Equities climbing again as sterling advance resumes [Video]

Market Overview

As the clouds of uncertainty over the US/China trade dispute and UK political gridlock on Brexit have begun to lift, risk appetite has begun to improve again. However, with trade, the devil is always in the detail. Major markets have been thrown around in recent sessions on reaction to the US and China reaching agreement on “phase one” of a trade deal. Whilst moving on from phase one sounds great, there has been a lack of detail over the agreement and perhaps a few question marks over whether it is all that it is cracked up to be. Thursday’s initial all-out positive reaction was followed by Friday’s caution. Spikes and retracements have been seen across key markets. However as the dust begins to settle this morning, there is a gradual suggestion that risk is still positive. Traders have been eyeing 7.00 on the Dollar/Yuan rate as a line in the sand. Having seen yuan strength retraced sharply from 6.93 on Friday to close above 7.00, but we see the yuan edging tentative strength to almost bang on 7.00 today. Treasury yields have edged higher in early moves too. The yen and dollar are also seeing outflows resuming this morning. Equity markets still seem to be unencumbered this morning, with the falling VIX and European futures looking strong. The surprisingly positive Chinese economic data for November is also playing a part. With China Industrial Production jumped to multi-month highs at +6.2% (+5.0% exp, +4.7% in October) with China Retail Sales at 8.0% (+7.6% exp, +7.2% in October). The strong advance on sterling seemed to be questioned on Friday but is once more back on track this morning. A large majority Conservative Government will create Brexit clarity at least for the first time in three and years, even if there is still much work to be done.

Wall Street closed a choppy session with the S&P 500 less than 1 tick higher at 3169, however, US futures are looking positive today at +0.3%. This has not helped a mixed session in Asian (Nikkei -0.3%, Shanghai Composite +0.6%) but European markets are pushing on today with FTSE futures +0.4% and DAX futures +0.6%. In forex, there is a curious position on risk forming. GBP continue to climb strongly in the wake of a large majority Conservative Government in the General Election. EUR is also gaining good ground today. There is a mixed mood elsewhere, with mild JPY weakness but little real direction other than CAD gains. In commodities there is little real direction on gold whilst a mild unwinding slip on oil.

The late December data is always disrupted by the Christmas holiday period, so the flash PMIs are out early this month. The Eurozone flash PMIs are expected to show improvements across the board at 0900GMT. Eurozone flash Manufacturing PMI is expected to pick up to 47.3 (from November’s 46.9) whilst Eurozone flash Services PMI is forecast to tick higher to 52.0 (from a final November reading of 51.9). The Eurozone Composite PMI is expected to improve to 50.7 (from 50.6 final November). We also now get UK flash PMIs which are at 0930GMT and are expected to also improve across the series, albeit still in contraction. UK Flash Manufacturing PMI is expected to improve to 49.3 (from 48.9), with UK flash Services PMI up to 49.5 (from 49.3) leaving the UK flash Composite PMI up to 49.6 (from 49.3). The US flash Manufacturing PMI is at 1445GMT and is expected to be unmoved at 52.6 and the US flash Services PMI penciled in to improve to 52.0 (from 51.6).

 

Chart of the Day – EUR/JPY

There is a developing underperformance of the yen and this is playing out through a breakout on EUR/JPY. There has been a pivot resistance at 120.75/121.40 which has capped the recovery potential in recent months. However, a shift in sentiment in recent sessions has breached this resistance, now on a two day closing basis. It has come with momentum indicators such as RSI (into mid-60s) and MACD lines (bull cross buy signal) improving. The reaction today to Friday’s intraday pullback will be key after Friday’s shooting star candle. A positive early response seems to be suggesting that the bulls are still in control but needs to be maintained to the close. The 120.75/121.40 band is now a basis of support. The hourly chart shows support building at the breakout which needs to be maintained. There is an immediate range breakout target around 123.50, with the July high of 123.35 a barrier. Initial resistance is at Friday’s high of 122.65.

 

WTI Oil

It may have needed to have been redrawn a couple of times, but there is still a growing medium term uptrend channel on WTI. There have been numerous attempts to push on with the channel that has been hit by sharp bear candles. However, time and again, these drops have been quickly supported. The latest breakout seems to be building from growing support around $57.70/$58.65. The positive newsflow surrounding the US/China trade talks have helped to boost oil higher for another break to multi-month highs on Friday. We see positive momentum (RSI into 60s and MACD lines rising at multi-month highs) to confirm the move. We are buyers into weakness. The Fibonacci retracements (of $63.40/$51.00) have often been near term consolidation or turning points, so the 76.4% Fib at $60.45 being hit on Friday is notable. Any near term retreat into support around $58.65 (also the 61.8% Fib) would be an opportunity to buy.

 

Dow Jones Industrial Average

The Dow jumped higher on Thursday as the news of a phase one trade deal filtered through. An intraday all-time high has subsequently been hit on the past two sessions (the latest at 28,290. There is a positive technical set up too, with the RSI into the 60s and Stochastics edging into bullish configuration. However, there is still a sense of this being a market not fully convinced. Momentum may be positive but also slightly tentative (MACD lines are not confirming yet and need at least a bull cross). This is also shown in the fact that Friday’s candlestick was a very nervous positive close but also still lacking an all-time closing high. This could be an important session today after a weekend of more headlines and futures seem to be positive today. A decisive close clear of 28,175 would open the move higher. There is a near term buy zone between 28,035/28,175 and the bulls remain in control above 27,805.

 

Read More Analysis Here: EUR/USD, GBP/USD, USD/JPY, Gold