WTI Leads the Way

It’s certainly been lively in the markets this week. Yesterday the dollar posted a fresh 2019 high versus the EUR as further evidence emerged that the German manufacturing economy simply isn’t recovering. However, those dollar gains were actually very short lived because later in the session the latest US PMI numbers were surprisingly weak too- more on the dollar in a minute.

On Wednesday WTI oil started to fall back, from highs around $63.75 on Monday, closer to $60 a barrel by the close that day. This move lower was extended again yesterday and the near 10% drop, from the highs this week, to as low as $57.33 yesterday afternoon was well in advance of any moves seen the equity markets. Naturally, and eventually those equity markets did play catch up, as the S+P dropped back close to 2800 yesterday.

It is often hard to fathom which of these two, still closely correlated markets, leads the other. However, this week it’s clear that WTI has been the front runner and with that in mind let me once again share with you a comparison chart of the two.

The green line on this chart denotes the price of the S+P 500 and the white line is the price of WTI. I have also drawn on here the 200dma (daily moving average) for WTI (at $60.40) and that’s denoted by the yellow line. The WTI close below this yellow line yesterday was not a technically positive indicator. So, with that in mind perhaps its worth mentioning that a similar moving average on the S+P would come in nowat 2776. Consequently, a daily close below that level lookslike something to pay close attention to as well.

Turning back to the dollar, where the USD Index posted a fresh 2019 high yesterday at 98.37. That was just above its previous 98.33 high set in April. However, because of thatmuch weaker than expected US PMI data yesterday, the US currency fell back sharply into the close, posting a technically negative outside day reversal in the process. The other impact of that surprisingly weak US economic data is the impact it had on US yields which tumbled around 10bp in the 10years following fresh concern surrounding the prospects of a US recession.

Understandably, that move was also replicated on the EURUSD which did post, what was actually a fresh 2year low yesterday afternoon, at 1.1107, but then rebounded to end the session at 1.1181- a level it’s not far off from as I write this morning. Those early session gains for the USD were of course partly driven by the GBPUSD which traded to as low as 1.2606 yesterday morning. The price is higher this morning, but not yet significantly so and that’s largely due to a further push lower in the GBPEUR. If you look at a chart of that this morning too you can see how this has dropped off a cliff in recent sessions.

The close on this one yesterday at 1.1320 was clearly below its 200dma as defined by the yellow line you can see on this chart, currently at 1.1378. So far though, the price has remained above the 1.1300 level which does look to be providing a degree of support for the time being.

Of course the move lower in the GBP over the past 3 weeks is a total sea change, not just against the EUR, but versus the USD as well and naturally we can thank the political situation here for that. I think its fair to say that the prospect of a no deal Brexit looks like it has finally dawned on the marketswhere perhaps so many politicians are still in denial.

This appears to be in stark contrast in respect of how themarkets seem to be addressing the outlook for a US/China trade deal. Quite why this is so, I am not sure, but perhaps it’s just another case of hope outweighing reality and eventually the penny will drop? Personally, and from all I have seen most recently, there’s little evidence to suggest otherwise.

As I sign off here ahead of the latest UK retail sales data, the dollar is losing more ground with the EURUSD testing 1.12 and the GBPUSD moving, back closer to 1.27. Earlier this week, I noted again that certain reserve managers were continuing to soak up downside EURUSD flow and right now that clearly looks like it has had an impact, bearing in mind the rejection of multiyear lows yesterday and the subsequent rebound continuing again this morning.

Naturally, lower US yields aren’t helping the dollar much either right now and that’s perfectly understandable. However, trying to square that with the US equity markets looks out of line to me because if fresh concerns over the US economy are behind the dent in currency, then the very same shouldn’t have an opposite impact on the equity markets. It would surely be most odd if that were to continue?

That leads back to the headline today, because whilst many are still scratching around for reasons behind the sharp drop off in oil prices this week, it might be more than just US inventory build up that has that market rethinking the way forward. That’s because, as I already noted, Oil was in front of the pack this week. Hence, if its clues you’re after, then surelyone market to keep a very close eye on in the day’s and weeks ahead.

Important Economic Releases Due Today

24/05- 9.30am UK April Retail Sales Report

24/05- 1.30pm US April Durable Goods Orders