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Downtrend in conditions extends into 2019. Conditions: down 3pts to +4. Confidence: down 2pts to +2.

The NAB business survey indicates that both business conditions and business confidence weakened in February - with both at below average levels.

The business conditions index fell by 3pts to +4. This is down sharply from conditions prevailing over the first half of 2018, when the index averaged +18.

Business confidence fell by 2pts to +2.

This soft update is a significant development.

The survey was conducted in late February (from February 25 to March 1). Typically surveys conducted at this time of year are more reliable than those taken during the often volatile holiday season of December / January.

Also, this survey suggests that the sharp loss of economic momentum that emerged from around mid-2018 has extended into 2019. Hopes of a New Year rebound appear to be forlorn.

Soft conditions extending into 2019 fits with our reading of the economy. Westpac is forecasting real GDP growth to be 2.2% in 2019, a below trend pace, which will see the unemployment rate move higher.

Importantly, the housing downturn continues and will weigh on conditions during 2019. In addition, wages growth is still weak, with real wages broadly flat, pointing to ongoing soft consumer spending.

Business conditions details for February are: trading conditions down 2pts to +8; profitability down 4pts to +1; while employment moved sideways, at +5.

Businesses willingness to hire and to invest is another important consideration for the outlook this year.

The survey suggests that employment conditions currently are consistent with near-term job gains of +19k per month - which is only a little below the 2018 average of +22k and would likely hold the unemployment rate steady.

We note that employment conditions have eased, down from +11 over the initial 9 months of 2018. Given the typical lags between activity and the labour market, we expect employment conditions to weaken over coming months.

On investment, the survey points to downside risks.

Capacity utilisation weakened over the past three months, falling to a just below average level. The capital expenditure index fell further to be at a three year low and is approaching the lowest level since the 2014/15 period.

Retail business conditions plunged even further, from -14 in December and January to -24, the weakest 3 month period since 2013. Conditions in the key construction sector slipped below zero, to -5. The last time the construction sector index was consistently in negative territory was in 2013.

By state, conditions weakened further in NSW, to +3, the softest reading since 2014. In Victoria, conditions stabilised, at +7, well down from +21 over the first half of 2018.

A sharp loss of momentum in NSW and Victoria is significant given that employment strength of late has been confined to these two states. Across the other four states, employment has fallen by 0.2% since mid-2018.

After giving UK Prime Minister Theresa May the needed "meaningful clarifications and legal guarantees" on Irish backstop, European Commission President Jean-Claude Juncker warned in a joint press conference that "there will be no third chance".

He said "it is in this cooperative spirit today that Theresa May and I agreed on a joint legally binding instrument relating to Withdrawal Agreement. The instrument provides meaningful clarifications and legal guarantees on the nature of the backstop."

But he warned that "there will be no third chance, there will be no further interpretations of the interpretations, no further assurances of the re-assurances – if the meaningful vote tomorrow fails." "The choice is clear: it is this deal, or Brexit may not happen at all. Let's bring the UK's withdrawal to an orderly end. We owe it to history," Juncker added.

https://www.youtube.com/watch?v=EihDZtTrqxk

Sterling jumped broadly and remains firm after UK Prime Minister Theresa May secured "legally binding" changes to the Brexit deal after meeting with European Commission President Jean-Claude Juncker in the European Parliament in Strasbourg, France late Monday. May will now go into today's meaningful vote with nervous hope that the deal would be approved and pave the way to an orderly Brexit. Opposition Labour leader Jeremy Corbyn criticized as usual that May's negotiations had "failed" without "anything approaching the changes" she promised the Parliament. But it would be the legal advice from Attorney General Geoffrey Cox, which will be published before the vote, that holds the fate of the updated deal.

Two important agreements were agreed that could "strengthen and improve" both the withdrawal agrement. The most important one is a "joint legally binding instrument." May believed it could be used to start a "formal dispute" against EU if it tried to keep UK into the backstop indefinitely. And under ruling of an arbitration panel, UK would have "the right to enact a unilateral, proportionate suspension of its obligations under the Withdrawal Agreement"

Secondly, there is another "joint statement" adding to the political declaration. A specific negotiating track would be established given both sides' to work "at speed" on an agreement by end of 2020 to avoid triggering the Irish backstop. Thirdly, May will put forward a "unilateral declaration" to outline the UK's position that there was nothing to prevent it from leaving the backstop arrangement if discussions on a future relationship with the EU break down and there is no prospect on an agreement.

