US/China fears hit risk sentiment ahead of key OPEC meeting

Market Overview

Risk appetite has suffered considerably in the last couple of sessions as US bond markets seem to be taking a view on the prospects for US growth. Doubt surrounding the potential for the US and China to put a stop to their spiralling trade dispute have played a role in this. This growing negative sentiment has been exacerbated overnight on the news that a top executive of China’s Huawei has been arrested in Canada due to an extradition order by the US. This is not a situation that is likely to help tensions between the two countries as they move towards a negotiation period that is supposed to be with a view to ending their dispute. With risk appetite suffering, safe haven asset plays are being preferred, with gold and the yen performing well, whilst equities and higher risk currencies (especially with links to China trade such as the Aussie) are under pressure. Traders will also be keeping an eye on the OPEC meeting in Vienna today. where expectation is growing that there will be some sort of cut to production proposed. The question is whether the cartel can agree. Already Qatar has announced it is leaving OPEC in January, whilst it seems as though Saudi Arabia is leading calls to cut levels. Apparently there could be a move to reduce production to levels agreed in November 2016, which would mean Saudi cutting to around 10m barrels again. An overall cut of around 1m to 1.3m barrels per day seems to be the consensus, but can the squabbling members of OPEC agree and will Russia (who is not a formal member of OPEC but is in co-operation with Saudi) also cut production? The size of a cut could be key for oil which has slumped 30% in recent weeks on demand and oversupply concerns.

Wall Street was shut for a day of mourning yesterday, but futures are being hit hard with S&P 500 futures -1.3%. This has hit Asian markets with the Nikkei -1.9% and the Shanghai Composite -1.6%. European markets look to be similarly under pressure early today with FTSE 100 futures -1.1%. In forex, there is a risk negative theme running through with the yen outperformance being stark, whilst the Swiss franc is holding up amidst dollar gains versus the higher risk commodity majors (Aussie, Kiwi and Canadian loonie). In commodities, risk-off but dollar strength equals gold relatively flat, whilst silver is weaker. Oil is around a percent lower ahead of OPEC and the delayed EIA inventories.

There is a lot for traders to get their teeth into today. Aside from the OPEC meeting, all of the US data which was originally pencilled in for yesterday but has been delayed due to the day of mourning for ex-President George Bush Snr. The ADP Employment is at 1315GMT and is expected to come in at 196,000 (down from last month’s 227,000) whilst Weekly Jobless Claims at 1330GMT are expected to improve slightly to 226,000 (from 234,000 last week). The key data point for the day is the ISM Non-Manufacturing at 1500GMT which is expected to slip a touch to 59.2 (from 60.3 in October). The EIA Oil Inventories are at 1600GMT and are expected to show crude stocks in drawdown for the first time in eleven weeks at -0.8m barrels (+3.6m last week) with distillates stocks building by +1.5m (+2.6m last week) and gasoline stocks +1.5m (-0.8m last week). Late in the evening it is also notable to see that Fed Chair Powell speaking at 2345GMT.

 

Chart of the Day – EUR/AUD

There has been a complete turnaround in sentiment in the past few sessions. Aussie has been one of the standout performers of the major currencies in recent months, pulling Euro/Aussie back consistently from a high of 1.6355 to this week’s low of 1.5345. This included a breach of pivot support at 1.5600 then would have been a basis of resistance. However, three successive strong bull candles are becoming four today and the sharp move higher has pulled the market now through the pivot but also a downtrend resistance  around 1.5600. This retracement move is through a near term crossroads and how the market reacts around the resistance between 1.5700/1.5780 will be key for the medium term outlook. Although momentum has ticked higher, the RSI has now unwound to a level where the sellers would still be looking to regain control. The pivot at 1.5600 is now a basis of support today, with the 23.6% Fib level at 1.5583 also worth watching now.

