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Absolute May’hem

May’ hem engulfed markets overnight after PM May beat a hasty retreat ahead of Tuesday’s parliamentary vote on her EU withdrawal deal and the Brexit impasse triggered expansive volatility in the markets. The Pound plummeted as the market took out two years of pent-up frustration and “Pounded the Pound “mercilessly as traders spent the better part of the session remodelling Sterling risk around ” worse case “scenario — especially, the notion that PM May’s political obituary is penned and the appointment of a new leader who would take a harder line on Brexit highly likely. The pound slumped to near 1.2500, the lowest level in two years after the prime minister said her Brexit plan would have been rejected by a “significant margin” in a Commons vote pencilled in for Tuesday. And the Pound found little support from PM May herself in the Commons where she fielded far more questions than answers.

India

In Asia, the sudden resignation of RBI Governor Patel (especially ahead of state election results Tuesday) added to global investor unease as the Rupee plummeted over 1.5 %

Risk Sentiment

Indeed, not the ideal situation for risk which is facing a towering wall of worry as virtually every major economy in the world is slowing suggesting the synchronised global slow down is accelerating at a much faster pace than thought.

It was a harrowing day in the US markets, and at the worst, the DJIA traded – 508 points lower on the day, but investors did muster up the courage to retrace these extreme moves. However, let this be a stark reminder to investors just how frangible liquidity is at this time of year, which will exacerbate market movement even more so in this risk-averse environment.

It looks like a bit of a mixed bag for Asia after US markets rebounded from sharp losses earlier in the day as US investors turned bargain-hunting mode snapping up arguably oversold Facebook and Microsoft shares for holiday stocking stuffers.

Oil Market

The market response to OPEC production cuts has been anything but overwhelming after oil prices slipped for its worst loss in two weeks eroding all of last week’s gains. There remains a lot of uncertainty if the production cut is thick enough to make a significant dent in global supply, but price action does suggest a substantial tranche of market participants remain entirely unconvinced that a floor is in place. But the general risk-off tone in global markets and the stronger dollar on the back of haven flow is contributing to the selling pressure also.

This tepid response to the OPEC cut is likely a result of both sides of the equation. Traders returned to from the weekend to face a towering wall of worry as the worlds largest economies (US-China -Japan) have all reported significantly weaker economic data. And when you factor in the political upheaval in India, it does muddy the demand side of the equation given that these colossal consumers of oil products economic outlook remain hazy at best Especially when traders continue to view the production cuts as little more than the best of many worst-case scenarios.

Gold Markets

Gold prices fell form yesterday’s Asia highwater mark as the US dollar gained on haven appeal. Also denting sentiment, US equity market investors mustered up enough courage to step in front of the global equity market rout and buy tech stocks. But from my seat, this looks to be little more than technically driven short covering rally as the investor sentiment remain incredibly fragile suggesting the Gold will stay bid on the dip while remaining supported by the dovish Fed pivot.

As per yesterday note and sticking with this view “Of course, the markets are always prone to short covering rallies; even still I expect traders to be better sellers for risk knowing the hurdle for flipping to bullish positions seems high.”

Currency Markets

The USD gained across the board. primary rounding in risk aversion appeal

The Euro

Yesterday’s phantom rally on the EUR left more than a few scratching their heads. Again the 1.1430 pivots held with very little follow through. I still believe the break above 1.1400 was an extension of the US dollar sensitivity to weak US economic data after Friday NFP miss.

The Pound

Kicking the can down the road but the longer it takes, the more uncertainty builds, and the lower the pound can fall

The Yuan

My desk must listen to me ad nauseam discusses interest rates and suggest this is the only real way to play currency markets over the long haul.

Looking at yesterday softer China PPI means an actual rise in real interest rates in China, and as the economy goes in the tank, it would suggest one of two things. The exchange rate via a weaker RMB will need to do more of the heavy lifting, or the Pboc will have to step up to the plate on the monetary policy front. Either way, it would seem the elusive 7 USDCNH is back on the table again for early 2019.

