Risk Sentiment was hurt again overnight after Iran launched missile attacks on Iraqi bases housing US troops. Equities turned back down, while oil, gold and safe-haven currencies gained. The greenback was aided by the better-than-expected ISM non-manufacturing PMI for December. As for today, ahead of Friday’s official employment report for the month, USD-traders may pay some attention to the ADP report.
Equities Turn South, Oil and Gold Rally, as Iran Attacks US Bases in Iraq
The dollar traded higher against all but one of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It gained the most against AUD, NOK, and SEK, while it eked out the least gains versus CHF and CAD. The currency against which the greenback underperformed was JPY.
The relative strength of the safe-havens JPY and CHF suggests that risk sentiment was hurt again at some point. Major EU bourses ended their trading mixed, while the US ones were slightly lower, with investors turning cautious again after Iran’s Supreme National Security Council said that it is assessing 13 retaliation scenarios against the US, warning that even the weakest one will be a “historic nightmare”. Indeed, during Asian trading hours, Iran launched missile attacks on Iraqi bases housing US troops in response to the US strikes on Friday, which resulted in the killing of an Iranian commander. Asian indices were a sea of red today, with Japan’s Nikkei 225 and China’s Shanghai Composite losing 1.57% and 1.22% respectively.
In the wake of the attacks, oil prices jumped as fears of supply disruptions returned, but they were quick to give back a decent portion of those gains, perhaps as tweets from US President Trump and Iran’s foreign minister served to calm somewhat the markets, at least for now. The US President said, “All is well” and “So far, so good!” referring to the assessment of casualties and damages that was taking place. Iran’s minister said that they do not seek escalation, but they will defend themselves against any aggression. What’s more, a US official said that the US was not aware of any casualties, but the situation is still being assessed. Due to its safe-haven status, gold soared as well, briefly overpassing the 1600 mark, to test levels last seen in March 2013.
Iran warned the US to withdraw its troops from the region if they want to avoid further escalation, while a senior official in the Iranian Supreme Leader’s office said that this was the “weakest” of several retaliation scenarios. Now, it remains to be seen how the US will react and whether Iran will launch more attacks in case the US refuses to withdraw its military personnel.
As for our view, the risk for further escalation remains high, something that could keep oil and gold prices supported. Equities could come under renewed pressure if more attacks take flesh, while the franc and the yen could benefit further. For risk appetite to return, the two sides may have to resolve the issue in peace and avoid fueling fears of a full-blown war. In such case, the safe havens are likely to pull back, and equities may rebound again. With regards to oil, things may not be so straightforward. Easing of tensions may trigger further correction, but the latest optimism surrounding the US-China trade saga, with the signing of a “Phase One” deal looming very soon, could keep the black liquid in an uptrend.
Back to the currencies, the dollar was aided by the ISM non-manufacturing PMI for December, which came in better than anticipated. Specifically, the index rose to 55.0 from 53.9, with the forecast pointing to a smaller increase, to 54.5. Although this may have eased some concerns with regards to the US economy, according to the Fed funds futures, market participants still anticipate another rate cut by the Fed in October. Perhaps they prefer to wait for Friday’s employment report before they adjust those bets.
WTI Crude Oil – Technical Outlook
WTI soared overnight following the Iranian attacks, breaking above Monday’s peak of 64.75. However, the rally was stopped slightly below the 65.70 hurdle, and then, the black liquid retreated to give back a large portion of the attack-related gains. Overall, WTI continues to trade above the upside support line drawn from the low of November 29th, and thus, we would consider the near-term outlook to be cautiously positive.
The current setback may continue for a while more, perhaps for the price to test the 62.15 support, or even the aforementioned upside line. The bulls may decide to take charge from near those zones and perhaps drive the battle back up towards Monday’s peak, at around 64.75. If they manage to break that level, we may see them targeting the overnight high again, at around 65.70.
Taking a look at our short-term oscillators, we see that the RSI hit resistance near the 70 line and turned down, while the MACD, although positive, lies below its trigger line, pointing down as well. Both indicators detect declining positive momentum and support our view for some further retreat before the bulls decide to take charge again.
In order to start examining whether the buyers have dropped their weapons, we would like to see WTI breaking below the pre-mentioned upside support line. Such a move may wake up the bears, who could decide to push the price down, towards the lows of December 31st and January 2nd, near 60.65. Slightly below that zone lies the 60.10 support, the break of which may extend the decline towards the low of December 13th, at 59.25.
Gold – Technical Outlook
XAU/USD surged as well overnight, breaking above Monday’s high of 1588, to hit resistance at 1611, a level last seen back in March 2013. Then, it retreated back near 1588. On the 4-hour chart, the precious metal is printing higher peaks and higher troughs above an upside support line drawn from the low of December 22nd, and therefore, we would see a positive near-term picture.
That said, before the bulls decide to take the reins again, we could see the current retreat extending for a bit more. A dip back below 1588 could confirm the case and may allow declines towards the 1571 support, or the aforementioned upside line. Traders may place some buy orders near those territories and may decide to return the metal back above 1588, perhaps aiming for the 1611 hurdle again.
Shifting attention to our short-term momentum studies, we see that the RSI topped slightly above its 70 line, while the MACD lies above both its trigger and zero lines, but shows signs that it could also start topping. These signs enhance our view that some further retreat may be on the cards before the next positive leg.
In order to start examining the bearish case though, we would like to see a clear dip below 1555. Such a dip would also bring the metal below the upside support line and may trigger declines towards the 1530 zone, which is marked near the inside swing high of January 2nd. Another break, below 1530, could extend the fall toward the low of that day, at around 1516.
As for Today’s Events
Ahead of Friday’s NFPs, we get the US ADP employment report for December. The report is expected to show that the private sector has gained 156k jobs, more than doubling November’s 67k print. This could raise speculation that the NFP number, due out on Friday, may also come near its forecast, which is at 160k. However, we have to repeat for the umpteenth time that the ADP is far from a reliable predictor for the NFP number. Even in November, the ADP revealed a 67k job gains, but nonfarm payrolls came in at 266k. Taking into account data from January 2011, the correlation between the two time-series at the time of the release (no revisions are considered) has now declined to 0.41%.
With regards to the energy market, the EIA (Energy Information Administration) report on crude oil inventories for last week is coming out. The forecast points to a 3.572mn barrels slide, following a 11.463mn tumble the week before. However, bearing in mind that yesterday, the API report revealed a 5.945mn slide, we would consider the risks surrounding the EIA forecast as tilted somewhat to the downside.
On the political front, UK PM Boris Johnson will meet with the EU Commission President Ursula von der Leyen ahead of the kick-start of the negotiations over trade, which will begin after the UK formally exits the EU on January 31st. With Johnson holding a hard line that any trade accord should be found before December 2020, this meeting could send some first vibes on how the officials talks will start rolling.
As for tonight, during the Asian morning Thursday, Australia’s trade balance for November is coming out, as well as Chinas CPI and PPI rates for December.
We also have two central bankers speaking today: ECB Vice President Luis de Guindos and Fed Board Governor Lael Brainard.
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