LCG Market Snapshot video: Dragon Fly Doji reversal on Wall Street
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The Dow Jones sold off for 8 days but has reversed strongly overnight, creating a Dragon Fly Doji candlestick pattern on the LCG Wall Street daily chart. Markets are hopeful Donald Trump can move on from healthcare and switch his attention to tax and spending policy.
This is LCG’s daily Market Snapshot. Our Senior Market Analyst Jasper Lawler offers a concise analysis of one of the day’s key themes or events and how it could affect the charts of an asset within the stock, forex, indices or commodities market.
The United Kingdom is under the spotlight, as the country prepares to start the Brexit process on Wednesday, March 29th.
As such, the Brexit shenanigans keep the headlines busy, the latest being the bill the UK will need to pay for its EU divorce. The Brexit Secretary David Davis said that the Britain will not pay the 50 billion pound divorce bill as mentioned by the EU officials. The bill would be ‘nothing like’ the proposed amount. Indeed, the House of Lords would have reckoned that the cost would rather be zero.
As it stands, the Brexit talks could turn into hostile negotiations, which could dent investors’ appetite in the UK businesses and their European partners.
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The Article 50 is triggered; the UK has officially sent its demand to leave the European Union.
PM Theresa May will speak at the Parliament by the mid-day in London and is expected to reveal the content and the tone of the letter. The completion is aimed for March 2019 and in the light of the pre-negotiations, the Brexit journey could well be hostile.
Sentiment in the pound is heavy, as investors wonder whether the UK will display a divorce-only approach, or include clauses for the future of the EU-UK relations.
Chancellor of Exchequer Hammond hinted at some sort of custom agreement, stating the UK understands they can’t ‘cherry-pick’. Although his comments leaned toward a positive tone, risks prevail.
Cable (GBPUSD) gave back more than two figures in two consecutive sessions as the broad-based demand in US dollar, combined to Brexit worries drove short-term swing traders out of the market.
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Dollar expectations skew GBPUSD The British pound fell back sharply against the US dollar in hours before Prime Minister Theresa May triggered Article 50 to officially leave the EU. The trouble with using Brexit uncertainty to explain the drop in the pound is that the euro and yen also fell against the dollar. In essence, the drop in GBPUSD was mostly a dollar move on reignited hopes of Trump-led US stimulus than fears over Article 50. The pound fell against the euro early on ‘Article 50 Day’ but quickly unwound most of the losses as images flashed across the wires of Theresa May signing the letter. Another kneejerk plunge in Sterling after Article 50 is triggered is clearly possible, but seems unlikely. Market reactions have changed The way markets react to Brexit news has morphed over time. It would seem currency traders are going through the grief process.
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US GDP data could boost the Fed hawks following Rosengren’s comments
Except the yen, all G10 majors softened against the US dollar following hawkish comments from the Federal Reserve (Fed) presidents. Boston Fed President Eric Rosengren said he would opt for three additional rate hikes in 2017 to prevent an overheating in the economy, as Chicago Fed President Charles Evans assumed two additional rate hikes would be ‘safe’, three hikes could happen.
The comments couldn’t prevent the US 10-year yields from slipping below the 2.40% level. The US 2-10 year spread flattened the most since the US election, as the short-end of the curve was lifted at a higher speed than the long-end. This is because the rates were being pulled higher from very low levels and companies are not concerned by extra hiking for the moment. For the moment, the ‘Trumpflation’ easily counterweight the rising rate pressures on the US companies.
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LCG'S Market Snapshot: A double bottom in Brent crude oil?
Talk of 95% compliance from OPEC counties in March to oil output cut targets as well as a Libyan production outage has reduced concerns of oversupply despite record US stockpiles. US inventories data
The pound shortly reversed gains accumulated through the Asian session, as the European Council revealed the draft guideline for the Brexit. The EU said ‘nothing is agreed until everything is agreed’.
In the first phase of the negotiations, the UK will be asked to ‘settle the disentanglement of the UK from the EU and from all the rights and obligations the UK derives from commitments undertaken as a Member State’. The UK needs to pay the bill of 60 billion pounds to the EU before advancing toward further stages of the divorce. Second, the UK should ‘provide as much clarity and legal certainty as possible’ to citizens and businesses on the ‘immediate effects’ of the Brexit.