EUR/USD

Price action in the past couple of sessions reflects the near term uncertainty that has now built up. Two successive very small bodied candles, testing both resistance around $1.1400 and support around $1.1300 only to end up with little overall direction. The downtrend channel remains intact and is the initial basis of resistance at $1.1375 today, now before the run of lower highs starts to kick in around $1.1430. Momentum indicators are somewhat benign on a near term basis too, with the RSI hovering just shy of neutral, the MACD lines still drifting higher towards neutral and little conviction on Stochastics. The bull holding on to $1.1265 and subsequently $1.1300 is key for maintaining a prospective improvement. This is though becoming a chart in need of a catalyst. It is Non-farm Payrolls tomorrow.

GBP/USD

Uncertainties over Brexit are continually proving to be a barrier to any gains on sterling. With the UK Parliament reaching a critical stage in the process, intraday volatility on Cable is heightened. Two small bodied, long shadowed candles reflect this. There seems to still be a gravitation towards the medium term range low at $1.2660 (August low) as positive candlesticks are few and far between. The resistance is building at $1.2840/50 and whenever there is an intraday rally for sterling, it gets sold into very quickly. The downside bias remains and a breach of $1.2660 is likely, which would open $1.2580 and then $1.2350. A close above $1.2850 would help to improve but there is plenty of resistance in place above to cap the upside.

USD/JPY

There is a growing sense that the yen is strengthening. Yesterday’s positive reaction on Dollar/Yen may have mitigated some of Tuesday’s sharp negative candle, but the early moves today would suggest that the sellers are now massing. Momentum indicators are deteriorating now, with the RSI below 50, MACD lines pulling lower and the Stochastics beginning to accelerate down. Resistance is already in place at 114.00/114.20, but it is interesting to see yesterday’s rebound failing around 113.20 which was previously supportive. The importance of the 112.30 November low is significant as the 6 month uptrend now comes in today just underneath around 112.25. The rising 89 day moving average is also a key medium term gauge and sits around 112.35. This is becoming a key moment for the medium term outlook.

Gold

It was interesting to see that even as the dollar looked to regain some lost ground in the past 24 to 36 hours, there has been a sense that the gold bulls do not want to give up on their hard gotten gains. The breakout above $1236 was a key move and yesterday’s candlestick helped to cement what seems to be an improving outlook now. The momentum indicators are remaining positive with the RSI above 60, Stochastics above 80 and MACD lines beginning to edge higher too. The breakout now means that there is a near term band between $1230/$1236 which will be seen as an immediate buy zone, should the support continue to build. That was certainly the case with yesterday’s session and the bulls are again holding firm today. The immediate resistance remains the $1243 intraday high from October but beyond there a continued close above $1236 should really be opening $1266. Continue to look to buy into weakness on gold as the uptrend channel asserts itself.

WTI Oil

Fundamentally, all eyes will be on the OPEC meeting today where the size and scope of a production cut will be all important. Technically, it is interesting to see that the recent recovery has spent two sessions eyeing the resistance of the eight week downtrend, only to back away on both occasions. Posting small bodied candlesticks reflects the uncertainty that the OPEC meeting brings. The downtrend comes in around $53.50 today and a closing breach would be positive today. The big positive move would be above the increasingly key pivot at $54.75 which would then open $58.00. A recovery in medium term momentum signals is building now, but disappointment at OPEC would re-open the psychological $50 again and the key low at $49.40

Dow Jones Industrial Average

An enormous bear candle has completely smashed the recent recovery apart. A run higher over the past week seemed to be putting the bulls back in control but a near precipitous session yesterday has put paid to that idea. The volume for the session seemed to be fairly solid, so it may not have been a liquidity issue, just solid selling. Volatility has remained elevated for several weeks now and this just continues this theme, something that will keep the bulls on edge. The hourly chart shows a basis of support around 24,675/24,700, whilst there is now overhead supply 25,200/25,480 for a technical rally early today. Tuesday’s move makes the market increasingly difficult to call now, but a follow up negative candle today would generate the negative momentum that could once more see the November lows (c. 24,275) ultimately tested. The market was closed yesterday when futures initially looked positive for today, but this has again deteriorated sharply and it looks now as though there is going to be a continuation of the selling pressure. Watch out for the November low.