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DOW opens sharply lower today and after initial recovery attempt, selling intensifies again. At the time of writing it's down -500 pts, or -1.98% at 24817. Technically, the break of 24899.77 support confirms resumption of whole decline from 26951.81 high. Next target will be 61.8% projection of 26951.81 to 24899.77 from 25817.68 at 24549.51.

In the longer term picture, fall from 26951.81 is seen as corrective whole up trend fro 15450.56 (2016 low). Such correction would extend to 38.2% retracement of 15450.56 to 26951.81 at 22558.33 before completion.

European Commission formally rejects Italy's budget after its regular meeting. Vice President For the Euro Valdis Dombrovskis said in a press conference that "today, for the first time, the Commission is obliged to request a euro area country to revise its draft budget plan."

He added, "we see no alternative than to request the Italian government to do so. We have adopted an opinion giving Italy a maximum of three weeks to provide a revised Draft Budgetary Plan for 2019,"

Regarding Italy's letter to the Commission yesterday, Dombrovskis said "Unfortunately, the clarifications received yesterday were not convincing to change our earlier conclusions of a particularly serious non-compliance with the recommendation addressed to Italy by the Council on the 13th of July." And, "the Italian Government is openly and consciously going against the commitments it made."

The Commission now requests Italy to amend the draft buget in the next three weeks for resubmission. And, the Commission is ready to open a disciplinary process called the excessive deficit procedure against Italy.

Italian 10 year yield jumps notably after the news as it's now back at 3.556, after dipping to 3.42 earlier today.

EUR/USD is steady in range. But EUR/JPY dips further towards 128.32 also on broad based risk aversion.

Daily Pivots: (S1) 1.2919; (P) 1.3004; (R1) 1.3052; More...

GBP/USD recovered ahead of 1.2921 support and intraday bias is turned neutral first. Further rise could be seen. But in any case, upside should be limited by 1.3316 key fibonacci level to bring down trend resumption eventually. On the downside, break of 1.2921 support will add to the case that corrective rise from 1.2661 has completed. Next target will be 1.2661/2784 support zone.

In the bigger picture, whole medium term rebound from 1.1946 (2016 low) should have completed at 1.4376 already, after rejection from 55 month EMA. The structure and momentum of the fall from 1.4376 argues that it's resuming long term down trend. And this will be the preferred case as long as 38.2% retracement of 1.4376 to 1.2661 at 1.3316 holds. However, firm break of 1.3316 would bring stronger rebound to 61.8% retracement at 1.3721. And, the eventual depth of the fall from 1.4376, and the chance of hitting 1.1946 low, will depend on the strength of the interim corrective rebound from 1.2661.

Daily Pivots: (S1) 1.1430; (P) 1.1492; (R1) 1.1529; More....

Intraday bias in EUR/USD remains neutral with focus on 1.1431/2 support. Break will fall from 1.1814 to retest 1.1300 low. In case of another recovery, upside should be limited by 1.1621 resistance to bring another decline. However, break of 1.1621 will turn focus back to 1.1814 instead.

In the bigger picture, corrective pattern from 1.1300 could have completed at 1.1814 after hitting 38.2% retracement of 1.2555 to 1.1300 at 1.1779. Decisive break of 1.1300 will resume the down trend from 1.2555 to 61.8% retracement of 1.0339 (2017 low) to 1.2555 at 1.1186 next. Sustained break there will pave the way to retest 1.0339. On the upside, break of 1.1814 will delay the bearish case and extend the correction from 1.1300 with another rise before completion.

Daily Pivots: (S1) 0.9940; (P) 0.9961; (R1) 0.9981; More...

Intraday bias in USD/CHF remains neutral for consolidation below 0.9980 temporary top. While deeper retreat cannot be ruled out, as long as 0.9848 support holds, further rise is expected. On the upside, above 0.9980 will extend the rally from 0.9541 to 1.0067 key resistance. However, considering bearish divergence condition in 4 hour MACD, break of 0.9848 will indicate reversal and turn outlook bearish.

In the bigger picture, the pullback from 1.0067 has completed at 0.9541 already. And rise from 0.9186 is likely resuming. Firm break of 1.0067 will pave the way to retest 1.0342 key resistance. We'd be cautious on strong resistance from there to limit upside to bring another medium term fall to extend long term range trading.

West Texas Intermediate oil futures plunged over the last sessions, moving towards the long-term ascending trend line in the 4-hour chart. Also, they hold below the 20- and 40- simple moving averages (SMAs), while the technical indicators are confirming the recent negative structure in the near-term. The RSI indicator is pointing south, having just fallen below the 30 oversold zone, and the MACD oscillator just recorded a bearish cross with its trigger line.

