Analyst Articles – Forex News 24

Eurozone PMIs and Ifo Index Miss Expectations, Euro Shrugs
Crude Oil Prices May Drop with Stocks as Market Mood Sours
Euro Stoxx 50 May Fall After Nikkei 225 Sinks on Trade War Fears
S&P 500 Is Due a Break and Pound Collapses Alongside May’s Hold
Canadian Dollar, Crude Oil Prices Decline to Support. Yen May Gain
What if Mexico, Canada Join the US in the Trade War with China?
EU Elections Highlight EUR Crosses
Investors Turn Defensive as Trade War Risk Bites
Crude Oil Price Drop Helping USDCAD Hold Range Support
XAU Breakdown Stalls at Technical Support

Eurozone PMIs and Ifo Index Miss Expectations, Euro Shrugs

Posted: 23 May 2019 02:42 AM PDT

EUR price, Eurozone PMIs and Ifo Index:

The Eurozone purchasing managers' indexes and the German Ifo Index all came in below forecast levels in May but there was little response in the Euro.
The results of the European Parliament elections Sunday are the next hurdle for Euro traders.

Eurozone PMIs, Ifo Index disappoint

The purchasing managers' indexes for the Eurozone and the Ifo Index for Germany all came in lower than economists had predicted in May but there was little response in EURUSD or the Euro against other major currencies. The results in full are in the following table:

Source: DailyFX calendar

In response, EURUSD slipped lower but the response was muted as traders wait for the results of European Parliament elections due Sunday.

EURUSD Price Chart, Five-Minute Timeframe (May 23, 2019)

Chart by IG (You can click on it for a larger image)

You can read our preview of the European elections here

And in the video above you can listen to a recording of my live webinar before and after the data were released (it starts at 1'50").

Resources to help you trade the forex markets:

Whether you are a new or an experienced trader, at DailyFX we have many resources to help you:

— Written by Martin Essex, Analyst and Editor

Feel free to contact me via the comments section below, via email at martin.essex@ig.com or on Twitter @MartinSEssex

2019-05-23 09:30:00

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Crude Oil Prices May Drop with Stocks as Market Mood Sours

Posted: 22 May 2019 11:38 PM PDT

CRUDE OIL & GOLD TALKING POINTS:

Crude oil prices decline most in three weeks on dismal inventory data
Gold prices idle as bond yields and US Dollar diverge in risk-off trade
European politics, US-China trade war to put traders on the defensive

Crude oil prices plunged, recording the largest daily drop in three weeks, as EIA inventory flow data reveled a much larger-than-expected build of 4.74 million barrels last week. Investors were expecting to see a 1.28-million-barrel drawdown, although leading API statistics hinted at an increase yesterday.

Meanwhile, gold prices marked time as market sentiment soured. Bond yields tracked stocks lower – complementing the metal's appeal as a non-interest-bearing alternative – but any support from this appeared to be offset as haven-seeking flows buoyed the US Dollar. That undercut anti-fiat demand.

CRUDE OIL PRICES MAY FALL WITH STOCKS IN RISK-OFF TRADE

Asia Pacific markets followed Wall Street lower, and more of the same is hinted ahead. Indeed, bellwether S&P 500 futures are trading convincingly in the red. That bodes ill for cycle-sensitive oil prices, while gold may continue to struggle as baseline lending rates and the Greenback diverge.

Investors face a variety of headwinds. Eurozone PMI and German IFO data may point to sluggish regional growth and shaky business confidence as Brexit uncertainty deepens all the while EU Parliament elections threaten to usher in a wave of eurosceptics hoping to constrain and perhaps even dismantle the bloc.

This is on top of US-China trade war escalation. The US is now considering blacklisting five Chinese surveillance companies including Megvii, cutting them off access to US components and software. That marks a broadening of last week's analogous action against technology giant Huawei.

Did we get it right with our crude oil and gold forecasts? Get them here to find out!

GOLD TECHNICAL ANALYSIS

Gold prices are idling at rising trend line support set from August 2018. A daily close below this and the 1260.80-63.76 inflection area targets the 1235.11-38.00 zone next. Resistance is in the 1303.70-09.12 region, with a push above that eyeing the 1323.40-26.30 price band. February's high at 1346.75 follows.

CRUDE OIL TECHNICAL ANALYSIS

Crude oil prices recoiled from resistance, sinking toward range support at 60.39. A daily close below that opens the door for a test of the 57.24-88 area. On the topside, a dense layer of overlapping resistance levels runs from 63.59 to 67.03. A daily close above the upper boundary targets the $70/bbl figure next.