STOCKS

Equities have bounced as expected. While the DAX looks more positive others like the Dow, Sensex, Nifty etc are closer to a key resistance which will need a close watch.

Dow Jones (25,650.88, +200.64, +0.79%) has risen sharply yesterday. A key resistance is near current levels at 25,720 (21-day moving average). A break above it can take the index further higher to 26,000. But a pull-back from 25,720 can drag the index to 25,200 and 25,150. In such a scenario, a range bound move between 25,100 and 25,720 is possible for some time.

DAX (11,543.48, +85.64, +0.75%) has reversed higher from the 21-day moving average support level of 11,407. A revisit of 11,650 levels looks possible in the coming sessions.

Nikkei (21,521.61, +396.52, +1.88%) has bounced after brief dip below 21,000 yesterday and is likely to head towards 21,600-21,650 in the near term.

Shanghai (3,072.73, +45.74, +1.51%) can test 3,100 on a break above 3,075. The price action in the coming sessions will give a clear and confirmed indication of the next move.

Sensex (37,054.10, +382.67, +1.04%) and Nifty 50 (11,168.05, +132.65, +1.20%) have surged sharply yesterday and are closer to a key trend resistance. Sensex has a resistance near 37,100 and for the Nifty it is at 11,200. A pull-back from these resistances can drag the Nifty to 11,100 and Sensex to 36,900 or even 36,700. But a break above these resistances can take the Sensex higher to 37,550 and the Nifty 50 to 11,285-11,300.

COMMODITIES

Oil is moving higher within its overall sideways range. Gold can consolidate in the near-term with a bullish bias. Silver looks positive to move further higher. Copper has bounced from a key support and can see some upticks in the near term.

Gold (1295) has come-off slightly, but is holding above the support at 1290. As mentioned yesterday, gold may consolidate between 1290 and 1300 for a few sessions with a bullish bias to break above 1300 and test 1310 in the near term.

Silver (15.35) looks slightly stronger that gold and is likely to test 15.5 and 15.6. Support is at 15.15.

Copper (2.91) has bounced from the key support level of 2.88. A test of 2.93 and 2.95 is possible while above 2.90.

WTI (56.95) and Brent (66.82) have inched higher within their sideways range. As mentioned yesterday, Brent is likely to test 67, a break above which can take it to 68. WTI can rise to 58 on a break above 57.2. Overall the 64-68 and 55-58 sideways range on Brent and WTI respectively remains intact.

FOREX

Some corrective move seen in the currency markets. While Dollar trades weak, currencies are sensing some relief and strengthening since the last 2-sessions.

Dollar-Index (97.06) is trading below 97.25 and has scope of testing 96.50 before a corrective upmove is possible. Instead a rise back towards 97.25 or higher seen today would make it bullish to re-test 97.75 on the upside. Higher chances of 97 holding just now seem probable.

Euro (1.1259) has risen and looks bullish towards 1.1340/50 in the coming sessions. Only on a break below 1.12, we would consider a possible test of 1.11 on the downside. Else, 1.12 is expected to hold for the near term.

Euro-Yen (125.46) has bounced well from 124.40 and while the rise sustains, Euro-Yen could rise towards 126.00/80.

Dollar Yen (111.42) has 111 as an immediate support and while that holds, the pair could rise towards 112.00/50. Near term looks bullish.

Pound (1.3217) has risen sharply in the last 2-sessions but faced rejection from 1.33. While 1.33 holds, Pound could fall back towards 1.31; else if the upward momentum continues, we could see a rise towards 1.34 soon. Watch price action near 1.33.

Aussie (0.7073) is looking bullish towards 0.7150. Narrow trade range of 0.70-0.7150 could remain for some more time.