The Malaysian Ringgit

The Ringgit fell prey to weaker risk sentiment and slippery oil markets, but losses were relatively contained. But given the fact we are entering the silly season and liquidity is drying up fast an furious across all EM markets. Since we’re unlikely to see a shift in US-China relation before the New Year while we should expect a more unfavourable change in market sentiment, the prospect of both worsening market and horrible liquidly is triggering trader and investor alike to pare back risk substantially.

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As expected, USDJPY made a Monday rally for wave c) that can stop around 50% - 61,8% Fibo. retracement and between 113.0 – 113.35 resistance area. Monday rallies are usually fake movements, so we would not be surprised if we see a sharp bearish reversal in the upcoming days, especially if we see a sell-off continuation in the US stock market.

USDJPY, 30Min

CRUDE OIL targets more decline in the short term leaving 50.07 as the next price key target. Support lies at the 49.50 level where a break will expose the 49.00 level. A cut through here will set the stage for a run at the 48.50 level. Further down, support comes in at the 48.00 level. On the upside, resistance resides at the 52.50 level. Further out, resistance comes in at the 53.00 level. A break above here will aim at the 53.50 level and then the 54.00 level followed by the 54.50 level. All in all, CRUDE OIL remains biased to the downside in the short term.

WTI oil price eased on Monday but staying in directionless mode after spike on Friday on news that OPEC decided to reduce the output stalled and Friday’s action ended in long-legged Doji candle.

Adding to neutral tone was the second straight long-legged weekly Doji, as recovery attempts showed signs of stall after rallies were repeatedly capped by falling 20SMA ($53.24) and daily closes were well below the moving average.

Also, fresh bulls failed to close above broken weekly 200SMA ($52.29), increasing downside risk.

Concerns that 1.2 mln bpd cut won’t be sufficient to stabilize oil market, as oil inventories rose on surge in US supply.

It seems that oil looks for another catalyst which would generate stronger direction signal, after recovery attempts lost steam.

Stronger momentum on daily chart underpins, but overall picture is negative and sees risk of retesting cracked psychological $50 support if 20SMA continues to cap.

Eventual break below $50 pivot would generate strong negative signal which could spark fresh bearish acceleration in extension of larger downtrend from $76.88 (2018 high).

Break and close above 20 SMA would sideline downside risk, but stronger recovery signals could be expected on break above $56.26 (falling 30SMA) and $59.90 (Fibo 38.2% of $76.88/$49.40 fall).

Res: 52.78; 53.24; 54.54; 55.89
Sup: 51.25; 50.59; 50.00; 49.40

Sterling is under broadly based selling pressure today as UK Prime Minister Theresa May called off tomorrow's Brexit parliamentary vote. She conceded that her Brexit deal would be defeated by a wide margin and pledged to go back to EU for changes on the Irish border backstop. Kiwi is so far very resilient and seems not even bothered with US stocks selloff. For now, GBP/NZD is the top mover of today.

GBP/NZD's development is inline with our bearish view as discussed here. The decline from 2.0469 resumed today and reached as low as 1.8183. Based on current downside acceleration, 61.8% retracement of 1.6684 to 2.0469 at 1.8130 will likely be taken out. And in any case, break of 1.8634 resistance is needed to confirm short term bottoming. Otherwise, outlook will remain bearish even in case of recovery.

Also, in our view, the medium term corrective rise from 1.6684 (2016 low) should have completed at 2.0469. Based on current downside momentum, fall from 2.0469 is likely resuming the down trend from 2.5647 (2015 high). Reaction to above mentioned 1.8130 fibonacci level will reveal the chance of this bearish case. Decisive, firm break of 1.8130 will at least bring retest of 1.6684 low.