COMMODITY TRADING RESOURCES

— Written by Ilya Spivak, Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter

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2019-05-23 03:30:00

Euro Stoxx 50 May Fall After Nikkei 225 Sinks on Trade War Fears

Posted: 22 May 2019 09:46 PM PDT

Asia Pacifc Markets Talking Points

US-China trade war fears fuel risk aversion in Thursday Asia trade
The Nikkei 225 suffers with telecommunication shares as Yen gains
Euro Stoxx 50 is at risk amidst European elections, eyeing support

Find out what retail traders' equities buy and sell decisions say about the coming price trend!

Top Asia Market Developments

Risk aversion characterized Thursday trade in Asia Pacific markets, echoing the cautious mood seen on Wall Street in the prior trading session. Fears of the US stepping up efforts to blacklist Chinese telecommunication and surveillance companies are fueling greater concern that US-China trade talks could head in the wrong direction.

In Japan, these fears could be seen reflected in the Nikkei 225 which traded about 0.7 percent lower. The nation's benchmark index was weighed down by telecommunication companies, with shares of SoftBank Group down over 5.5%. Elsewhere, the Shanghai Composite and ASX 200 traded about 0.85 and 0.21 percent to the downside.

The uptick in risk aversion ended up benefiting the anti-risk Japanese Yen, as anticipated. On the flip side of the spectrum, the pro-risk Australian and New Zealand Dollars underperformed, with both currencies also being overshadowed by increasingly dovish RBA and RBNZ monetary policy expectations. The British Pound was also little lower given uncertainty to Brexit if UK Prime Minister Theresa May is ousted.

The Remaining 24 Hours

European indexes and the Euro are bracing for volatility as the first round of European Parliamentary elections begins. EUR/USD is vulnerable should a greater share of Eurosceptic parties gain seats. Meanwhile, there will be a slew of Eurozone PMIs that will offer a gauge of economic performance in the regional bloc. Regional data is still tending to underperform, more of the same could sour sentiment.

Euro Stoxx 50 Technical Analysis

S&P 500 futures are pointing lower, hinting that risk aversion may continue through the remaining 24 hours. Taking a look at Euro Stoxx 50 futures, to show after-hours trade, they could soon find themselves testing the rising support line from February on the chart below now that we are aiming lower after a retest of the descending resistance line from late April.

Euro Stoxx 50 Daily Chart

Chart Created in TradingView

FX Trading Resources

— Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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2019-05-23 04:30:00

S&P 500 Is Due a Break and Pound Collapses Alongside May’s Hold

Posted: 22 May 2019 09:07 PM PDT

Trade Wars Talking Points:

Trade wars remains the most pressing fundamental theme as discussions are pushed back, the US considers more bans and China subsidizes
Both growth and political risk interests will flare up ahead led by global PMIs and the start of EU Parliamentary elections
The British Pound continues to defy convention of indecisive markets with a 13-day EURGBP climb befitting the UK’s Brexit, May course

See how retail traders are positioning AUDUSD, EURUSD, S&P 500 along with the other FX majors, indices, gold and oil intraday using the DailyFX speculative positioning data on the sentiment page.

The S&P 500 and US Indices are Due a Break, Follow Through is Another Matter

We are wading into deeper and more tumultuous fundamental waters through the back half of this trading week. While the trade wars (particularly the engagement between the US and China) remains the most capable and active systemic theme to mete out market movement, there is potential for key developments in other channels of critical financial and economic influence that could finally trigger larger swings than the small range checks and false breaks we’ve had to navigate lately. A strong shove in sentiment would be welcome for most traders as despite the persistent lack of direction from the market, there is an overbearing sense of tension through value, stability and exposure. In a technical sense, things are coming to a head – at least in the short-term. The past week has seen the amplitude of indecisive swings diminish even as the fundamental risks have pressed ahead. In layman’s terms, that has resulted in quite a few wedge formations among the different benchmarks of risk appetite.

The most prominent risk asset type in my book are the US equity indices. The S&P 500 represents the group well with a ‘terminal’ pattern that is essentially out of room to maneuver. If the markets are very quiet over the next 24 hour hours, we may keep to the quickly closing technical bounds. That said, even a standard level of activity could force a ‘break’. Yet, the clearance of support or resistance in this case does not guarantee much in the way of follow through. Those that have been keeping tabs will have seen the instance of breaks that stall immediately after the breach far outnumber those that have found some measure of trend to back the promising spark. There is certainly a bias in terms of potential (bearish) and probability (bullish), but momentum will depend heavily upon more directed and unsettling motivation than we have seen as of late.

