SHARP OIL PRICE DECLINE DRIVES A RETREAT ON RISK APPETITE
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.
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.
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.