Over the last few weeks, price action in virtually all the principle capital markets has been characterized by two aspects, namely indecision and a lack of direction, and the question that many traders are asking themselves this morning, is when we are we likely to see a breakout from the current sideways consolidation. The answer may come this week as we have a full schedule of announcements and economic releases that should provide some much needed market momentum.
Last week the US dollar traded in a relatively tight range, and with no major news from the US, the markets moved sideways with sentiment falling moderately as both US Treasury yields and equity markets drifting lower as the VIX climbed modestly higher. From a technical perspective the VIX on the daily chart has now created a firm platform of support in the 13.50 area, and with several isolated pivot lows now defining this level, any sustained move higher for equity markets, will need to see this level breached with a clear break and hold. The VIX on Friday closed at 15.95. below the two isolated pivot highs which define the upper level of the current consolidation region, and any break here could see a test of the 19.20 level of late August. Until then, we have to wait for a breakout from the current sideways congestion, and this weeks releases could be the catalyst.
This week sees the release of several key numbers in the US with September CPI on Tuesday leading the way. In addition, there are several important speeches from FED members, and the markets will be watching for further clues as to whether QE3 is likely to be adjusted in any way in the short to medium term. Any changes may be triggered by the recent positive news for jobs which saw the unemployment rate drop by 0.5% coupled with four year lows in the jobless claims. Both of these surprised the markets, and probably the FED, and since then, markets have been anticipating some reaction from the FED which is one of the many factors causing the current sideways drift.
Another, is the fact that many investors are now withdrawing from equity markets on the expectation of a sharp sell off in the short term, and in addition with the inflated and entirely false situation in the bond markets, this has added to the general lack of liquidity and volatility in all the major markets. Indeed, with so many market players now looking to short the market, this is simply adding weight to the view that the reverse will happen, catching most traders on the wrong side once again. This is why the VIX is so powerful in revealing the internals of the market, based at is on on the underlying buying and selling in the options market. Most traders and speculators fail to appreciate the importance of this single index, which reveals more about market sentiment and money flow than any other. Trade without the VIX and you are in effect trading blind, whatever the market, the instrument or the time-frame you trade.
Moving to the currency markets, the Eurozone continues to dominate and last week the S & P ratings agency cut Spain’s sovereign debt rating to one level above the so called ‘non investment’ grade, and since then the reaction in the bond markets has been positive. Spanish yields fell to 5.65% mid week on the news, and also pulled the S&P into line with Moody who now rate Spain marginally above junk bond. The markets view is that this has increased the likelihood of Spain requesting financial assistance from the ESM which in turn would then trigger a bond buying program by the ECB. The effect on the Euro was of course positive, with the short sellers being squeezed once again, as the EUR/USD closed the week pushing back to re-test the 1.3000 level once again. In order to breach this level, the pair will need to clear minor resistance just below However on the daily chart, and just like many other markets on the longer term timescale, the pair are in sideways consolidation at this level, and until we see a clear break and hold above the 1.3100 region, any bullish momentum is likely to struggle.
Away from US markets and to the world economic picture, the news this week will be dominated by China and Australia. For China the markets will focus on four releases. The September Trade Balance, consumer and producer prices, industrial production and finally retail sales. Each of these is likely to have a huge impact this week across all market sectors. In addition, the Chinese Q3 GDP is also scheduled for release, with the markets expecting a further slowing in growth, with the forecast being a fall of 0.2% to 7.4%. If this is coupled with a narrowing in the Trade Balance, and negative news for both prices and industrial production, then the People’s bank of China may be forced to take action with further stimulus. This is what the markets are expecting this week from the Chinese, and of course any slowdown is already being seen in other markets, such as Australia, which has a close link. Indeed the RBA expressed concern over the strength of the Australian currency in it’s recent policy statement following the surprise cut in rates, as the currency wars, and the so called ‘race to the bottom’ resumes once again around the world. Whilst bad news from China may trigger initial weakness, this may be short lived, with market stimulus then moving closer, which may result in Aussie dollar strength in the short to medium term. From a technical perspective the AUD/USD on the daily chart appears to have found some short term support in the 1.0150 area, where an isolated pivot low has seen the pair recover to close last week at 1.0231. Despite this, the short term outlook remains bearish with our trading indicator remaining red, and the three day trend also bearish, with selling volumes on both time-frames firmly in place.
By Anna Coulling