S&P 500 Emini Futures (2 Hour Chart)

Political Risk and Global Growth Will Garner Headlines and Perhaps Volatility, But Trend?

Taking stock of what could feasibly escalate volatility to full-blown trend, there still exists a primacy in trade wars. With the Trump administration delaying the decision on auto tariffs up to six months and the USMCA discussions starting back up after the metals tariffs were dropped, the focus is fully on the reciprocal actions between the United States and China. Since the escalation of the tariff rate from the two over a week ago, we have seen less dramatic but equally consequential efforts taken through subsidies and strategic restrictions. On the heels of its controversial ban of China’s leading telecommunications conglomerate Huawei, the US is reportedly considering blacklisting five Chinese surveillance companies. For its own part, China is responding to the United States’ reported discussion of subsidies to its struggling farmers with tax breaks for its own integrated circuit makers and software companies. As USDCNH continues to menace the closely-watched 7.0000 mark, it is worth watching less managed measures of market health. USDHKD is a good complement but AUDUSD harbors none of the distortions of the direct benchmarks.

Chart of USDCNH and USDAUD (Daily)

S&P 500 Is Due a Break and Pound Collapses Alongside May's Hold

As we live headline-to-headline on trade wars, there are more discrete events scheduled around political risks and the course of global growth moving forward. Updates on economic activity will be the most prominent feature of our forthcoming landscape. Following the troubled OECD forecast (downgrade to 3.2 percent growth and a halved business investment forecast), robust Japanese 1Q GDP update and pained Chicago Fed US national activity report, we are due a tangible and broad update on the global economy. May readings of economic activity for Japan, the Eurozone and the US are due today. The PMI figures have a strong correlation to official quarterly GDP figures and these priority readings are clearly timely. Individually, this data is unlikely to generate strong moves for local assets; but collectively, a strong or weak showing can generate a broad speculative market response. To be clear, I am of the mind that a stunted reflection of the global economy could generate a far larger slump than an equivalent ‘beat’ could a rally.

Political risks deserve their own fundamental appreciation. The weight of the European Union elections, the UK government’s struggle with Brexit proceedings and Japan’s navigation of the trade wars creates numerous fractures. However, the United States seems to have some of the most consequential pressure of the majors. The pressure on US President Trump through the Special Council’s probe and the House of Representatives drive for his financial records has pushed the White House to pull back its effort to move forward with a potential $2 trillion infrastructure spending program. That fiscal stimulus package is one of the very few options to genuinely fight unfavorable tide changes in global sentiment, so the risk of its failure carries serious consequence.

Dollar, Euro and Yen Have Reason to Struggle While Pound and Aussie Extend Bear Trends

Heading into the Thursday session, there are more assets that will struggle for traction than those that will present a clear bias to exploit for trading purposes. The Euro is perhaps the most misleading benchmark currency. On the traditional data front, we are not lacking for highlights. The Eurozone PMIs are good for economic sway, but the German business sentiment survey will assess systemic risk and the ECB monetary policy meeting minutes will set the stage for a failed normalization of extreme easing. Ultimately, the EU Parliamentary elections is top concern and that will be a drawn-out event risk through Sunday. It is unlikely the market will interpret the implications of this vote in advance given the depth of its influence. That means the Euro may experience bouts of volatility, but it will struggle to develop clear trend. In a similar vein, a lack of commitment to risk trends will see the Yen and its crosses unwilling to follow clear trend.

Chart of EURUSD and CME's Euro Volatility Index (Daily)

S&P 500 Is Due a Break and Pound Collapses Alongside May's Hold

If two of the most liquid currencies are unable to commit to a robust course, I would net set expectations for the US Dollar to miraculously forge its own course. The FOMC minutes this past session reinforced the central bank’s effort to cool the market’s dovish expectations, but that didn’t afford any relief rally for the Greenback. US PMIs carry some weight but not a greater influence than the currency’s role as a top liquidity provider against motivated counterparts. Just as readily as the Greenback would exploit a universal drop in key counterparts (with a rally) anchored alternatives will stunt the Dollar’s progress moving forward.