The trade agreement will be discussed at the advanced stages of the negotiations. The EU states cannot negotiate bilateral agreements with the EU states, as the 27 remaining Member States will act as one. Hence, the UK will need to fight alone against the European Union, which could eventually reshuffle the balance of power in disfavor of the parting member, the UK.
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Stocks waver with St Petersburg bombing
Markets were steady on Monday with no sign yet of a resumption of last week’s dip-buying in stocks. Anecdotally, traders appear to be waiting for FOMC minutes and the US unemployment report to test the conviction of Fed members signalling 3-4 hikes this year.
Apart a spurious social media-based poll reported in Russian media over the weekend putting Francois Fillon ahead, French election polling has been devoid of upset and isn’t causing much concern for markets. Still we know from the Brexit and Trump pattern, markets only really start paying attention to important elections the week before.
The pound and UK stocks fell in unison on Monday after the EU figuratively scrunched up Theresa May’s Article 50 letter and lobbed it into the bin over her demand for tandem trade and exit talks.
Stocks
Early gains slipped away by the afternoon following some disappointing manufacturing data and reports of deadly explosions on the St Petersburg subway.
Germany’s DAX was the exception to the rule of lacklustre trading in Europe, coming within a whisker of its all-time high. The German index seems to have gained a new lease of life since Angela Merkel’s party had its run-way election victory in the state of Saarland. Political stability in Europe passed its first test after the Dutch election, making European shares look relatively more attractive than US peers.
Shares of Burberry led the FTSE 100 higher on news it would license its cosmetics business to Coty. It’s not exactly a flagship deal for Burberry in itself but could be a gateway to a new revenue model.
Licensing cosmetics out to Coty allows Burberry to monetise the cachet of its brand without the overheads.
Imagination Tech comfortably took the bottom spot in the FTSE 250. Investors gutted Imagination shares when Apple failed to renew its partnership.
LCG Morning Call European Opening Calls FTSE +14 points at 7296 DAX -6 points at 12,251 CAC +3 points at 5084 A mixed open is expected in European shares on Tuesday following yesterday's late sell-off. The Japanese yen and gold prices are rising in a sign that a risk-off tone is taking hold. Data showing a sharp drop-off in US auto sales has been credited with causing the concern. Car sales typically have a strong correlation with stock markets. Falling car sales cannot cause a bear market but it’s another leading indicator that downside risks are rising. South Africa saw most of the FX action overnight with the rand headed to its lowest levels since January after Standard & Poors downgraded the country's debt to junk. The Reserve Bank of Australia left interest rates unchanged a 1.75%, striking a mildly cautious tone. Data to watch out for data includes UK construction PMI, European retail sales and US factory orders. If UK construction growth disappoints like manufacturing, it will be another dose of cold water poured on the UK economic outlook post-Brexit.
LCG Senior Market Analyst Jasper Lawler uses technical analysis and fundamental analysis of indices, forex, commodities to prepare for the week ahead in markets.
The FTSE 100 stocks opened upbeat in London; energy (+2.03%) and mining stocks (+0.52%) lead gains on the back of firmer oil and commodity prices. Copper futures traded 1.45% higher.
The barrel of WTI extended gains past $51.50, the 100-day moving average, as the American Petroleum Institute announced that the US stockpiles decreased by 183’000 barrel over the last week. The EIA report is due later in the session and is expected to print a decline as well.
The FTSE tested the 200-day moving average, 7350p, and could encounter decent offers from 7350p to 7385p (March 29th high) due to the pound appreciation. The GBPUSD extended gains to 1.2483 (200-hour moving average) on the back of solid PMI services data. The UK’s services sector expanded faster than analysts’ expectations in March.
From a technical perspective, daily trend and momentum indicators remain positive; suggesting that dip-buyers in GBPUSD could continue seeing opportunity pre-100-day moving average.
The 100-day moving average, 1.2410, continues lending support to Cable despite the Brexit volatility and some traders’ reluctance to purchase the pound in the middle of the EU/UK shenanigans. Resistance is eyed at 1.2496 (minor 23.6% retracement on March rise), before considering a further rise to the critical 200-day moving average, 1.2570.
