market outlook what to expect next week 1835162016

City Index Market Outlook  

 

• Main themes

• Look Ahead: Indices

• Look Ahead: Stocks

• Look Ahead: Commodities

• FX Technical Outlook

 

1. Main Themes:

US: Clinton’s Presidency not necessarily a boon for US markets

The final Presidential debate is over, and with less than three weeks to go before the election on November 8^th, it appears that Hillary Clinton may have done enough to win the Presidency with only 10 Electoral College votes (at the time of writing) left to win. It appears that she is pulling ahead in the race to attract support from the major swing states, especially Florida, and this could put Hillary Clinton back in the White House, but this time not as First Lady.

US assets have had a fairly muted reaction to the shift in the polls in favour of Clinton. The dollar pullback in recent days and the retreat in 10-year Treasury yields from the key 1.8% level suggests that the markets could stay range-bound in the run up to the election. Likewise, US stocks have also traded sideways in recent days. We believe that two things could limit the dollar rally, and potentially the US equity market rally in the aftermath of a Clinton victory. Firstly, the Fed may only hike rates once in the coming months, most likely at the December meeting, and could then leave rates on hold for 2017, which is what the market is currently pricing in. Unless Yellen and co. hint that rates will rise at a faster pace, then it could be tricky for the buck to extend its recent rally. Secondly, if Clinton’s Presidency heralds a lurch to the left in a bid to win the support of the Bernie Sanders supporters then we could see equity markets in the US start to wobble.

Overall, the outcome of this Presidential race is looking increasingly sewn up for Clinton, however the impact on the markets remains unclear. This could keep US assets range-bound between now and the election on November 8th.

Asia: China unlikely to intervene in the renminbi (SG and AU)

Two things are worth noting as we look towards a new week. Firstly, China’s currency remains close to a 6-year low versus the USD, with USDCNY above 6.74. This suggests that the Chinese authorities have not intervened to prop up its currency since coming back from the public holiday. We think that the Chinese authorities may be reluctant to step back in to prop up the CNY at this stage for a couple of reasons: firstly, the PBOC’s balance sheet has contracted by 10% in 2 years as the PBOC has used FX reserves to buy the renminbi and increase its value at various stages. A 10% decline in the size of a balance sheet the size of China’s is a serious chunk of change. The PBOC may not want to see its balance sheet decline too much more, lest it tightens monetary conditions too much and chokes off economic growth. Secondly, the US government has been on hold during election season, so China has not come under international pressure to boost the value of its currency. We may not see the US, who have labelled China as a currency manipulator in the past, pile the pressure back on Beijing to boost the value of its currency until next year, once the new President is sworn in. Thus, the PBOC could save its arsenal of CNY-supporting measures for the future, and we may see further CNY weakness in the coming weeks, particularly if the dollar rally is extended.

Looking ahead to next week’s BOJ meeting, a BOJ member said last week that pushing back its forecast for when the economy will meet the BOJ’s 2% inflation target is not a way to ease monetary policy further. The BOJ seems to be prepping the market for a neutral statement at its meeting that concludes Nov 1^st, and we do not expect the BOJ to announce any increase in its stimulus programme before year end. With Brexit and US Presidential risk taking a back seat after hogging the limelight for so long, we think that fundamentals could come back into focus in the coming weeks. Thus, any signs that the BOJ could remain on hold and will not ease policy further could boost the yen against the euro, where we think policy will be eased further, and potentially against the USD, as we believe the Fed could tone down any hawkish sentiments after it potentially hikes rates in December. Relative value could the new buzzword in the global FX market.

2. Look Ahead: Indices

On a firm footing for further potential upside

Nikkei 225 – Poised for a potential bullish breakout

Source: City Index

Key Levels (1 to 3 weeks)
Intermediate support: 17020
Pivot (key support): 16700
Resistances: 17500 & 18000
Next support: 15830

Medium-term (1 to 3 weeks) Outlook

The Japan 225 Index (proxy for the Nikkei 225 futures) has continued to inch higher as expected and met our first medium-term upside target resistance at 17165. Please click here for a recap on our previous weekly outlook.