Chart of DXY Dollar Index and Implied Yield Forecast from Fed Funds Futures Dec'2019 (Daily)

S&P 500 Is Due a Break and Pound Collapses Alongside May's Hold

Not all of the majors seem destined to spin their wheels. The British Pound has suffered a remarkable slide of late. Through Wednesday’s close, the Sterling posted a 13th consecutive drop against the Euro to further the already-record stretch. The news out of the UK was stark. UK Prime Minister May’s plan to muster support for her Withdrawal Agreement hit a wall despite offering a second referendum option for Labour as her own party railed against her solution. Speculation of her near-term departure from the seat of power has swelled but reports that the resignation was essentially at hand were once again beat back. If she meets speculation in the upcoming session, plenty more volatility is owed to the Sterling. If a solution is not offered, a relief rally will be troubled by the anticipation of the EU Parliamentary elections implications for the UK. Another loaded currency with strong potential to move but equal risk of a ominous lurking owing to fundamentals is the Australian Dollar. The perception of Chinese health may not reflect well through USDCNH or the Shanghai Composite, but AUDUSD is a market-determined exchange rate. We discuss all of this and more in today’s Trading Video.

Chart of EURGBP and Consecutive Candle Count (Daily)

S&P 500 Is Due a Break and Pound Collapses Alongside May's Hold

If you want to download my Manic-Crisis calendar, you can find the updated file here.

2019-05-23 02:56:00

Canadian Dollar, Crude Oil Prices Decline to Support. Yen May Gain

Posted: 22 May 2019 04:49 PM PDT

Asia Pacific Market Open Talking Points

Canadian Dollar weakened as crude oil price fall fueled BoC rate cut bets
British Pound weakened on Brexit uncertainty, is Theresa May done for?
Risk of US-China trade war still an overhang for equities, Yen may gain

Trade all the major global economic data live as it populates in the economic calendar and follow the live coverage for key events listed in theDailyFX Webinars. We'd love to have you along.

Canadian Dollar Sinks with Crude Oil Despite Solid Retail Sales Data

The Canadian Dollar brushed aside solid local retail sales data, underperforming against most of its major counterparts on Wednesday. Excluding automotive, companies sold 1.7% more m/m in March versus 0.9% expected and from 0.7% in February. That was the highest since May 2018, but once you accounted for autos, those only rose 1.1% versus 1.2% anticipated. Bank of Canada rate cut bets actually increased by day-end.

Moreover, the Loonie was focused on what was going on with the decline in crude oil prices. It began with a downturn in sentiment during European hours as equities fell. The commodity brushed aside a drop in Russian oil output, which highlights its vulnerability to a decline in stocks due to its sentiment-linked vulnerability. The commodity did also accelerate its decline when US weekly oil inventories increased.

CAD/JPY Versus Crude Oil Prices and Canadian Bond Yields

Chart Created in TradignView

Canadian Dollar Technical Analysis

USD/CAD finds itself wedged between support at 1.3390 and resistance just under 1.3445. The pair struggled to breakout to the upside over the past three weeks when looking at its performance around the peaks in March. A break under support exposes what could be a rising channel of support from February lows.

USD/CAD Daily Chart

Chart Created in TradingView

British Pound, Brexit, FOMC Minutes and the US Dollar

The British Pound continued to depreciate across the board in its prolonged decline since earlier this month over the future of Brexit. Over the past 24 hours, UK Prime Minister Theresa May came under increasingly more pressure to step down which risks throwing another curveball at EU-UK divorce negotiations. Meanwhile, the US Dollar traded sideways as the FOMC minutes stressed the importance of local data.

Thursday's Asia Pacific Trading Session

S&P 500 futures are pointing narrowly lower heading into Thursday's session following a disappointing day on Wall Street. Overnight, the US weighed blacklisting Chinese surveillance firms such as Megvii and Meiya Pico. If this risks escalating US-China trade wars after talks have reportedly been stalling, equities could be vulnerable with the anti-risk Japanese Yen in a potentially good spot to benefit from.

FX Trading Resources

— Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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2019-05-22 23:00:00

What if Mexico, Canada Join the US in the Trade War with China?

Posted: 22 May 2019 02:57 PM PDT

Trade War Talking Points:

After the US lifted metal tariffs on Mexico and Canada, some market participants have suggested the USMCA could form a united front against China in the ongoing trade war
Amid the conflict, Mexico has enjoyed a surge in exports to the United States as manufacturers look for workarounds
Read why 7.00 is the Spot to Watch in USDCNH in the US-China Trade War

What if Mexico and Canada Join the United States in the Trade War with China?

Progress in the US-China trade war has ground to a halt according to officials from both sides, which has rattled investor sentiment. As each party searches for leverage, some market participants have suggested a united USMCA could band together in an effort to alter uncompetitive Chinese trade practices. While Mexico and Canada carry significantly less sway with the Asian nation than the US, their trade balances are anything but negligible.

