ECB Draghi comments, dovish central banks, big earnings and changing politics in focus

Market Insights

There have been a number of developments politically and economically overnight, with a lot more to come over the rest of this week and through the weekend.

It’s a big day for central bank meetings which have taken a dovish tone so far. The Bank of Japan raised its GDP forecast by 0.1% to 1.6% but cut its inflation forecast by 0.1% to 1.4%. Governor Kuroda indicated to would be premature to talk about easing back until inflation is running above 2.0% so they remain pedal to the metal. The Yen is broadly weaker on this news, falling relative to USD, EUR, GBP and CAD.

Meanwhile, Sweden’s Riksbank maintained its (0.50%) negative interest rate as expected but surprised the street by  and increased its QE program by SEK 15B (US$1.7B) over the opposition of three board members. SEK is down sharply on this news. 

The ECB announced no changes to monetary policy as expected this morning. At his press conference, President Draghi indicated he plans to maintain current QE levels (post one and done taper) through December at least. Although downside risks have diminished, inflation remains subdued and he plans to keep QE going until inflation gets back up above 2.0% on a sustained bases with interest rates to remain at current or lower levels until after the end of QE.

The Euro is bouncing around on the news with a rally unwinding declines seen earlier this morning. Part of the big Euro rally this week was on speculation that a Macron win in France would ease political uncertainty in the Eurozone enabling the ECB to move up its time table for tapering. The street appears so far to be viewing the comments as balanced even though they were not as hawkish as some had been hoping.

Politics also remains in focus, impacting a number of markets. In the US, risks of political turmoil appear to be easing. Last night Congress passed a one-week stopgap spending measure to avoid a government shutdown this weekend and allow negotiations to continue. The Republicans appear to be close to an agreement on health care reform with a vote possible this weekend or next week. Yesterday’s tax reform package seems to offer something for everyone, but it remains to be seen what will actually get through Congress and how long it will take.

In foreign affairs, it appears the US is going to try sanctions on North Korea before military options, and President Trump eased back the rhetoric on NAFTA indicating it plans to negotiate (having spooked the markets with yesterday’s tear up NAFTA and walk away posturing rumours). CAD and particularly MXN have bounced back strongly todayon this clarification.

Politics in Europe may also impact trading today. German legislators are expected to vote on a tough Brexit negotiating stance ahead of this weekend’s EU summit on Brexit strategy. The second round campaign in France continues. The latest UK election poll from YouGov shows the Conservatives attracting (only) 45% support, still more than enough for a big majority.

Amid all of this news, stocks are mixed. European markets are down slightly this morning with the Dax down 0.2%, and the FTSE down 0.4%. US index futures are up 0.2%.

There are a ton of earnings ‎reports out overnight and this morning. Suncor Energy has kicked off Big Oil results with a bang, coming in way above street estimates. Potash Corp results have also been a lot stronger than expected.

Chart Signals: Signs of market peaks and possible reversals emerge

As markets move past the big moves that started the week, signs of exhaustion and potential corrections have started to emerge. The US SPX 500 appears to be forming a double top, while a head and shoulders top in the UK 100 appears to be back on. GBP, USD and CAD have started to rebound while crude oil remains under pressure and EUR has been really choppy.  

North American and European Indices

US 30 is holding steady near the 21,000 round number trading between 20,970 and 21,010. It remains below 21,130 and a double top may be forming. RSI confirms upward momentum levelling off but so far this looks like a pause within an uptrend.

US SPX 500 may be forming a double top, having run into resistance at 2,400 and dropping back toward 2,385 with next support possible near 2,370 then the 50-day average near 2,360. RSI suggests upward momentum levelling off.

US NDAQ 100 has paused near 5,555 to digest recent gains and work off a slightly overbought RSI. Initial support has moved up toward 5,535 from 5,480 with next potential measured resistance near 5,600.

UK 100 appears to be resuming its downtrend, falling back under 7,260 the neckline of a head and shoulders top and sliding toward 7,245 with next potential support near 7,200 then 7,145. RSI failed to retake 50 and has turned back downward confirming distribution.

Germany 30 has dropped back toward 12,450 as it continues to quietly roll over after running into resistance near 12,500. A negative RSI divergence suggests upward momentum slowing. It remains in an uptrend overall though, holding well above 12,380 its recent breakout point.

Commodities

Gold is trading between $1,260 and $1,270 with next resistance near $1,280 and next support near $1,250. The price has been sliding for 2 weeks and the RSI is testing 50 where a breakdown would confirm a downturn in momentum. On the other hand, the 50-day average continues to creep toward a golden cross of the 200-day average.

Crude Oil WTI continues to plunge, continuing the decline that started with a failure to overcome $50.00 round number resistance. The first leg down took the price back toward the $48.60 to $49.20 zone but now a second downleg is under way that has pushed the price down toward $48.20 with next potential support near $46.70 a 23% retracement of the previous year’s uptrend.

FX

US Dollar Index continues to stabilize in the 98.60 to 99.20 area and may be forming a double bottom. A breakout could fill in a recent downward gap with next resistance near 99.55. RSI suggests downward momentum levelling off.

USDJPY shot up toward 111.80 where it smacked into its 50-day average and has dropped back into the 111.00 to 111.50 area. This may just be a trading setback, however, with RSI still rising to indicate continuing accumulation. Next resistance possible near 112.20 with next support near 110.65 both   Fibonacci levels. 

EURUSD is showing signs of peaking for now, encountering resistance near $1.0945 a Fibonacci level and bouncing around in the $1.0860 to $1.0930 range with next support possible at a Fibonacci cluster near $1.0830. RSI indicates a correction starting to digest an overbought RSI

EURGBP is resuming its downtrend, falling away from 0.8500 and trading around 0.8460 a Fibonacci level between 0.8440 and 0.8480. Next potential support near 0.8380 the bottom of a recent gap.

GBPUSD continues to climb, retesting $1.2900 resistance which could end in a double top or a breakout that could challenge the $1.3000 round number. Support rises toward $1.2870 from $1.2800. RSI confirms upward momentum but is approaching overbought territory.

USDCAD has encountered resistance near $1.3650 and appears to be levelling off dropping back toward $1.3580. Initial downside support levels appear near $1.3570 then $1.3530 and $1.3500. RSI touched overbought territory and has started to back off indicating a correction possible.

CADUSD appears to be stabilizing in the $0.7325 to $0.7385 area. RSI has bounced off 30 suggesting some of the recent downward pressure may be starting to ease. Initial resistance possible near $0.7380 then $0.7410 with next support near $0.7270, all Fibonacci levels.

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