidation over the past few days means that the recovery uptrend of the past four weeks is now under pressure. Having reversed to leave resistance at $54.25 earlier in the week, the market has drifted sideways. Is this a move that is set to turn corrective? The reaction higher this morning suggests the bulls are still in control. Also momentum indicators could hold the key. The RSI may have lost impetus around 60 but is not yet calling or calling the market lower. Neither are the MACD lines which are similarly positive but have lost impetus in this consolidation. Stochastics are strong still for now, but if they do start to falter under 80 this could be the first signal to note. For now the bulls are holding up well. Initial support is at $51.80, whilst the main support of $50.40 and the 23.6% Fib at $50.50 also remain intact. Another day of consolidation may see the uptrend breached, but this could still just be part of a consolidation before the next leg higher. Whilst these supports remain intact, the bulls will be happy. Resistance at $54.25/$54.75 with the 38.2% Fib at $55.55 and then resistance at $58.00.
Dow Jones Industrial Average
The last few sessions have seen the big rally just losing some steam, with the move turning back from 24,750 and a subsequent broken uptrend reflects a near term phase of consolidation. A couple of very small bodied candlesticks in the past two sessions shows this too. However, it is interesting to see the 50% Fibonacci retracement at 24,333 being a basis of support in this consolidation, which is a positive for the bulls. Momentum indicators are acknowledging the loss of impetus with the Stochastics drifting a shade lower, but it is notable that the MACD lines are now pushing above neutral and the RSI remains above 50. This is a bull consolidation and although the (sharp) uptrend has been broken, there is a good band of breakout support now 24,000/24,333. A move to the next Fib retracement, the 61.8% Fib at 24,950 remains likely.
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