Off-kilter Le Pen debate helps Europe A slightly off-kilter French presidential debate performance from Marine Le Pen has lessened a little more of the political tension across markets. The French CAC index outshined the German DAX. Investors appear to be pre-empting the French election result, taking on a little more exposure in France at the expense of “safer” German assets. Voters like Le Pen’s clear policy message but are worried on the issue of the euro. Undecided French voters face the unenviable choice of protesting a corrupt establishment or putting their euro-denominated savings at risk. The mining sector tracked a rise in the price of copper while bank stocks reacted positively to strong economic data to lead the FTSE 100 higher. Lloyd’s shares underperformed bank peers after it announced the closure of 100 high street branches. Wall Street watching Trump and Xi Wall Street opened higher on Wednesday with the Dow Jones breaking out to a 2-week high. A surprise jump in US private sector job growth reignited the reflation trade while the $7.6bn acquisition of Panera Bread by JAB Holding added to the optimism. A little apprehension before Federal Reserve minutes and the meeting between US President Trump and Chinese Premier Xi capped some of the enthusiasm. The assumption seems to be that Trump will toe the line for President Xi. This seems like a big assumption. Confronting German Chancellor Merkel over Germany’s NATO contributions is not the action of a man who kowtows to foreign leaders. Trump has openly labelled China a currency manipulator so his position is clear. The open questions are whether Trump follows through on his rhetoric, and if he does how China adjusts. Neither of these will be answered this week. Aussie in crosshairs of trade war Click here to read the full article on LCG.com
The single currency reversed gains, as the European Central Bank (ECB) President Mario Draghi’s comments revived the ECB doves in Frankfurt. Draghi said that a ‘reassessment of the current monetary policy stance is not warranted at this stage’ and saw ‘no need to deviate from wording of the forward guidance’. The EURUSD tested the 100-day moving average, 1.0620.
The pair is stuck within the 1.0620-1.0700 range. A breakout in either direction could gain momentum. On the upside, we watch 1.0748 and 1.0808 (major 38.2% and minor 23.6% retracement on March rise). On the downside, the move could extend toward 1.0500/1.0495 (March low).
FTSE down, financials, energy stocks lead losses
The FTSE opened downbeat; financials and energy stocks were sold at the London open. Lloyds erased 4% as news that the bank will close 100 branches hit the wires. BP (-1.44%) and Royal Dutch Shell (-1.00%) traded south as the WTI bounced lower from $52.00 after the EIA reported that the US inventories increased by 1.6 million barrels last week, versus a contraction of 100’000 barrels expected.
Cable remained capped by 1.2500 offers. Trend and momentum indicators remain marginally positive, keeping the possibility of a renewed rise toward the 200-day moving average, 1.2565. The short-term support to the recent positive trend is eyed at 1.2420/1.2506 (major 38.2% retracement on March rise / 100-day moving average).
Will the Fed’s balance sheet shrinkage plans moderate the rate normalization?
The Federal Reserve (Fed) minutes revealed the FOMC members’ will to start shrinking the $4.47 trillion worth of balance sheet ‘later this year’. This has been an important piece of additional information that has been brought on the table for the first time since the Fed stopped tapering its asset purchases. Fed’s Dudley warned that the balance sheet shrinkage would act as a ‘substitute for short-term rate hikes’, warning that the Fed may need to decide whether ‘to take a little pause in terms of raising short-term rates’.
GBP softer on data, NFP in focus UK’s manufacturing and industrial production unexpectedly contracted for the second month in a row. Cable sold off to 1.2430 as a kneejerk reaction, the intraday trend turned bearish for an eventual extension of losses toward 1.2420 (major 38.2% retracement on March rise) and 1.2405 (100-day moving average). On the upside, the 1.25 offers are expected to remain intact, as the positive momentum is currently losing pace. FTSE flat near 7300p
The FTSE opened downbeat; mining stocks pulled the markets lower in London.
Rio Tinto (-1.81%), Glencore (-1.38%), Anglo American (-2.49%)
Gold miners and energy stocks outperformed, yet couldn’t offset the risk-off traders.
Gold miners gained on the back of firmer gold prices. Randgold Resources rallied past 2.50% as the yellow metal traded at the highest levels since the US presidential election.
