The Swing Overview – Week 41
Equity indices tested significant supports in the first half of last week. Then, in the second half of the week, they started to strengthen under the influence of good data from the US economy. However, nothing fundamentally changed from the overall context.
Fears of higher inflation persist, while the expected tapering of US bond purchases is still in play, which is strongly positive for the US dollar and was the cause of the recent declines in equity indices.
Data from the US economy
The manufacturing purchase managers' index for September came in at 61.1 (expectations were for 59.6). The non-manufacturing purchase managers' index came in at 61.9 (60.0 was expected).
Good news came also from the labor market. First, according to the ADP report, 568,000 new jobs were created in the private non-farm sector (forecast was 428,000). At the same time, there were fewer jobless claims in the US (326,000 instead of the expected 348,000). However, the crucial indicator of the condition of the US labor market will be the NFP report, which is scheduled on the calendar for October 8, 2021.
Data from Europe
The PMI manufacturing managers' index in Germany reached 58.4 in September. A number higher than 50 indicates expansion, so the result achieved for September is a good value. The negative news is that the last 4 index readings have been slowly declining, which may lead to concerns that the German economy is slowing down. This concern was also supported by a higher decline in German manufacturing orders, which was -7.7% in September (expected decline was -2.2%).
On the other hand, CPI, or inflation in the Eurozone, came in at 3.4%, which is higher than analysts' expectations of 3.3%.
Fears of a slowing economy and rising inflation at the same time are fuelling fears of stagflation. It is therefore not too surprising that the euro weakened further against the dollar last week.
US 10-year bond yields continue to rise
The yield on the 10-year bond reached 1.6%. This is the highest level since June this year. The rising yields are then supporting the US dollar in its bullish trend.
Figure 1: USD index and US 10-year bond yields
The strengthening of the US dollar has been positively influenced by better-than-expected data from the US economy.
The SP 500 broke through significant support
The selloff on the SP 500 index stalled last week. On the daily chart, we see that the price got back above the SMA 100 moving average, which tends to be a very strong support zone. But at the same time, a lower low has been formed and the current declining upper trendline suggests a more bearish sentiment.
Figure 2: US SP 500 index on daily and 4H chart
The current nearest resistance is in the area around 4,427. The next significant resistance is around 4,481. Support, on the other hand, is at 4,397 and the next support is at 4,369.
The US indices are a barometer of the so-called risk-on and risk-off sentiment. This sentiment is well illustrated by the AUDJPY pair, which correlates strongly with the SP 500 index in the short term. The next picture shows AUDJPY on the daily chart and on the 4H chart, where the movement of the SP 500 index is shown for comparison as well (red line).
Figure 3: AUDJPY on D1 and H4 chart where it is shown together with SP 500 (red line)
The AUDJPY pair is approaching its resistance, which is at 82.00. Last week, AUDJPY defended strong support at 80.00.
A bearish formation called the death cross is confirmed on the DAX.
When the moving average with a period of 50 falls below the moving average with a period of 100 on the daily chart, a death cross formation is formed. This is mostly a bearish signal and the direction of the DAX has confirmed it so far. The EMA 50 moving average is below the SMA 100 on the H4 and also on the D1 chart.
Figure 4: The DAX on daily and 4H chart
The DAX is well below the SMA 100 on the daily chart, confirming the bearish sentiment. Worse data from the German economy supported this move. The price bounced off the 14,821 support last week, which remained in place. We can also consider 15,032 as support, which was broken, but the price immediately afterward got above this support again.
Resistance is 15,262 and then further on 15,457.
The DAX correlates strongly with the US SP 500, so we recommend keeping an eye on the SP 500 for further developments on the DAX.
The euro continues to fall against the dollar
The worse data from the European economy has of course had a negative impact on the European currency. The euro continues to move in a downtrend on the pair with the US dollar, which we can see on the 4H timeframe and also on the daily chart. The price has broken through significant support in the band around 1.16 and continues to fall further.
Figure 5: EURUSD on the H4 and daily chart
The current resistance can be taken at a value of around 1.15644. The next resistance is then 1.1600. As current support, we can take the value around 1.15, where the euro last traded against the dollar in July 2020.
The gold is inversely correlated with the US dollar
The stronger the dollar, the weaker the gold and vice versa. The inverse correlation between the US dollar and the gold, whose value is expressed in dollars, is logical and is shown in the following figure.
Figure 6: Gold and the evolution of the USD index on the D1 chart
We can see that when the US dollar started to fall, gold strengthened. Conversely, when the dollar started to strengthen, gold weakened. Currently, the US dollar is strengthening and this is not good news for gold. From a technical analysis perspective, gold is in a downtrend on the daily chart. The EMA 50 moving average is below the SMA 100, which is a bearish constellation.
The nearest resistance is at 1,769. Support is around 1,722.