Sharp oil price decline drives a retreat on risk appetite

Market Overview

A sharp decline in the oil price has seen risk appetite retreat overnight and markets are looking cautious this morning. OPEC decided to extend their production cuts of 1.8m barrels per day by nine months but the perception is that this is merely papering over the cracks as US shale oil continues to pick up production. The market was clearly looking for more from OPEC. A 5% decline in oil is enough to push traders into more safe haven plays such as gold and the yen which are outperforming today. Comments from Fed member Brainard also helped to stabilise Treasury yields and the dollar overnight. Lael Brainard (a voting member of the FOMC) believes that the global risks pose fewer threats to the US economy, notable as the Fed has previously pointed to global imbalances as a reason not to hike. Sterling has been hit overnight by the latest poll in front of the election on 8th June which has Labour just 5% behind the ruling Conservatives.

Wall Street closed strongly again with the S&P 500 +0.4% at all all-time high of 2415. Asian markets have been more cautious though with the Nikkei -0.6%, whilst European indices are mixed to slightly lower in early moves. In forex markets there is a general safe haven slant, with the yen outperforming. This is despite Japanese inflation mildly disappointing with core CPI +0.3% (+0.4% exp) even though this was above the +0.2% last month. Sterling is a notable underperformer following that poll tightening, along with weakness in the  commodity currency, the Aussie. In commodities, gold is taking a safe haven bid whilst oil is again lower in the wake of the OPEC meeting, down by over half a percent.

Focus is back on the US today with the second reading of Q1 growth the big announcement. US Q1 Prelim GDP is at 1330BST and is expected to show a slight upward revision to +0.9% (from +0.7%). After the Fed’s concerns over Q1 growth, a bigger upward revision would certainly support yields and the dollar. Core Durable Goods Orders are at 1330BST and are expected to be +0.4% on the month. The revised reading of University of Michigan Sentiment for May is at 1500BST and is expected to be slightly revised lower to 97.6 (from 97.7 in the prelim).

 

Chart of the Day – DAX Xetra

As Wall Street has broken out to all-time highs the DAX continues to struggle for traction. Dips have been seen as a chance to buy for months now but yesterday’s candle would have been seen by the bulls as a disappointment as Wall Street was so strong. There has been a pivot at 12,660 that has developed over the past few weeks. Despite several intraday attempts to push above the pivot this week the bulls have been rebuffed consistently. A day of high volatility resulted in this pivot once more remaining a basis of resistance. The momentum indicators are mixed and have plateaued recently, however there is still an expectation that once the bulls can release the shackles there will be renewed upside impetus for the challenge of the all-time high at 12,832 again. The intraday resistance is around 12,700, but a close above 12,660 would be a sign that the bulls are beginning to gain traction again.  The hourly chart shows initial support at 12,597 before yesterday’s spike low at 12,544 and the key reaction low at 12,490. An intraday dip could be seen today in reaction to the decline on the oil price, but this could be a chance to buy again, however supports need to hold.

 

EUR/USD

The EUR/USD pair has been consolidating for the past few days as the bulls take stock of the recent gains. There have been a run of cancelling candles that appear to have rendered the near term outlook devoid of any direction. The support remains in place at $1.1160 however a serious test of $1.1267 has also failed to materialise. This leaves the momentum indicators still positively configured but latterly plateauing with the RSI and Stochastics both flattening. The hourly chart reflects this consolidation as moving averages have become increasingly benign and momentum indicators have become neutralised. The most recent trend has been positive so the bulls still remain in the driving seat, but the support at $1.1160 needs to hold to prevent the market from turning near term corrective. A breach of $1.1160 opens around 100 pips of correction and back into the support band $1.1022/$1.1100 which would be a medium term chance to buy again. Continue to expect the bulls to pull the market higher to $1.1300 and the base target at $1.1350.

 

GBP/USD

A degree of dollar support across the majors, combined with sterling weakness has dragged Cable back within the range in a move that will concern the bulls. For weeks the minor corrective moves have been bought into as the rising 21 day moving average has supported the market. However a run of bearish candles is developing now and after yesterday’s negative candle, combined with the early weakness today, the sellers are gathering momentum. The support at $1.2890 has been breached to open $1.2840 which is the first higher reaction low of the recent drift higher. A breach of $1.2840 would realistically open the support of the key breakout at $1.2775. The momentum indicators are now decisively falling away with the RSI back to 50, whilst the MACD and Stochastics are also tracking lower. The market is certainly now forming a range and the sellers are in control for the time being. A lower high from yesterday’s peak at $1.3012 is now in place below the key near term resistance at $1.3050. The hourly chart shows corrective configuration on momentum and now unless the near term pivot at $1.2930 can be breached, rallies will be sold into.

 

USD/JPY

The market continues to trade around the old pivot at 111.60 as the choppy run of candles continues. This consolidation around such a key level is indicative of an uncertain market. The momentum indicators are indecisive but there is still a negative bias to the configuration with the RSI and Stochastics unable to regain upside traction. The hourly chart shows the support at 110.85 will now determine near term control. With the market in decline early today this level will certainly be watched as a breach would open the key low at 110.20. The hourly momentum suggests the bulls need to react soon this morning to prevent a bearish configuration taking control. The 112.20 old pivot is still a key ceiling and prevented the bulls from running away earlier this week, whilst yesterday’s high at 111.95 adds to the resistance.

 

Gold

Despite repeated tests this week, the barrier of the pivot at $1261 remains a key force in preventing the bulls regaining control. There is a mild bullish bias to the momentum indicators, which comes with the recent recovery, however on a medium term basis, the market has simply rallied back into an area of neutral trading between two pivot lines $1240 and $1261. A closing breakout to the upside is needed to re-engage the bulls which have had the shackles put on them for the past week and a half. Once more this morning the market is creeping higher but can the bulls make the required break? The hourly chart suggests a slightly bullish momentum configuration but with recent moves have repeated failed between $1260/$1265 on an intraday basis there is a big test ahead. Support has built in the past couple of days and the low at $1252.50 is now a basis for the bulls to work from. Support at $1245 is near term key as a break would complete a top pattern.

 

WTI Oil

In the wake of the OPEC meeting there has been increased volatility on oil prices, with a sell-off of around 5% and a $3.50 daily range on WTI (the average true range is around $1.30). The reaction to the OPEC decision seems to have been one of disappointment. The concern seems to be that members did not realistically contemplate something extra on top of the expected nine month extension, such as deeper levels of cuts. This looks to be a case of “buy on rumour, sell on fact” and could begin another downward leg on the oil price. The intraday spike has posted a high now at $52.00 which is clear the key resistance to watch. However, momentum indicators are beginning to roll over with the Stochastics turning down close to a sell signal and the RSI also below 50, which is a negative signal. The old support band $49.60/$50.20 has also been decisively breached and now becomes a basis of resistance again. Once the volatility begins to settle we will know more, but for now the extremes of yesterday’s trading range will be watched as trigger levels. Next support is at $48.00.

 

Dow Jones Industrial Average

Wall Street markets are looking very strong once more and the Dow is no different. The S&P 500 has burst through to all-time highs whilst the Dow has broken above the near term resistance at 21,070 to open its own all-time high of 21,169. The bulls will be encouraged by the upside potential shown on the momentum indicators with the RSI only in the low 60s and the MACD lines only just having crossed higher. This is now the sixth consecutive bull candle and although there is a gap open at 21,022 the outlook is increasingly strong and corrective moves continue to be a chance to buy. The old resistance between 21,033/21,070 is now initially supportive.