The barrel of WTI crude rallied to $52.94 following the US strike on Syria, as a response to the Syrian gas attack on civilians earlier this week. Royal Dutch Shell (+1.09%) and BP (+0.48%) were among the leading gainers in London.
NFP data, Dudley’s speech in focus
The US nonfarm payrolls (NFP) and Fed Dudley’s speech are the major talking points in the US.
The US economy is expected to have added 174’000 nonfarm jobs in March, versus 235’000 reported previously. The expectations are soft, given that the last 12-month average stands at 185’000. On a side note, the ADP report, released on Wednesday, surprised on the upside. Although the correlation between the ADP and the NFP figures are not statistically significant, there could be a positive surprise in the US data before the weekly closing bell.
The pound (+0.16%) started the week flat-to-positive, in an effort to consolidate Friday’s losses after the unexpected contraction in UK’s manufacturing and industrial data sent the GBPUSD below its 100-day moving average (1.2398). The 1.2360-support (Fibonacci 50% retracement on March recovery) has been tested for the third consecutive session. Breaking below this level should pave the way toward 1.2301 (major 61.8% retracement). The key resistance stands at 1.2422 (major 38.2% retracement & down-trending triangle top). UK inflation & labour data in focus
The UK’s inflation (Tue) and labour data (Wed) are the key events of the week.
The rising inflation has become a major concern in the UK, since the Bank of England (BoE) eased the monetary conditions to support the British economy through the Brexit. The headline inflation surpassed the BoE’s 2.0% target in February.
Good news is that analysts expect a cool down in consumer prices in March. According to estimates, the headline inflation may have softened to 2.2% year-on-year from 2.3%, the core inflation could have eased to 1.8%y/y from 2%. If this is the case, the pound could resume its descent throughout this week. On the other hand, an upside surprise in CPI (consumer price index) could revive the BoE hawks despite last week’s weak economic data and trigger a fresh, hawkish rally in the pound given that an increasing number of BoE members would consider an interest rate hike sooner rather than later.
Pound recovery weighs on FTSE
The appetite in the FTSE reversed soon after the weekly opening bell, as the pound extended recovery to 1.24 mark. Energy stocks (-0.55%) opened under pressure, despite a third positive session in the oil markets.
The headline inflation in the UK remained unchanged at 2.3 year-on-year, versus 2.2% expected, the core inflation eased to 1.8% as expected from 2.0% printed a month earlier.
The consumer prices in the UK continue growing faster than the Bank of England’s (BoE) 2% policy target. The rising inflation has become a major concern in the UK, since the Bank of England (BoE) eased the monetary conditions to support the British economy through the Brexit.
The last MPC meeting witnessed several BoE members’ hawkish shift given the rise in inflationary pressures. Still, the market assesses less than 18% probability for a BoE rate hike by the end of 2017. UK’s sovereign market pricing suggests that the hawks are not ready to take control of the markets at this stage. Cable extended gains to 1.2445 post-CPI data. The key daily support is seen at 1.2395/1.2400, area including the 100, 50-day moving averages respectively. On the topside, offers are touted pre-1.2500. Boosted by the CPI data, the BoE hawks could encourage an extension toward the 200-day moving average (1.2557).
Mélenchon steps on the gas
Latest polls suggest that Jean-Luc Mélenchon, the far-left candidate, is surprisingly gaining field on the run up to the first round of the French presidential election due on April 23rd. According to one Kantar poll, Mélenchon advanced to the third place, taking lead over Francois Fillon. Mélenchon proposes quite a radical political program, including 100 billion euros worth of stimulus, besides reducing the working week from 35 to 32 hours, overhauling the EU and stepping out of NATO.
An eventual far-left win is as doubted as far-right Le Pen’s victory.
As a result, the EURUSD remains under a decent selling pressure against the US dollar. The French-German yield spread widens on French election shenanigans. Political risks could encourage a further slide in EURUSD toward the 1.0500/1.0495 mid-term support zone.
European stock markets opened upbeat. Euro Stoxx advanced to highest levels since December, as individual stock news reversed the risk-off trading earlier in Asia.