USDCNY (6.7125) has dipped a bit. Could test 6.70 before again re-attempting a test of 6.72. Note that the pair has fallen from resistance on the daily candles and while that holds, near term could be bearish towards 6.68.

Dollar Rupee (69.89) has immediate support at 69.75 as seen on the daily candles and lower support at 69.50 on the 3-day candles. These levels are likely to hold this week producing a bounce to 70 or higher within the next couple of weeks. Today we could see a dip below 69.80 targeting 69.75 or lower.

INTEREST RATES

The US yields have bounced and are trading higher today. . The 2Yr (2.50%), 5Yr (2.47%), 10Yr (2.67%) and 30Yr (3.05%) have risen sharply and look bullish for the rest of the sessions this week. The 5Yr, 10YR and 30YR could rise towards 2.5%, 2.7% and 3.10% soon. The 2Yr could test 2.52-2.55% in the near term. Overall the yields may continue to rise for the next few sessions.

The Japan 10YR yield (-0.03%) is trading near support and could bounce towards 0.003 in the near term.

The UK yields are falling and heading towards support levels. A bounce in the yields could be seen soon. The 20Yr (1.63%) has support near 1.60-1.5970 levels and could bounce from there soon while the 10Yr (1.18%) could test 1.14-1.10% before rising from there.

The 10Yr GOI (7.5124%) dipped again yesterday and could be headed towards 7.45% in the near term favoring some more strength in the Rupee. 7.45% is an immediate support and could produce a bounce pushing back the yield to levels above 7.50/55% in the medium term.

Key Highlights

• The British Pound rallied recently after trading as low as 1.2960 against the US Dollar.
• A crucial bearish trend line was breached with resistance at 1.3120 on the 4-hours chart of GBP/USD.
• The US Retail Sales in Jan 2019 increased 0.2% (MoM), compared with the last decline of 1.6%.
• The US Consumer Price Index for Feb 2019 will be released today, which could increase 0.2% (MoM).

GBPUSD Technical Analysis

The started a major decline from the 1.3350 high against the US Dollar. The GBP/USD pair broke the 1.3200 and 1.3120 support levels to enter a bearish zone before buyers appeared near 1.2960.

Looking at the 4-hours chart, the pair gained bearish momentum after it broke the 1.3125-1.3120 support and the 100 simple moving average (red, 4-hours). It even tumbled below the 1.3020 and 1.3000 support levels.

A new weekly low was formed at 1.2961 and later the pair started a solid upward move. It broke the 1.3055 resistance and the 50% Fib retracement level of the last decline from the 1.3350 high to 1.2961 low.

More importantly, there was a break above a strong resistance near the 1.3125 level and a crucial bearish trend line with resistance at 1.3120 on the same chart. Above the trend line, the pair spiked above the next resistance at 1.3200 and the 61.8% Fib retracement level of the last decline from the 1.3350 high to 1.2961 low.

A successful close above the 1.3155 resistance means that pair likely moved into the positive zone. If there is a downside correction, the broken resistances at 1.3155 and 1.3125 may act as supports.

Fundamentally, the US Retail Sales figure for Jan 2019 was released recently by the US Census Bureau. The market was looking for no change in sales in Jan 2019, compared with the previous month.

The result was positive as there was a 0.2% rise in sales in Jan 2019, better than the last decline of 1.6% (revised from -1.2%). Looking at the Retail Sales ex Autos, there was an increase of 0.9%, whereas the market was looking for +0.3%.

The report added that:

Total sales for the November 2018 through January 2019 period were up 2.6 percent (±0.5 percent) from the same period a year ago. The November 2018 to December 2018 percent change was revised from down 1.2 percent (±0.5 percent) to down 1.6 percent (±0.3 percent).

Overall, GBP/USD could dip in the short term, but the 1.3125 and 1.3155 supports are likely to prevent downsides.