Data Source: Bloomberg

Over the last 10 years, Canada and Mexico have accounted, on average, for 2.43% and 2.96% of China's total exports. During this time, Canada has seen its share of Chinese exports shrink – from 2.6% in 2009 to 2.3% in 2018. On the other hand, Mexico has seen its trade with China climb from 2.43% in 2009 to 3.36% in 2018, as the economic ties between the two countries grow. Together, the three North American nations account for more than 25% of China's total exports. Conversely, the reliance of USMCA members on Chinese demand is quite limited.

Data Source: Bloomberg

North American demand for Chinese goods has fluctuated over the last decade, reaching a low of 8.62% in 2011 and a high of 10.83% in 2015. More recently, demand has been trending lower and the total percentage of Chinese imports from USMCA nations slipped to 9.31% in 2018.

View A Brief History of Trade Wars for background on economic conflicts like the US-China Trade War.

Therefore, the trade relationship between USMCA and China leaves the latter with few retaliatory options. The nation has already had to explore unconventional methods in its economic bout with the United States, so an engagement with a trading bloc that accounts for 26% of trade inflows but only 9% of outflows could weigh significantly on Chinese trade and the economy by extension. But what are the chances the North American nations band together?

Currently, the chances are low. The USMCA agreement will first have to be passed by US lawmakers – which is anything but certain. This assumes the removal of metal tariffs was the final barrier for agreement from Mexico and Canada. Beyond that, the United States will have to convince its partners to engage in economic conflict with the world's second largest economy – a tall task. However, there is some precedent for cooperation.

Canada and Huawei

On December 1, Huawei CFO Meng Wanzhou was detained in Canada at the behest of the United States. The detention amounted to another front in the US-China trade war – and dragged Canada into the conflict. Since the detention in late 2018, tensions between Canada and China have been strained as two Canadian nationals faced arrest in China alongside a block on imports of canola seeds from two of Canada's biggest exporters.

Early this May, President Trump and Canadian Prime Minister Justin Trudeau talked over the phone to discuss trade. The two reportedly discussed steel and aluminum tariffs, which have since been removed – paving the road to recovery between the two partners. With these developments, Canadian action against China now seems plausible, with multiple reasons for Canada to join forces with the US.

Mexico Has Everything to Gain

While Canada has an axe to grind, Mexico could look to make hay while the sun shines. As increased levies make Chinese exports less attractive to US consumers and less profitable for exporters, corporations will search for alternatives. Last week, Walmart announced it will begin analyzing options to shift its supply chain out of China to avoid price increases and others are likely to follow. While many companies will look to shift production elsewhere in Asia, some have chosen to move closer to home.

Data Source: United States Census Bureau

Already, companies have begun to open up shop in Mexico – with Hasbro and GoPro as two of the more notable examples. The shifting tides have had an immediate impact on recent trade data. Consequently, Mexico is now the United States' top trading partner in goods according to US Census Bureau data. Further, US imports of Mexican goods rose 10% in 2018 – the most since 2011.

That said, the country's best course of action may be to stay off the radar and hope the trend continues. In the year-to-date, USDMXN has slipped -3.3% and the Peso could etch greater gains should exports to the United States continue to climb.

While the likelihood that either Mexico or Canada directly engage in the trade war is minor, its impacts can be observed in shifting trade balances and fluctuating currency rates. But, with the Chinese economy hinged to exports, the addition of two import-heavy belligerents could prove an insurmountable obstacle for Xi Jinping and the People's Bank of China – were it to occur.

–Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

DailyFX forecasts on a variety of currencies such as the US Dollar or the Euro are available from the DailyFX Trading Guides page. If you're looking to improve your trading approach, check out Traits of Successful Traders. And if you're looking for an introductory primer to the Forex market, check out our New to FX Guide.

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2019-05-22 21:15:00

EU Elections Highlight EUR Crosses

Posted: 22 May 2019 02:21 PM PDT

EURO CURRENCY VOLATILITY – TALKING POINTS

The EU will hold parliamentary elections starting this Thursday through Sunday. According to the Financial Times latest poll, the European People's Party coupled with the Progressive Alliance of Socialists and Democrats look set to lose their combined majority. If polls are indicative of future results, EUR price weakness may persist if the rise of populism and Euroscepticism is confirmed.

EURUSD, EURGBP, EURJPY – IMPLIED VOLATILITY AND TRADING RANGES

Unsurprisingly, rising implied volatility measures derived from EURUSD, EURGBP, and EURJPY forex options pricing suggests Euro traders brace for volatility ahead of EU parliamentary election results.

