What we are looking for
- USD strength remains firm: The USD has decisively gained ground on major forex, especially against European currencies. EUR/USD has fallen decisively below parity. GBP/USD is also breaking to multi-year lows.
- Indices are under mounting corrective pressure: Since the Wall Street rally turned lower last week, markets are sharply corrective now.
- Commodities are mixed: Metals prices are falling, but oil has rebounded on the prospect of tighter OPEC+ supply.
- Data trading: The flash PMIs will give plenty of opportunities for data trading today. Also, watch for New Homes Sales and Richmond Fed Manufacturing.
There are mounting fears of recession, where the high cost of energy prices are biting businesses and consumers in major economies. The primary region where markets are reacting is Europe, a region heavy with energy-consuming countries. In recent days we have seen the EUR and GBP falling hard. EUR/USD fell to parity in July only for a technical rally to set in. It has taken about a month but the pair has fallen back once more, and the move looks decisive. GBP/USD has also fallen hard, below 1.1760 to levels not seen since the spike lows of the initial reaction to COVID. The German DAX index also fell hard yesterday, losing 2.4% on the day (admittedly only slightly more than Wall Street). The corrective momentum is growing on indices.
Today’s focus is on the outlook for growth in August, with the flash PMIs. Already we have seen disappointing moves into contraction (unexpectedly) in Australia and Japan. Only the US is expected to see its Composite PMI now picking up. If this is shown in the actuals it would exacerbate the premise of US economic outperformance and help to bolster the performance of the USD.
It is a day packed with flash PMIs on the economic calendar. The UK flash PMI is expected to show a continued trend of deterioration in August, albeit still mildly in expansion territory above 50. The US flash PMI is expected to improve in August but still to remain marginally in contraction below 50. Elsewhere for US data, analysts are looking for New Home Sales to continue the trend of faltering housing data. Also, the Richmond Fed Manufacturing will be watched too.
Market sentiment remains negative: JPY outperformance, USD strength, with a negative bias to indices, whilst silver is underperforming gold.
Treasury yields a shade lower: Yields have not reacted too much, only falling slightly this morning.
Australian flash PMIs fall into contraction: The August flash Composite PMI has fallen to 49.8 which is a shade into contraction territory (below 50). This was from the July level of 51.1 and missed estimates of 50.9.
Japanese flash PMIs slip into contraction: The Japanese Composite PMI has also fallen below 50 to 48.9 in August from 50.2. This comes despite the expectation of a slight improvement to 50.9.
Eurozone flash PMIs deteriorate but are not as bad as expected: The Composite PMI has fallen to 49.2 (from 49.9) This was slightly better than the 49.0 expected.
Oil rebounds on Saudi output comments: The Saudi energy minister has said that OPEC+ may need to lower production to stabilise the market. The oil price has jumped on this news.
US Dollar Index testing its highs: The Dollar Index has rallied strongly in recent sessions and is now testing the multi-year high of 109.29 this morning.
Cryptocurrencies are relatively stable, for now: Despite the risk aversion, cryptocurrencies have held ground. There is a threat of a rebound coming as Bitcoin has bounced by +1.5% this morning, back to $21400.
- UK flash PMIs (08:30 GMT) The consensus is looking for deterioration to 51.3 in August (from 52.1 final in July). Both Manufacturing and Services are expected to fall.
- US flash PMIs (13:45 GMT) Consensus is looking for a pick up to 49.0 in August (from 47.7 final July).
- US New Home Sales (14:00 GMT) Analysts are looking for a decline of almost 3% to 0.575m in July (from 0.590m in June).
- Richmond Fed Manufacturing (14:00 GMT) Analysts are expecting a deterioration to -15 in August (from 0 in July).
Major markets outlook
Broad outlook: A risk negative and USD positive bias remains, even if there is a slight pause this morning.
Forex: USD is easing back very slightly, with the commodity currencies performing well (a higher oil price is helping CAD to outperform).
- EUR/USD has once more broken below parity and also closed below the July low of 0.9950. The market has fallen sharply for the past seven sessions. There has been an intraday rebound this morning and it will be interesting to see if this develops into a technical rally. However, with the price at a 20-year low, there is no support to speak of. We would look to use any near-term rallies as a chance to sell. There will be initial resistance between 0.9950/1.0000.
- GBP/USD is a very similar outlook to EUR/USD. A sharp downside move over the past two weeks and a move below the July low at 1.1760. An intraday rebound from 1.1717 this morning may suggest there are signs of fight from GBP bulls, but we would look at selling any near-term rallies. There is resistance up towards 1.1890. With Cable breaching the July low it is the lowest since the COVID breakout spike low of 1.1410.
- AUD/USD continues to hang on to the support at 0.6860/0.6870 with another intraday rebound this morning. However, yesterday’s bull failure around 0.6930 is a concern that the rallies are still not holding. Momentum indicators are taking a more corrective configuration. We favour further pressure on 0.6860 in due course with a breakdown opening moving towards 0.6800 and below. The initial resistance is 0.6930.
Commodities: Precious metals remain corrective, whilst oil needs to build on the recent support.
- Gold has posted a sixth corrective candle in a row on the daily chart. However, there are some signs of near-term consolidation forming. We need to see whether this is a pause for breath or a potential rally from $1727. The four-hour RSI has just unwound from below 30 overnight, so it may just be a technical unwind. However, since losing the support at $1754, there is resistance now overhead between $1754/$1772 which we would be looking for a selling opportunity. Initial support is around $1711/$1713.
- Silver has driven decisively lower in the past week and a move back to test the $18.14 July low should not be ruled out now. However, in the past 18 hours, the market has shown signs of support forming at $18.71. This could induce a near-term rebound. However, we would see this as another chance to sell. Initial resistance is now between $19.15/$19.40.
- Brent Crude oil has fluctuated over the past week but held the $93.25 support yesterday to rebound again. For now, we would still be looking to use near-term technical rebounds as a chance to sell. Any unwinding move towards 40/50 on the RSI continues to be seen as an opportunity to sell. However, a move back above $99.50 would begin to improve the outlook. There would need to be a rally above $102.90 resistance to significantly improve the near-term outlook. We still favour a retest of the $93.25 low in due course.
Indices: US futures have been falling sharply. There is a near-term rebound that is forming today, but can it hold?
- S&P 500 futures have fallen sharply to breach the band of support between 4145/4200. However, this has not been broken on a closing basis, yet. The market has started to move higher into the European session today. However, can this move hold? The four-hour chart shows an unwind from oversold, but if the RSI begins to falter again under 50 then it would suggest that the market is increasingly corrective and rallies are a chance to sell. Resistance is at 4185/4200. If the support at 4080 is broken the outlook would turn increasingly corrective.
- German DAX has fallen hard in the past four sessions. The move below 13330 support suggests that the market is now with a growing corrective outlook. The market has ticked higher initially this morning, but there is resistance now between 13330/13446. A bull failure around here would be another chance to sell. The close below 13330 support has opened a test of 13035.
- FTSE 100 has held up relatively well in recent sessions amid sharply corrective peers. The support at 7457 is the key gauge and so far it has held firm. There are still no outright sell signals yet, but if other indices continue to fall, it will be difficult for the FTSE 100 to hold higher. Resistance is growing now between 7453/7478.
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