Economic Releases to Watch Today

• UK Industrial Production for Jan 2019 (MoM) – Forecast 0%, versus -0.5% previous.
• UK Manufacturing Production for Jan 2019 (MoM) – Forecast 0%, versus -0.7% previous.
• UK Trade Balance non-EU for Jan 2019- Forecast £-3.750B, versus £-3.642B previous.
• US Consumer Price Index Feb 2019 (MoM) – Forecast +0.2%, versus 0% previous.
• US Consumer Price Index Feb 2019 (YoY) – Forecast +1.6%, versus +1.6% previous.
• US Consumer Price Index Ex Food & Energy Feb 2019 (YoY) – Forecast +2.2%, versus +2.2% previous.

Wall Street pulled higher by tech sector

Wall Street indices closed higher despite issues at Boeing, as the tech sector pushed the Nas100 index 2% higher. Rumours circulated overnight that UK PM May had secured a “better” Brexit deal from Europe ahead of tonight’s Parliamentary vote.

US30USD Daily Chart

The US30 index recovered from early Boeing-led weakness to close higher for the second straight day. The index appears to be continuing the trend in early dealings this morning

The 200-day moving average at 25,138 remains untouched, supporting prices since February 12

US consumer prices are expected to rise 0.2% m/m in February from a flat reading the previous month. Fed’s Brainard is scheduled to speak at 1345 GMT.

DE30EUR Daily Chart

The Germany30 index snapped a three-day drop yesterday amid more-positive news on Brexit. The index shrugged off weaker-than-expected industrial production data

The index is edging toward the 200-moving average resistance at 11,812. It has capped prices since August 1

Germany’s industrial production fell 0.8% m/m in January, a surprise drop with economists anticipating a 0.4% gain. The production numbers echoed weak data from factory orders in the same month. There are no major data releases scheduled today.

UK100GBP Daily Chart

The UK100 index fell for a third consecutive day yesterday, despite rumours that PM May has secured an improved Brexit deal from Europe. Tonight’s Parliamentary vote still introduces a huge element of uncertainty and the index is likely to remain under pressure until the outlook is clearer

The 55-day moving average at 6,985 moved above the 100-day moving average at 6,983 yesterday, the first time since September 4 last year

As well as the Brexit vote, we see the UK’s production data for January, which has been holding up pretty well, and the trade balance for the same month.

British pound produces sterling performance

As the first of a probable three key UK Parliament Brexit votes begins today, the markets have assumed the inevitable outcome will be a request for the European Union to extend the Article 50 leaving date on Thursday. As such, the British pound (GBP) soared from its Monday opening at 1.3000 to 1.3290 before settling at 1.3240 in early Asian trading. That’s a stellar 1.80% gain in the last 24 hours.

The GBP led a US dollar retreat overnight as first Asian and then European stocks shrugged off the clouds of Friday and posted healthy gains. European banking stocks found tailwinds from a rumoured Deutsche Bank/Commerzbank merger, while the UK FTSE 100 got a sugar rush from the no-news-is-good-news Brexit optimism. US stocks were quick to follow suit as US retail-sales data rebounded from December’s disastrous figure to post a 0.20% gain.

Wall Street enjoyed a positive day likely due to an Apple upgrade and Nvidia buying an Israeli semiconductor company, resulting in a climb of 2.0% on the Nasdaq and 1.47% on the S&P. Significantly both indices recaptured their 200-day moving averages. Impacted by Boeing, the Dow was a relative laggard closing 5.36% down but still finished the day a respectable 0.79% higher.

This newfound wave of optimism despite a concrete US-China trade deal, tier 1 data, or any shred of a cohesive outcome to Brexit highlights two likely scenarios. One, a large amount of fast-money trading has taken place based on headlines and hope, and therefore there could be an equally high chance of potentially ugly corrections. Two, investor money has been sat on the sidelines waiting for the macroeconomic clouds to clear and has grown impatient, joining the hope-versus-reality trade.

Either way, for now, the street appears to be saying that no news is good news and has an itchy risk-seeking trigger finger that could set the tone for Asian markets today.

FX

The USD retreated overnight, most notably against the GBP due to Brexit optimism. We’ll probably see another very choppy headline-driven day on the pound ahead of today’s vote. Initial resistance is at 1.3300 followed by 1.3350. Without sounding like a broken record, traders would be wise to beware UK politicians bearing gifts. It’s likely we will see high volatility and poor liquidity on the pound today, and smart traders would do well to stay nimbler than the negotiations have been to date.