EURUSD PRICE CHART: DAILY TIME FRAME (DECEMBER 27, 2018 TO MAY 22, 2019)

EURUSD is estimated to trade between 1.1215 and 1.1099 with a 68 percent statistical probability over the next week according to 1-week implied volatility of 4.43 percent. The upper bound of the 1-standard deviation band surrounding spot prices aligns closely with technical resistance posed by the 23.6 percent Fibonacci retracement level from its year-to-date high and low in addition to the bearish downtrend line around the 1.12 handle.

This price level has recently served as a major area of confluence and could be retested if the European People's Party and Progressive Alliance of Socialists and Democrats can retain majority in Parliament. On the contrary, the loss of seats could push EURUSD to target 2019 lows near the 1.11 handle.

EURGBP PRICE CHART: DAILY TIME FRAME (DECEMBER 27, 2018 TO MAY 22, 2019)

EURGBP has been on a 16-day tear of consecutive gains in response to the latest Brexit developments causing turmoil in the UK and Pound Sterling. Judging by EURGBP 1-week implied volatility of 6.14 percent, spot prices are anticipated to trade within a 127 pip range between 0.8873 and 0.8747 over the next week with a 68 percent statistical probability. Although, the recent ascent in spot EURGBP could be at risk of reversing lower if the Europe of Freedom and Direct Democracy Party – also known as the Brexit party – gains traction as it would give a blow to EU proponents.

EURJPY PRICE CHART: DAILY TIME FRAME (DECEMBER 27, 2018 TO MAY 22, 2019)

Spot EURJPY has been under pressure since mid-April along with several other 'risky' currencies relative to the Japanese Yen as ongoing US China Trade War tension sparked a move to safe-haven currencies. This trend could continue and send EURJPY toward the 122.00 handle where the upward-sloping trendline extended from the January 2ndJPY flash-crash bottom to the intraday low on May 15th could be tested along with the 61.8 percent Fib.

That being said, EURJPY 1-week implied volatility of 5.89 percent used to calculate the currency pair's 1-standard deviation yields a trading range at 122.22-123.92 with a 68 percent statistical probability. Loss of majority power between the European People's Party and Progressive Alliance of Socialists and Democrats could shudder Euro bulls and push EURJPY back on its more recent downtrend. The risk of further downside in spot EURJPY is also posed by the threat of looming global risk trends and deteriorating market sentiment.

– Written by Rich Dvorak, Junior Analyst for DailyFX

– Follow @RichDvorakFX on Twitter

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2019-05-22 20:50:00

Investors Turn Defensive as Trade War Risk Bites

Posted: 22 May 2019 11:46 AM PDT

S&P 500, US CHINA TRADE WAR, RISK APPETITE – TALKING POINTS

Stock market sentiment sours as trade war uncertainty bites
S&P 500 sector performance attribution could hint at further weakness despite stocks recovering from month-to-date lows
Equity traders may find solace in more liquid and 'non-directional' forex markets if tensions escalate further
Find out major differences between Trading Stocks and Forex

The S&P 500 has edged nearly 3 percent lower since President Trump tweeted earlier this month his intent to increase tariffs on China. Although the stock market has recovered slightly from the lows of its recent rout, market sentiment appears damaged still as suggested by relative sector performance.

S&P 500 RETURNS BY SECTOR – MAY 03 CLOSE TO MAY 22 INTRADAY (CHART 1)

According to SPDR ETF returns of the major S&P 500 sectors since the May 3rd close – the Friday preceding Trump's trade war tweets on Sunday, May 5th – the technology sector (XLK) has significantly lagged the broader market. This is a stark contrast to year-to-date equity returns considering the sector has advanced roughly 20 percent which compares to the S&P 500's overall 14 percent gain so far in 2019.

Seeing that tech stocks comprise the largest sector of the S&P 500 by far, further weakness in technology companies like Apple (AAPL), Microsoft (MSFT) and Google's parent Alphabet (GOOG) threatens to exacerbate broader market weakness. This is due to the fact that performance of these 'mega-cap' tech darlings contributes significantly to the overall return of the market-cap weighted S&P 500 index.

S&P 500 RETURNS BY SECTOR – MAY 03 CLOSE TO MAY 22 INTRADAY (CHART 2)

With tech now widely underperforming the S&P 500, the "shifting winds" could indicate a change in investor sentiment as traders begin to favor defensive sectors like utilities (XLU), consumer staples (XLP) and healthcare (XLV). This is because companies in these non-cyclical sectors generally possess characteristics like stable cash flows and cheap valuations which tend to outperform during periods of elevated market uncertainty which leads to investor pessimism and risk-aversion.