Should the price manage to strengthen its negative momentum and post a significant leg lower, the 50.0% Fibonacci retracement level of the upleg from 58.15 to 76.90, around 67.50, could be the next support level to have in mind. A break below this area could drive prices towards the 66.95 support, which stands near the rising trend line. A negative rally below this line, could shift the long-term bullish outlook to a more neutral one, hitting the 65.70 barrier.

On the flipside, if prices rebound and surpass 68.50, the 38.2% Fibonacci of 69.70 could come in focus again. Further advances could drive oil until the 69.90 resistance and then at the 70.64 hurdle, taken from the low on October 12.

To summarize, WTI crude looks bearish in the short-term, while in the longer-term picture, it has been strongly positive since February 2018.

Indeed, a wall of worry has morphed into towering wall of pain as extremely fragile circumstance across the capital markets continues to undermine investor confidence. Markets continue to tremble but with traders suffering a severe case of the cold sweats as geopolitical risk runneth over, the unambiguous bias towards safe havens suggest the street is expecting this rout to deepen. In the absence of any tier one US economic to tether market sentiment, the bears are uncaged, and a bull is on the menu!

The pessimistic market view of China governments efforts to support market sentiment is a massive trigger after Chinese equities tumbled head over heels in today’s Asian session.

Gold

Gold moved higher hard today, embodying a full-out flight to safety. Near-term key resistance is holding for now around 1234-1236, where the 200-week moving average converges with the December 2017 lows but on break, this will severely test the existing structural short gold complex, and if a break is triggered we could see a short covering rally extend to $1250 in a heartbeat.

Oil

Oil bears are winning the battle despite the fallout from the killing of Saudi journalist Jamal Khashoggi. But I think its the knock-on effect. Saudi Energy Minister Khalid Al Falih says he would not rule out boosting Saudi exports by as much as 2 million barrels per day and that they would meet any oil demand due to the drop in Iran exports. Noise is set to get louder before the Iran sanctions are placed to take effect on November 5. While the Khashoggi saga appears to be far from over the thoughts that US-Saudi tensions could lead to a supply disruption are but a distant memory.

Also, market sentiment could take a knock as the market’s position for US inventory data, which have been rising well above markets expectations.

Currency markets

The Pound is entering that mode again, where no position is a good position as the negative headlines continues to compound extremely negative sentiment.

The Yen rallies on haven demand, but tremendous support remains at 112 which should keep USDJPY downside in check at least until the traders have then next negative equity mood swing.

The Canadian dollar is trading sideways on Tuesday. Currently, USD/CAD is trading at 1.3106, up 0.04% on the day. On the release front, there are no Canadian events. In the U.S, the Richmond Manufacturing Index is expected to drop to 25 points. On Wednesday, the Bank of Canada is expected to raise the benchmark rate to 1.75%.

All eyes are on the Bank of Canada, which holds its policy meeting on Wednesday. The BoC has raised rates twice this year, and a third hike would raise rates to 1.75%, which would be the highest level since October 2008. This meeting is the first since Canada signed on to a new trade agreement with Mexico and the United States, which should provide a boost to the economy and calm investor jitters. The Federal Reserve raised rates in September and is expected to do repeat in December, so a BoC rate hike will help keep the Canadian dollar attractive to investors.

Relations between the U.S and China remain tenuous, with the markets nervous that the trade war could worsen. The U.S Treasury Department released its semi-annual report on foreign exchange rates on Thursday, and there was some relief in the markets as the report did not name China as a currency manipulator. Still, the report said that the U.S was “deeply disappointed’ with that China refuses to disclose the extent of its foreign currency intervention. The Chinese yuan has slipped some 9 percent since April, and U.S officials are concerned that China has deliberately weakened the currency in order to counter U.S tariffs on Chinese goods, and will continue to monitor China’s currency practices.

Daily Pivots: (S1) 112.49; (P) 112.68; (R1) 113.02; More..

USD/JPY's fall from 112.88 extended lower today and focus is now on 111.94 minor support. Break should confirm that corrective rise from 111.62 has completed and larger fall from 114.54 is resuming. Intraday bias will be turned to the downside for 38.2% retracement of 104.62 to 114.54 at 110.75. As such decline is viewed as part of medium term correction, we'll look for bottoming signal above 109.76 key support in that case. On the upside, above 112.88 will target 61.8% retracement of 114.54 to 111.62 at 113.42 instead.

In the bigger picture, corrective fall from 118.65 (2016 high) should have completed with three waves down to 104.62. Decisive break of 114.73 resistance will likely resume whole rally from 98.97 (2016 low) to 100% projection of 98.97 to 118.65 from 104.62 at 124.30, which is reasonably close to 125.85 (2015 high). This will stay as the preferred case as long as 109.76 support holds. However, decisive break of 109.76 will dampen this bullish view and turns outlook mixed again.

