US markets underwent a bit of a roller-coaster session yesterday with the Dow and S&P500 once again hitting new record highs, as the Dow looked to close at a record for the 10th day in succession before rolling over just after the London close.
The declines in US markets started to gain traction in the afternoon session as nervousness set in after President Trump warned North Korea that they would face “fire and fury like the world has never seen”, if they continued with their attempts to build a nuclear warhead, that is able to hit the western US.
As a result all major US markets closed lower for the first time in over two weeks, and this weakness unsurprisingly has spilled over into Asia markets as well, as geopolitical tensions prompt some nervousness, particularly since North Korea’s state media suggested that they were examining the prospect of a missile strike near the US base in Guam.
This raising of tensions on the Korean peninsula, overshadowed the latest Chinese inflation data which was slightly softer than expected at 1.4%, and is likely to translate into a lower open for Europe later this morning, reversing the gains of yesterday’s positive session, which was brought about in part by a decent US jobs indicator.
The catalyst for the positive European close was a sharp rebound in the US dollar after the latest US jobs opening data (Jolts) hit a record high of 6.2m in June. The strength of the number prompted some fairly decent US dollar buying, largely on the premise that a strong jobs market will eventually lead to rising wages, prompting the potential for further rises in interest rates.
This in turn prompted sharp declines in the euro and the pound which had the uplifting effect of pulling markets in Europe into positive territory into the close, despite some concerns that weaker than expected import and export numbers out of both Germany and China might be indicative of a little bit of economic softness in both economies at the back end of Q2.
It has started to become apparent to some in recent days that the US dollar, after five months of losses, may be susceptible to some kind of rebound, and yesterday’s price action would appear to confirm that there are some weak short positions out there.
Wednesday is also crude inventories day and despite a rather choppy last few days Brent prices have been unable to crack above the $53.50 level which has proved thus far to be a fairly durable obstacle. The recent weakness in the US dollar has helped underpin along with some strong jawboning from Saudi Arabia, however it is still apparent that increases in production as well as rising exports are likely to act as a drag on further gains.
We’ve already seen data from July that saw OPEC report record exports, while US production has also increased, despite five successive weeks of inventory draws. With US driving season coming to a close and gasoline inventories showing evidence of elevated builds it would appear that the rebalancing story could well have a lot more legs in it.
EURUSD – the inability to move above the 1.1830 area, has seen the euro slip back with a fall back to the 1.1610 the next target. We need a weekly close above the 200 week MA at 1.1795 to argue for a move towards 1.2000, which now seems less likely in the short term.
GBPUSD – has slipped below the 1.3000 area thus opening up the prospect of a move towards 1.2920, as well as trend line support at 1.2830 from the March lows at 1.2109. Resistance now comes in at the 1.3020 area.
EURGBP – spilled over to the 0.9090 area before sliding back again. The inability to follow through to the upside suggests the prospect of a move back to the 0.8980 area in the short term. Support at the 0.8980 area needs to hold for the move towards 0.9300 to play out or risk a pull back to the 0.8870 area.
USDJPY – having found support at the 109.80 area, we need to see a move back towards the 111.30 area to stabilise and shift the onus away from a test of 108.20, and towards a return to the 112.30 area.