Additional evidence of waning investor sentiment is provided by the AAII Sentiment Survey which shows that the Net Sentiment Index has dropped from 39.63 on May 2nd to 30.88 as of May 16th. Also, fading demand for comparably riskier high-beta stocks with unstable profitability like Tesla (TSLA) or new IPO listings like Lyft (LYFT) and Uber (UBER) could similarly signal shifting stock market sentiment to a less optimistic view. Moreover, the recent lack of risk appetite by investors is hinted at by the sharp drop in Treasury yields which has bolstered gold prices.

US China trade war tension risks further escalation as negative rhetoric endures following the breakdown in negotiations between the two countries earlier this month. Aside from tariffs, Chinese technology companies like Huawei are being targeted by the United States. If China decides to retaliate, supply chains and revenue sources of American tech companies could be in jeopardy.

Sell in May and Go Away Stock Market Anomaly: Should You Sell Stocks?

This possibility threatens a bearish knee-jerk reaction from US investors and has potential to snowball into a sharp selloff. That being said, the erosion of confidence in equities may continue even if the overall index holds should technology and other speculative sectors continue to flag.

Worth mentioning amid these concerns is the potential benefit equity traders may find from currency market liquidity and other advantages forex trading can offer such as its 24-hour session and natural 'non-directional' nature. The continuous forex market helps to significantly reduce the instances of large gaps that are frequent and sometimes extreme in equities as seen in the recent series of S&P 500 gaps to the downside in response to US China trade war headlines.

Another underappreciated aspect of FX relative to equities is the fact that there is always a 'long leg' and 'short leg' to any currency pair. For most participants in active stock trading, the predominant approach is to only pursue various long-only strategies which does not align well with return probabilities or volatility.

– Written by Rich Dvorak, Junior Analyst for DailyFX

– Follow @RichDvorakFX on Twitter

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2019-05-22 17:30:00

Crude Oil Price Drop Helping USDCAD Hold Range Support

Posted: 22 May 2019 10:31 AM PDT

Crude Oil Price Talking Points:

Crude Oil prices have pulled back after the weekly energy inventory reports, which showed supplies growing faster than expected amid rising tensions between the US and Iran.
Pullback in oil prices is helping USDCAD hold support and maintain its sideways range dating back to April 23.
Recent changes in trader positioning suggest that a range break can't be ruled out for USDCAD in the near-term.

Looking for longer-term forecasts on Oil prices? Check out the DailyFX Trading Guides.

Crude oil prices have taken a sharp turn lower midweek after the US Department of Energy inventory figures for the week ended May 17 showed a larger than expected build in supplies. According to the DOE weekly report, crude oil inventories jumped by 4740K barrels versus an expected decline of -1283K. Similarly, gasoline inventories, on the eve of the summer holiday driving season in the US, rose by 3716K barrels versus an expected decline of -850K.

The surprising rise in energy inventories comes as geopolitical tensions between the US and Iran have ratcheted higher in recent weeks. Just last week reports emerged that Iran-linked military forces attacked US-based Saudi Arabian oil tankers in the Strait of Hormuz – a chokepoint for the energy industry, as 20% of global oil production passes through the waters between the Gulf of Oman and the Persian Gulf.

Now that crude oil prices have pulled back to a fresh weekly low at 61.05, it's worth taking a step back and examining longer-term charts, as there are potential implications for oil-sensitive currencies like the Canadian Dollar.

Crude Oil Technical Analysis: Weekly Price Chart (April 2018 to May 2019) (Chart 1)

Traders watching long-term crude oil price charts will take notice of a bearish piercing candle forming on the weekly timeframe; should we see a close below 60.63 on Friday, then we would have a bearish outside engulfing bar in place. Regardless of either a bearish piercing candle or a bearish outside engulfing bar, momentum is starting to shift to the downside.

Crude Oil Technical Analysis: Daily Price Chart (April 2018 to May 2019) (Chart 2)

Crude Oil Price Drop Helping USDCAD Hold Range Support

The daily crude oil price chart better highlights the bearish momentum emerging in crude oil prices. With today's price action, crude oil is now below its daily 8-, 13-, and 21-EMA envelope. Similarly, daily MACD has turned lower below its signal line into bearish territory, while Slow Stochastics have turned lower as well (albeit still above its median line). A return to the May 2019 low at 60.02 should not be ruled out over the coming sessions.