Automakers lead gains in Frankfurt, after BMW (+1.40%) and Volkswagen (+1.58%) reported solid sales in March. VW’s brand sales increased by 2.5% year-on-year, as BMW’s brand sales surged more than 5% in March. Daimler’s (+2.18%) fourth quarter earnings before interest and tax nearly doubled compared to a year earlier, from 2.15 billion euros to 4 billion euros, as thanks to Mercedes’ new E-class, the company sold three times more than its competitor BMW.
French carmakers surged on the sector optimism; Renault (+1.47%) and Peugeot (+1.01%) joined the race.
Cheaper euro has been a supportive factor as well. The EURUSD remained offered below the 100-day moving average (1.0622) on rising political concerns ahead of the French presidential election. Stronger negative momentum suggests a further slide toward 1.0500/1.0495 (mid-term support).
GBP strengthens on solid wages growth in February
In the UK, energy stocks (+0.47%) were better bid as the WTI extended gains toward $54/barrel.
GBPUSD spiked to 1.2519 as average earnings grew by 2.3% in three months to February, faster than 2.1% expected. The unemployment rate remained unchanged at 4.7%. Solid read revived worries of rising inflationary pressures and boosted speculations that the Bank of England (BoE) would need to tighten its policy sooner rather than later against its will.
The GBPUSD trades on positive bias, which could encourage a further rise toward its 200-day moving average (1.2555). Intraday support is eyed at 1.2405/1.2397 (50 and 100-day moving averages respectively).
Gold on its way to $1300, as investors are left with little to regret on falling US rates Gold extended gains to $1288. Softer US yields could drive more capital into the yellow metal as the opportunity cost of being invested in non-interest bearing gold decreases. The next stop for gold buyers could be $1300. Support is eyed at $1265 (minor 23.6% retracement on March-April rise). Randgold Resources (+1.21%) and Fresnillo (+1.55%) gained on firmer gold. Yen, Aussie gained The USDJPY extended losses to levels last seen on November 2016. Nikkei (-0.68%) and Topix (-0.76%) had yet another negative session on the back of the stronger yen. In addition, the risk-off markets drove 586 billion yen in Japanese bonds and 441 billion yen in Japanese stocks on week to April 7. In contrary, Japanese investors sold 2’176.8 billion yen worth of foreign bonds. Sharp drop in US yields bring the 105 level back on radar for USDJPY traders. Large option barriers trail from 108.50 to 110.00 for today’s expiry and could enhance the downside pressures.
The Turkish lira pares the weekly gains as investors take profit and flatten their position before Sunday’s constitutional referendum. Turkey may be giving the most important decision of its modern history. On Sunday April 16th, Turkish citizens will say ‘yes’ or ‘no’ to the constitutional change aiming to consolidate President Erdogan’s power at the heart of the government. We are prepared for two-sided volatility in TRY and TRY-denominated assets at Monday’s open. Turkey to say ‘Yes’ or ‘No’
Although the accuracy of the market polls are questioned, Reuters has reported that the yes camp may have slightly taken the lead.
While a ‘no’ vote could trigger a relief-rally across the Turkish lira and lira denominated assets, the market reaction to an eventual ‘yes’ vote is unpredictable. A ‘yes’ victory could bring along a sharp sell-off on Monday, followed by a sharp rebound similar to the US presidential election. In fact, Turkish companies were brought to comply with Erdogan’s rule over more than ten years. Specific sectors, including the construction sector, boomed under Erdogan’s government. Therefore, a ‘yes’ victory could mean a favorable playground for some of the Borsa Istanbul (BIST) companies, although the fundamentals of the Turkish economy could be questioned in the medium to long-term.
A ‘no’ vote could boost the appetite in the Turkish stock and currency markets. Nevertheless, there are rising speculations that a failure to pass the constitutional referendum could mean another referendum for Turkey, hence the extension of political uncertainties through a progressively tenser political and social environment. On the run up to the referendum, the USDTRY eased to its 100-day moving average for the first time since September 2016. A two-sided volatility could hit the lira crosses on Monday. In the aftermath of the election, we will be monitoring the key technical levels.
As the market absorbs the referendum results, the only fact of having the vote behind could encourage further gains in the Turkish lira. The lira could challenge the 3.55/3.50 support on the downside. On the topside, the key resistance is eyed at 3.80 and a significant break above this level should suggest a renewed anxiety regarding the Turkish lira, increase the selling pressure and push the USDTRY toward the 4.00 mark.