Upside momentum remains intact as the weekly RSI oscillator continues to inch higher above its support and the 50% level. Therefore, the Index may now stage a bullish breakout from the significant resistance of 17500 (descending trendline from 21 June 2015 & range top in place since 24 January 2016) to target the next resistance at 18000 in the first step.
However, failure to hold above the tightened medium-term pivotal support at 16700 is likely to invalidate the preferred bullish bias for a deeper decline towards the next support at 15830 (former medium-term swing high areas of 30 June/04 July 2016 & close to the 61.8% Fibonacci retracement of the up move from 24 June 2016 low to 02 September 2016 high).

Hang Seng Index – 23550 resistance remains the potential upside trigger 

Source: City Index

Key Levels (1 to 3 weeks)
Pivot (key support): 23000
Resistances: 23550 (upside trigger), 24500 & 25400
Next support: 21650/380

Medium-term (1 to 3 weeks) Outlook

The Hong Kong 50 Index (proxy for Hang Seng Index futures) has managed to hold above the 23000 medium-term pivotal support and inched higher towards the 23550 upside trigger level.
No major changes in technical elements and 23550 needs to be surpassed to open up scope for a potential upleg to target the next resistances at 24500 follow by 25400.
On the other hand, a break below the 23000 medium-term pivotal support is likely to see a deeper slide towards the next support at 21650/380 (the pull-back support zone of the former “symmetrical triangle range” bullish breakout, 61.8% Fibonacci retracement of the up move from 24 June 2016 low to 09 September 2016 high & the ascending trendline in place since 11 February 2016 low).

ASX 200 – Downside target at 5360 almost met, potential start of a new upleg

Source: City Index

Key Levels (1 to 3 weeks)
Intermediate support: 5415
Pivot (key support): 5380
Resistances: 5500/5520 & 5580
Next support: 5320/300

Medium-term (1 to 3 weeks) Outlook

The Australia 200 Index (proxy for the ASX 200 futures) has declined as expected and almost hit the expected downside target/support at 5360 (printed a low of 5379 on 18 Oct). Please click here for a recap on our previous weekly outlook.

Current technical elements are now suggesting that the corrective wave 2/decline is likely to have ended at the 5379 low on 18 October 2016 and a medium-term up move is in progress. As long as the 5380 medium-term pivotal support holds, the Index is likely to shape a potential up move to retest the 5500/5520 intermediate resistance and a break above it may see a further rally to target the 5580 medium-term swing high area of 01 August 2016.

However, failure to hold above the 5380 medium-term pivotal support is likely to see a U-turn for an extension of the corrective decline towards the next support at 5320/300 (61.8% Fibonacci retracement of the up move from 14 September 2016 low to 04 October 2016 high & the lower boundary of the medium-term ascending channel in place since 11 February 2016 low).

Charts are from City Index Advantage TraderPro as at Thurs, 20 Oct 2016

3. Look Ahead: Stocks

OCBC (SGX: O39) – Imminent potential bullish breakout

 Key elements

• The long-term downtrend for OCBC remains intact since the bearish breakdown from the 10.90 major top formed in May 2013 to April 2015 (see weekly).
• In the medium-term (1 to 3 weeks), OCBC may see another round of corrective “relief rebound” as momentum indicators (daily & weekly RSI) are indicating a potential revival of upside momentum.
• Based on the Elliot Wave Principal and fractal analysis, the recent “symmetrical triangle” range configuration in place since 20 April 2016 high is likely to be undergoing its final leg where a breakout from the 6 months old range is imminent. In addition, the structure of the recent up move from 12 February 2016 low to 20 April 2016 high is advocating for a potential bullish breakout (see daily chart).
• The upper boundary/resistance of the “symmetrical triangle” is now at 8.70.
• The key medium-term support rests at 8.21 (base of the “symmetrical triangle” & 61.8% Fibonacci retracement of the up move from 12 February 2016 low to 20 April 2016 high).

Key levels (1 to 3 weeks)
Intermediate support: 8.30
Pivot (key support): 8.21
Resistances: 8.70 (upside trigger) & 9.57/78
Next support: 7.41

Conclusion
Technical elements are positive in the medium-term (1 to 3 weeks). As long as the 8.21 pivotal support holds and a break above 8.70, OCBC may see another upleg to target the next resistance zone at 9.57/78.

However, failure to hold above the 8.21 medium-term pivotal support is likely to invalidate the bullish bias for a deeper decline to retest the 12 February 2016 swing low area at 7.41.

