Mixed messages on tariffs leaves markets in consolidation

Market Overview

Tariffs are still the focus for traders, but this time at least, some better news. The US has decided to delay the tariffs on imported cars by another six months. This is in order to allow a further 180 days to negotiate with counterparts. This news certainly comes as a boost to the big German auto makers, boosting the DAX and the near term outlook for the euro. How long this boost lasts for is another matter though, as noises from the Chinese state media outlets are becoming increasingly steadfast on the US/China trade dispute. Although the claim is that their door is always open to negotiation, there is an sense that they are in it for the long term. Trump’s recent claim that the agreement would be “very successful” may be running increasingly thin. The flow into safe havens may have been stemmed for now, but it is not entirely reversing yet. We see around 110.00 on Dollar/Yen as a gauge, also $1290 support on gold. S&P 500 equities have managed to find some support on the autos tariffs news, but any escalation of the dispute with China will put it back under pressure again. Markets remain in a state of cautious alert, something that could continue for a while now. One data point to be aware of overnight, with Australian employment data  which was mixed to slightly negative. Australian unemployment rate increased higher than expected to 5.2% (5.1% exp, 5.0% in March), but this came with a higher participation rate and stronger employment growth of 28,400 (+14,000 exp, +25,700 last). The Aussie is under a little pressure as a result.

Wall Street closed with decent gains with the S&P 500 +0.6% at 2851. However, US futures have pared some of these gains this morning, around -0.3% lower. Asian markets have been mixed overnight, with the Nikkei -0.7% and the Shanghai Composite +0.5%. European indices are set for a mildly cautious move lower around the open with FTSE futures-0.1% and DAX futures -0.3%. In forex, there is a slightly risk negative look as the European session takes over, with JPY gaining some ground, whilst AUD underperforms. In commodities, gold is showing little real direction, whilst oil has continued its positive bias as tensions in the Middle East begin to mount.

It is a relatively quiet day on the economic calendar, limited to a few lower tier US data releases. The Philly Fed Business index is at 1330BST and is expected to improve to +9.0 in May (from +8.5 in April). US Building Permits are at 1330BST and are expected to have increased marginally to 1.29m in April (from 1.288m in March), whilst US Housing Starts expected to pick up to 1.205m (from 1.139m in March). Weekly Jobless Claims are expected to improve back to 220,000 (from 228,000 last week). Also keep an eye out for the comments from Fed speaker Lael Brainard (voter, dove) who is speaking at 1715BST.

Chart of the Day – DAX Xetra

We looked recently at the DAX as the market formed a correction within the uptrend channel. An ensuing correction brought the DAX back to the trend support from which the market has found key support again. The long term pivot at 11,865 is a basis of support but with the DAX bottoming at 11,844 this week coinciding with the uptrend channel support, the bulls are moving again. A fundamental event has now pushed the needle and the bulls have swung back into the driving seat. A 6 month delay to the autos tariffs resulted in a sharp jump on the DAX. Technically the impact has been for not only the support of the channel to be bolstered, yesterday’s low was also at 11,862 (almost bang on the 11,865 long term pivot). This also coincides with the support of the rising 55 day moving average (today at 11,839) which has been an excellent gauge for the medium term outlook since September. Yesterday’s rebound also formed a bullish engulfing candle (bull key one day reversal) which is a very powerful near term signal. The RSI has picked up from the low 40s (as it has done in the past two corrections) and Stochastics also bottomed. Positive signals are also not restricted to the daily chart. The hourly chart shows the hourly MACD lines giving a bull kiss, and RSI at an 8 day high. Resistance is at 12,140 initially and then around 12,200/12,210. Initial support at 12,020.

EUR/USD

The prospect of renewed negative momentum on EUR/USD is still a factor after three consecutive negative closes. However, it was interesting that yesterday’s session hit a low at $1.1175 to induce some support again. This old key low from March is clearly a level the market is watching now. A very small real body on yesterday’s candlestick with long shadows suggests a degree of indecision now and the negative momentum is stuttering. Today’s session could be key for near term direction now, with the uncertainty drifting into the initial moves today. The support band $1.1165/75 is certainly building, but the hourly chart shows a near term pivot at $1.1220 which protects $1.1265 key near term resistance. Hourly momentum suggests a period of consolidation forming. A decisive move above $1.1220 would improve the outlook.

GBP/USD

As the outlook for sterling deteriorates the candlesticks on Cable are increasingly negative. In the past week and a half, the consistent selling pressure has now dragged Cable below $1.2865 to test the old support from the turn of the year. There is a pivot around $1.2815 whilst the February low at $1.2770 is key. Corrective momentum has accelerated away from a building downtrend, but the increasingly aggressive candlesticks will be a concern for the longevity of support. Intraday rallies are a chance to sell. The hourly chart shows time and again old support becoming new resistance. The most recent pivot levels are at $1.2965 and more minor at $1.2920. Below $1.2770 opens $1.2700.

USD/JPY

We have focused on the old pivot level at 109.70 being a key gauge in recent days. It seems as though this is increasingly the case as the last two session resistance levels have come around this old floor. If the bulls can begin to trade through this resistance once more then the outlook could begin to improve. They would have been encouraged by Tuesday’s positive candle and then an intraday drop being bought into yesterday. However, for now this is a stuttering formation of support above 109.00. The daily momentum indicators show a consolidation rather than any recovery. This is backed by hourly indicators, with the RSI  struggling below 60 and MACD struggling around neutral. This 70 pip near term trading band could become a key indication of direction. Losing 109.00 opens the next key low at 108.50. Holding a move above 109.70 and then breaking above 110.05 would open a recovery.

Gold

The sharp spike higher on gold that hit a high of $1303 is now seeing a gradual unwind. The question is whether this is an unwinding move that pulls all the way back into the April/May consolidation, or whether there is a new level of support to work from. Breaking above $1289/$1291 means this is now a basis of initial support and if the bulls can work from here, then it could be a move to drive a sustainable recovery. The 11 week downtrend has been broken and equally as important, the 8 month uptrend held the recent consolidation. If the RSI can move above 60 and MACD lines rise decisively above neutral, whilst holding on to $1289/$1291 then the bulls will be more confident. The key test remains the long term pivot $1300/$1310. If this can be cleared then the bulls will be making key progress. An two week uptrend is supportive at $1288 today. Encouragingly, hourly momentum is holding up well as the price finds support above $1291 in the past couple of sessions.

WTI Oil

The consolidation continues, but is there a slight positive bias beginning to develop? For almost two weeks the market has been stuck between the resistance of the breakdown at $63.00 but support is holding at $60.00. The benign conditions of the momentum indicators remain, with the RSI stuck in the mid-40s and Stochastics flattened. The MACD lines gravitating around neutral also reflects a market increasingly in wait and see mode. However, with two positive candles in the past couple of sessions, and another positive open today, there are signs of life beginning to come through on momentum. A tick higher on both Stochastics and RSI are pointing to a test of $63.00 again. A closing break above the intraday high at $63.30 would be positive and imply a test of $64.80 again.

Dow Jones Industrial Average

The bulls would have certainly ben heartened by the price action of the past couple of sessions. A positive response through both sessions is now building up confidence once more. A run lower over the past couple of weeks has dented the bullish outlook. However, the support of the key March low at 25,210 is holding and a couple of positive candles  is beginning to suggest there is support forming. The 76.4% Fibonacci retracement of the 26,952/21,713 correction is worth looking out for at 25,715. This has been an area to cap the gains in the last two sessions and a decisive break back above would be a positive signal. The reaction high at 26,019 is also a level to watch. With a bullish outside day yesterday the support initially is at 25,342.