This morning, Australian home-loans data may cause short-term volatility in the Aussie dollar, which has struggled to rally despite a weaker USD.

With investors clearly in a risk-seeking mood for now and both the USD and bonds weaker overnight, the feel-good factor could overflow into Asia and see regional currencies enjoy a positive start against the greenback.

Equities

With China equities climbing off the canvas yesterday and very positive days in Europe and North America, Asian bourses could see a bright start. Investors are clearly in an optimistic mood despite nothing having changed materially around the world, and that optimism could continue in Asia trading. Investors should be cautious however because the rally is built on fragile foundations. It would be wise to stay nimble in a headline-driven market.

Oil

Crude oil sailed higher as Saudi Arabia reiterated it would continue its above-quota cuts past the April OPEC+ meeting and continue to curb exports, which should further squeeze US refiners and offset increased shale production somewhat. Brent crude rose 1.40% to USD66.70 a barrel and WTI 1.30% to USD56.80 a barrel. Some initial profit-taking could be seen in early Asia trading, but the positive risk environment may see buyers on any dips.

Gold

Gold was surprisingly resilient overnight, ending the New York session only USD7 lower at 1,293.00 an ounce. Whether this is a hint that the overnight equity and currency rally is built more on hope than reality remains to be seen. In the meantime, gold seems to have found a new range between 1,280.00 and 1,300.00 an ounce and appears content to consolidate there.

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GBP/USD has posted considerable gains on Monday, erasing the losses seen on Friday. In North American trade, the pair is trading at 1.3094, up 0.60% on the day. Earlier on Monday, the pair touched a low of 1.2961, its lowest level since February 19. In economic news, there are no British indicators. In the U.S., retail sales rebounded in February. Core retail sales sparkled with a 0.9% gain, up from -1.8% in January. Retail sales improved to 0.2%, compared to -1.2% in the previous release. Both indicators beat their estimates. On Tuesday, the U.S. releases CPI numbers.

All eyes will be on the British parliament this week, starting with a vote on the government’s withdrawal agreement on March 12. With no signs that this proposal will be different than the one which was shot down in parliament in January, the vote could turn into an embarrassment for the May government. If lawmakers vote down this proposal, they will vote the next day on two separate proposals – one on a no-deal Brexit, and the second on requesting the EU to extend Article 50 and delay Brexit past March 29. With all the uncertainty surrounding the drama in parliament, traders should be prepared for volatility from GBP/USD.

In the U.S., there was a surprisingly low reading from nonfarm payrolls. The indicator showed that the economy eked out just 20 thousand jobs, much worse than the forecast of 180 thousand. On a brighter note, wage growth improved to 0.4%, above the estimate of 0.3%. Despite the weak NFP report, the pound could not take advantage and posted losses on Friday, capping a week in which GBP/USD dropped 1.4%.

Cable ticked higher and pressures 1.31 barrier in early US trading on Monday, as traders took profits from short positions and re-positioning for fresh weakness in anticipation of another defeat of UK PM May on tomorrow’s important parliamentary vote on her Brexit plan.

May is due to travel to Strasbourg this afternoon in last attempts to break Brexit talks deadlock after the parliament voted it down.

The disagreement about the Irish border remains the main obstacle and the EU is willing to help in this case but not ready to compromise with bloc’s core priorities that keeps PM May under pressure.

Daily techs show signs of easing of bearish pressure, as stochastic and RSI turn higher after so far false break below 200SMA and subsequent bounce, but momentum remains weak and suggests limited recovery.

Sustained break below 200SMA would generate strong bearish signal which would require confirmation on probe through daily cloud top (1.2944).

Important barrier at 1.3109 (Fibo 38.2% of 1.3349/1.2960 / 5SMA) should ideally cap recovery, while break here would sideline immediate bears and extension above sideways-turned 10SMA (1.3171) would neutralize and shift focus higher.

Res: 1.3096; 1.3109; 1.3155; 1.3171
Sup: 1.3050; 1.2990; 1.2960; 1.2944