4. Look Ahead: Commodities

Crude oil prices remain on course to push further higher due to rising expectations of a tighter oil market as US oil inventories decline and production elsewhere either falls or freezes, while demand grows steadily. At least that is the hope for the OPEC, chief among them Saudi Arabia. The country’s energy minister, Khalid Al-Falih, has claimed this week that demand from China is not slowing down and that oil prices could stabilise further “if members act collectively” – in other words, collude to restrict supply. And by ‘members’ he presumably also means some non-OPEC countries like Russia. Comments such as these clearly suggests the OPEC and probably Russia will now have to cut their production in due course, for if they don’t then the consequences could be severe as not only will they lose further credibility but prices may then remain low for a lot longer than would otherwise have been the case. With regards to Chinese demand, Mr Falih is arguably correct. Refining rates in the nation rose last month as 43.8 million tonnes or 10.7 million barrels per day of crude oil was processed, up 2.4% from a year ago, while oil imports rose to a new record high of 8 million bpd. There’s also evidence of declining oil production in China where output fell nearly 10 per cent to near its lowest in six years.

Meanwhile in the US, crude inventories have been mainly falling since the month of May with the exception of a handful of occasions. Several sharp and unexpected oil inventory reductions have been reported in recent weeks by both the American Petroleum Institute (API), an industry group, and officially from the US Department of Energy (DOE). Although that trend was halted in the week ending October 7 with a large build of 4.9 million barrels in US oil stocks, inventories at the storage hubs in Cushing fell sharply, as too did stocks of distillates. In fact, that large crude inventory build was reversed entirely last week. According to the DOE, oil stocks in the US fell by a good 5.2 million barrels in the week ending October 14. What’s more, Cushing crude stocks again saw a sharp reduction and distillate inventories decreased by 1.2 million barrels. The inventory reduction in the US also points to a tighter oil marker, which is good news for prices if it can be sustained. From a technical perspective, WTI now needs to decisively clear its technically-important prior swing high of around $51.65 in order to encourage fresh buying momentum, potentially towards the levels shown on the chart. However the bullish technical outlook would become invalid in the short-term if support at $49.10 gives way on a daily closing basis.

WTI crude chart

Source: eSignal and City Index.

5. FX Technical Outlook:

USD/JPY

The USD/JPY’s three-week winning streak looked to have come to a halt at the time of this writing on Thursday, due among other things to profit-taking from the longs. The USD/JPY was consolidating below its technically-important 104.00-104.50 area, which had been both support and resistance in the past. While below here, the short-term bias remains moderately bearish. But the underlying trend may have turned bullish after the pair held its own on the higher time frames above the key 100-101 area, which as well as representing a psychological level (100) was also a significant support area in the past.  A key downward trend has now broken down and several resistance levels have been taken out, too. As such, we wouldn’t be surprised if the abovementioned 104.00-104.500 area also gives way soon. If the USD/JPY pushes onwards and upwards as we expect it might then the next bullish objective could either be at the 107.50 area – which represents the prior swing high – or at 107.65, where the 200-day moving average comes into play. At this stage, a closing break below short-term support at 102.80 is required to invalidate this short-term bullish outlook. Should that happen, then the support levels at 101.85, 101.25 and 100.00 would then become the next price objectives for the bears.

USD/JPY chart:

Source: City Index and eSignal

EUR/USD

The EUR/USD has been trending lower in recent days after its laborious consolidation phase during most of the summer. As a result, several support levels have broken down including the 50- and 200-day moving averages, the bullish trend line and the key 1.1105-1.1125 range. While this 1.1105-1.1125 range holds as resistance, the path of least resistance would remain to the downside, even if we do see a sharp rebound in the coming days. The next area of support to watch is around 1.0915-10940 where the low from June meets the 61.8% Fibonacci retracement of the last significant upswing. Given the slow and steady move lower, a potential drop to this area will more likely lead to a breakdown rather than a meaningful bounce. If so, the breakdown of support here will potentially pave the way towards the next bearish objective of 1.0755-1.0790 which is where the 78.6% Fibonacci retracement level convergences with the 127.2% extension of the corrective up move since June. Meanwhile some of the short-term resistance levels to watch include 1.1000, 1.1045 and that 1.1105-25 range as mentioned above.

EUR/USD chart:

Source: City Index and eSignal