IG Client Sentiment Index: Crude Oil Price Forecast (May 22, 2019) (Chart 3)

Crude Oil Price Drop Helping USDCAD Hold Range Support

Crude oil: Retail trader data shows 49.9% of traders are net-long with the ratio of traders short to long at 1.0 to 1. The number of traders net-long is 6.2% higher than yesterday and 8.1% lower from last week, while the number of traders net-short is 11.8% lower than yesterday and 4.3% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests crude oil prices may continue to rise. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed crude oil trading bias.

USDCAD Technical Analysis: Daily Price Chart (April 2018 to May 2019) (Chart 4)

Crude Oil Price Drop Helping USDCAD Hold Range Support

With crude oil prices turning lower, the oil-sensitive Canadian Dollar has come back under pressure, perhaps a sign that the goodwill around the USMCA progress has started to wane. Since the close on April 23, USDCAD prices have closed every session between 1.3377 and 1.3521, and with the daily bullish hammer forming today, the range appears ready to hold its ground. Concurrently, the USDCAD price rebound today has found support at the uptrend from the February, March, and April swing lows.

Should USDCAD move above 1.3521, we would again be looking at topside break of the month-long range, while a drop below 1.3377 would constitute a downside break of the consolidation as well as the uptrend from February, March, and April 2019 swing lows.

IG Client Sentiment Index: USDCAD Price Forecast (May 22, 2019) (Chart 5)

Crude Oil Price Drop Helping USDCAD Hold Range Support

USDCAD: Retail trader data shows 45.5% of traders are net-long with the ratio of traders short to long at 1.2 to 1. The number of traders net-long is 5.7% higher than yesterday and 47.8% higher from last week, while the number of traders net-short is 3.6% lower than yesterday and 33.3% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USDCAD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current USDCAD price trend may soon reverse lower despite the fact traders remain net-short.

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— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail at cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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2019-05-22 16:45:00

XAU Breakdown Stalls at Technical Support

Posted: 22 May 2019 09:54 AM PDT

In this series we scale-back and look at the broader technical picture to gain a bit more perspective on where we are in trend. Gold is virtually unchanged for the week thus far, with price now testing a major technical support zone we've been tracking for months. These are the updated targets and invalidation levels that matter on the XAU/USD weekly price chart. Review this week's Strategy Webinar for an in-depth breakdown of this setup and more.

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Gold Weekly Price Chart (XAU/USD)

Notes: In my last Gold Price Outlook we warned to be, "on the lookout for downside exhaustion here near-term," as price was attempting to confirm a weekly close below confluence support at 1275/76– a region defined by the yearly opening-range low and the 38.2% retracement of the 2018 advance. Nearly three-weeks later and price has failed to mark a weekly close below- note that the August trendline also converges on this zone over the next two weeks and we’re looking for a resolution.

Gold posted an outside-weekly reversal off fresh monthly highs last week with the sell-off taking gold prices back into this key zone. A weekly close below is still needed to fuel another leg lower targeting more significant support / broader bullish invalidation at 1253/58. Monthly open resistance stands at 1283 backed by the May range high at 1303– a close above would be needed to validate the turn targeting the 2019 high-week close at 1327.

For a complete breakdown of Michael's trading strategy, review his Foundations of Technical Analysis series on Building a Trading Strategy

Bottom line: The immediate focus is on the weekly close in relation to the 1275/76 zone. From a trading standpoint, a good spot to reduce short-exposure / lower protective stops. A weekly close below would leave the focus on 1253/58– look for a bigger reaction there IF reached. I'll publish an updated Gold Price Outlook once we get further clarity in near-term price action. Review our latest Gold 2Q forecasts for a longer-term look at the technical picture for XAU/USD prices.

Even the most seasoned traders need a reminder every now and then- Avoid these Mistakes in your trading

Gold Trader Sentiment

A summary of IG Client Sentiment shows traders are net-long Gold – the ratio stands at +4.32 (81.2% of traders are long) – bearish reading
The percentage of traders net-long is now its highest since November 25th
Long positions are 0.2% lower than yesterday and 11.6% higher from last week
Short positions are 8.8% lower than yesterday and 29.8% lower from last week
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Gold prices may continue to fall. Traders are further net-long than yesterday & last week, and the combination of current positioning and recent changes gives us a stronger Gold-bearish contrarian trading bias from a sentiment standpoint.

See how shifts in Gold retail positioning are impacting trend- Learn more about sentiment!

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Previous Weekly Technical Charts

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— Written by Michael Boutros, Technical Currency Strategist with DailyFX

Follow Michael on Twitter @MBForex

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2019-05-22 16:30:00