The Japanese yen is down slightly in the Monday session. In North American trade, USD/JPY is trading at 113.00, up 0.26% on the day. On the release front, Japan’s current account surplus dropped sharply to JPY 1.21 trillion, down from 1.33 trillion. This missed the estimate of JPY 1.29 trillion. Japanese Final GDP declined 0.6%, missing the estimate of 0.5%. In the U.S, JOLTS Job Openings improved to 7.08 million, but was well short of the estimate of 7.22 million. On Tuesday, Japan releases manufacturing data, while the U.S. releases Producer Price Index reports.

The new trading week started with dismal Japanese data, as Final GDP in the third quarter declined 0.6%. This was the second decline this year. On an annualized basis, the economy declined by 2.5% in Q3, after a gain of 2.8% in the second quarter. This was the worst downturn since 2014. In particular, the capital expenditure component of GDP fell 2.8%, much weaker than the estimate of 1.6%. This capex slump could dampen growth and inflation and has weighed on business confidence.

The ongoing global trade war is a primary factor in the weak reading, as Japanese companies which export to the U.S. or China have been hurt by higher tariffs. A weaker eurozone economy has led to softer European demand for Japanese exports. Making matters worse, domestic demand remains fragile, as nervous consumers continue to hold tightly onto their purse strings.

In the U.S., the week ended with soft employment numbers. Nonfarm employment change was weaker than expected, plunging from 250 thousand to 155 thousand. This was well off the forecast of 198 thousand. Wage growth remained stuck at 0.2%, missing the estimate of 0.3%. There was better news from the unemployment rate, which remained at a sizzling 3.7%. The data points to slowing growth in the U.S, which could lead to a change in monetary policy. The Federal Reserve minutes from the November meeting indicated that policymakers discussed changing their stance of gradual increases rate increases. The markets are currently looking at one rate hike next year – just a few months ago, analysts were predicting up to rate hikes in 2019.

UK Prime Minister Theresa May formally confirms in the Commons that the Brexit vote will be delayed. She said, the tomorrow's vote went ahead, it would be lost by a wide margin. May said she'll hold emergency talks with EU to discuss possible changes to the backstop. And, she pledges that changes to the backstop would ensure it's not permanent.

The second Brexit referendum, May warned that "this risks dividing the country again when as a House we should be striving to bring it back together". And she added that " if you want to stay part of the customs union, be honest that this this involves accepting free movement." Or, "if you want to leave with no deal, be honest that this will cause significant damage in those parts of the county that can least afford it."

https://www.youtube.com/watch?v=k5p8p88dEo8

Daily Pivots: (S1) 143.10; (P) 143.65; (R1) 144.08; More...

GBP/JPY's break of 142.76 support confirms fall resumption. Intraday bias is back on the downside for 139.29/47 key support zone. On the upside, above 144.22 minor resistance will turn bias neutral and bring consolidation first, before staging another decline.

In the bigger picture, as long as 139.29 cluster support (50% retracement of 122.36 to 156.59 at 139.47) holds, up trend from 122.36 (2016 low) could still extend beyond 156.69 high. However, decisive break of 139.29/47 will suggest that such up trend is completed and turn outlook bearish. In that case, next target is 61.8% retracement at 135.43.

Daily Pivots: (S1) 0.8898; (P) 0.8935; (R1) 0.8980; More...

EUR/GBP's rally accelerates to as high as 0.9047 so far. Intraday bias remains on the upside for 0.9098 resistance first. Decisive break there will extend the rise to 0.9304 key resistance next. On the downside, below 0.8958 minor support will turn intraday bias neutral and bring some consolidations first, before staying another rally.

In the bigger picture, EUR/GBP is seen as staying in long term range pattern started at 0.9304 (2016 high). Sustained break of 0.8939 resistance will confirm that it's in a medium term rising leg for 0.9098 and above. And for now, in case of another fall, downside will likely be contained by 0.8620/55 support zone to bring rebound.