Risk aversion is the main theme in the financial markets today and all major global stock indices are in deep red. DOW futures are also down more than -400 pts at the time of writing. However, Sterling defies gravity and is trading as the strongest together with Japanese Yen today. The Pound is lifted by news that EU may offer UK a lifeline in the Brexit negotiations. Australian and Canadian Dollar are trading as the weakest ones. Euro is mixed as markets are awaiting European Commission's verdicts on Italy's reply regarding its budget.

Technically, it's looking more likely that USD/JPY's recovery from 111.62 has completed at 112.88 already. And a focus will be on 111.94 minor support today. Break will likely resume the fall from 114.54 through 111.62 low. Meanwhile, Sterling is a bit mixed as while it rebounds, there is no confirmation of near term reversal against Dollar, Euro and Yen yet. Gold breached key resistance zone between 126.99/1238.62 and sustained break will pave the way to 1286.97 fibonacci level.

On other markets, at the time of writing, FTSE is down -1.00%, DAX down -1.85% CAC down -1.15%. Italian 10 year yield is down -0.006 at 3.473, German 10 year yield is down -0.023 at 0.428. Earlier today, Nikkei closed down -2.67% to 22010.78. Hong Kong HSI dropped -3.08% to 25346.55. Singapore Strait Times dropped -1.52% to 3031.39. China Shanghai SSE dropped -2.26% to 2594.83.

Sterling rebounds as EU may offer a UK-wide customs union

Sterling rebounds strongly on an RTE news report that EU is going to offer the a UK-wide customs union as a way to work around the Irish backstop deadlock. And, the way to handle it is that in the Brexit Withdrawal Agreement, there will be a specific commitment to a UK wide customs arrangement. However, a formal EU-UK customs union will require a separate agreement. By offering that, EU will still insist on a backstop to be in place.

The details of the idea are remain to be seen. For now, it's being viewed as a rumor. And it's uncertain whether UK Prime Minister Theresa May will accept it. Nor is it clear whether there is any technical issues overlooked. But for now Sterling is enjoying a notable rebound as seen in GBP/USD.

Italy may adjust budget plan if markets react negatively

Italian newspaper Il Messaggero reported today that the coalition government is prepared to adjust its budget plan should markets react negatively. For now, the government is sticking to its deficit target of 2.4% of GDP in 2019. And there could be a plan B for the government including redefining the key elements of the expansive budget. Those adjustments could even include retirements and basic income for the poor.

However, Italian Prime Minister Giuseppe Conte said today that he will not accept changes to the substance of the budget. And he repeated the pledge that 2.4% is a ceiling that won't be exceeded.

European Commissions will discuss today what's next regarding Italy, after formally getting its reply. It's generally expected that the Commission will reject the budget and demand resubmission from Italy.

Japan Cabinet Office: Economy recovering at a moderate pace but exports almost flat

In Japanese Cabinet Office's monthly report, general economic assessment was held unchanged. That is, the economy is "recovering at a moderate pace". It also maintained that "private consumption is picking up", "business investment is increasing", "industrial production is increasing moderately", "corporate profits are improving", "employment situation is improving steadily", and "consumer prices are rising at a slower tempo recently".

However, exports are somewhat downgraded from "pausing recently" to "almost flat". The report maintained the urged that "attention should be given to the effects of situations over trade issues on the world economy, the uncertainty in overseas economies and the effects of fluctuations in the financial and capital markets. "

On prices, the report noted "the Government expects the Bank of Japan to achieve the price stability target of two percent in light of economic activity and prices. "

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 112.49; (P) 112.68; (R1) 113.02; More..

USD/JPY's fall from 112.88 extended lower today and focus is now on 111.94 minor support. Break should confirm that corrective rise from 111.62 has completed and larger fall from 114.54 is resuming. Intraday bias will be turned to the downside for 38.2% retracement of 104.62 to 114.54 at 110.75. As such decline is viewed as part of medium term correction, we'll look for bottoming signal above 109.76 key support in that case. On the upside, above 112.88 will target 61.8% retracement of 114.54 to 111.62 at 113.42 instead.

In the bigger picture, corrective fall from 118.65 (2016 high) should have completed with three waves down to 104.62. Decisive break of 114.73 resistance will likely resume whole rally from 98.97 (2016 low) to 100% projection of 98.97 to 118.65 from 104.62 at 124.30, which is reasonably close to 125.85 (2015 high). This will stay as the preferred case as long as 109.76 support holds. However, decisive break of 109.76 will dampen this bullish view and turns outlook mixed again.

Economic Indicators Update