Market Overview
Is the risk rally sustainable? After two days of strong recovery gains, we have traders taking a far more cautious stance again this morning. Essentially, there is a continuation of recent trends in both number of cases and deaths of the Coronavirus. Furthermore, deaths are now being seen outside China. Despite this, there has been a sharp risk rally in the past couple of sessions after a substantial injection of liquidity by the Peoples’ Bank of China and some decent manufacturing PMI data. However, there are signs this morning of the move dissipating. Bond yields are tipping back lower, the Chinese yuan is again weakening, whilst the safe havens of yen and gold are finding support again.
Until there is a real sign that the virus is being contained (slowing trends of cases and deaths presumably), then markets have little reason to be bullish beyond the odd knee jerk bounce higher. We are likely to therefore see ongoing choppy market conditions prevail. The services PMIs today could be a near term signal of how concerning the Coronavirus could be.
The China Caixin Services PMI slipped to 51.8 (52.0 exp, 52.5 in December). Although this was not as bad as feared, if European and US data shows similar slippage then we could see the market fear levels elevating once more.
Wall Street closed sharply higher last night, with the S&P 500 +1.5% at 3297, however, US futures are slightly lower this morning by -0.2%. Asian markets were broadly higher as they played catch up on yesterday’s risk rally, with the Nikkei +1.0% and Shanghai Composite +1.2%. European markets are following the cautious early signals out of Wall Street, with FTSE 100 Futures -0.3% and DAX Futures -0.1%.
In forex, there is a cautious look to early moves too, with JPY clawing back some of yesterday’s losses and USD broadly performing well again.
Commodities remain a key asset class to watch, as gold swings back higher again by +0.5% and there are early gains on oil (as it has done throughout the past week before selling off into the close).
Today is the turn of the services PMIs to drive sentiment from the economic calendar. The final Eurozone Services PMI at 09:00 GMT is expected to be unrevised from the flash at 52.2 (52.2 flash January, 52.8 final December). This would mean the final Eurozone Composite PMI is expected to remain at 50.9 (50.9 flash January, 50.9 final December).
The UK final Services PMI is expected to be confirmed at 52.9 (52.9 flash January, up from the final December reading of 50.0). This would keep the final UK Composite PMI at 52.4 (52.4 flash January, 49.3 final December), but given the upside surprises in the manufacturing and construction PMIs, the risk must be to the upside in the UK data.
Into the US session, the ADP Employment change is at 13:15 GMT and is expected to drop back to 150,000 (from 202,000 last month). The US ISM Non-Manufacturing is at 15:00 GMT and is expected to remain at 55.0 (55.0 in December). EIA Crude Oil Inventories are expected to show another build of +3.0m barrels (after last week’s larger than expected build of +3.5m barrels).
We are also on the lookout for central bankers today, with the ECB President Christine Lagarde speaking at 1215GMT. Also the FOMC’s Lael Brainard (voter, centrist) is speaking at 2110GMT.
Chart of the Day – USD/CAD
The Canadian dollar has suffered significantly in recent weeks as the Coronavirus has smashed the oil price whilst leading to US dollar outperformance. This move has once more returned USD/CAD to test the key ceiling of resistance between 1.3300/1.3350. The question is whether this will once more be an area where the sellers regain control. The move comes with strength through momentum indicators, with RSI above 70, MACD lines continuing to gain ground above neutral and Stochastics also strong. There is an uptrend on the daily chart coming in at 1.3250 today which is supportive. The hourly chart also shows continued positive configuration on momentum indicators, with RSI above 40 and MACD lines above neutral. However, given the resistance band 1.3300/1.3350 which has so often provided the market turning point, we must be on alert for potential profit taking signals. Although the uptrend is intact, this resistance is a supply of overhead sellers. The hourly chart shows the 89 hour moving average is a basis of support (around 1.3250 early today) and is another trigger signal to watch for a potential bull failure. The trend is your friend, until it ends. So for now the bulls are in control, but for how long?
EUR/USD
Renewed selling pressure is taking hold on EUR/USD. A second negative candle with a decisive failing of the recent rally in the resistance band $1.1065/$1.1100 continues the now five week downtrend channel. Near term momentum signals are again turning lower with MACD faltering in a recovery, Stochastics bear crossing lower around neutral and RSI again failing around the 50/55 area. The hourly chart shows a hovering around a band of support from a pivot around the $1.1035 old near term breakout. How the market reacts around here could be key near term. With hourly momentum turning corrective the pressure is renewing for a test of the $1.0980/$1.0990 key lows once more. Resistance is also growing in the $1.1065/$1.1100 area too.
GBP/USD
The outlook for Cable remains highly uncertain. January was a very choppy month, and if anything, as we have moved into February, the outlook has become even more difficult to call. However, what is notable is that there is an appetite for the bulls to defend corrective moves into the $1.2900/$1.3000 area. A positive candle yesterday has once more seen the market close back above $1.3000. With an arguable bull hammer candle there is a support of recent lows between $1.2940/$1.2960. However, the marginal negative bias is back in play again, as the Stochastics swing lower. In 2020, there has only been one close on Cable below $1.3000, so the sellers would be looking for consistent closing breaches of this level to suggest they are finally breaking through the support. A mild early slip back today suggests the pressure remains on the bulls. The hourly chart shows resistance around $1.3030 needs to be decisively breached for them to build momentum in a recovery again. Subsequent resistance is around $1.3080. This is a market very much in the balance now.
USD/JPY
With two successive strong positive candlesticks, the outlook has once more been flipped around. Adding 85 pips on the day is a huge session for Dollar/Yen (almost double the Average True Range of 47 pips). The rebound has not only breached the two week downtrend, but also moved through resistance at 109.25 and closed yesterday above all the moving averages. Momentum indicators are swinging higher. A Stochastics bull cross buy signal at a level where the near term rallies have all kicked in over recent months. Also the RSI has moved above 50. How the market responds to a huge bull candle is just as important. So today’s session is key. Can the bulls hold on to the recovery? The support 109.15/109.25 is now important. The hourly chart shows an early unwind, but this band of support should now house near term underlying demand if this is a rally that has any legs in it. Closing back below would now be a disappointment and point towards renewed uncertainty.
Gold
The bulls have lost control of the rally. The uptrend has been decisively broken by a second strong negative candlestick and as such we turn neutral on a near term basis. Although our medium term outlook on gold remains positive, the near term bullish arguments have been crossed off one by one. It is though important to remember that just because an uptrend has been broken, it does not necessarily mean a big corrective move is imminent. Momentum indicators have swung lower (RSI below 60 and a near term cross lower on Stochastics), however, MACD lines are merely slipping back within their positive configuration. Dropping through support at $1562/$1572 has opened a retreat to the 38.2% Fibonacci retracement (of $1445/$1611) at $1546 which is a good basis of support now. We remain positive on gold on a medium term basis whilst the support band $1536/$1546 remains intact and weakness is a chance to buy. So with gold rebounding this morning, there is clearly an appetite to support gold still. The hourly chart shows a decisive move back above 50 would be a positive signal again. Initial resistance now $1562/$1570.
WTI Oil
The oil chart could be a massively important chart for the sustainable recovery of risk appetite. It is difficult to imagine a risk rally taking hold whilst oil is still falling. As such another intraday sell-off into the close must be a concern. A continuation of the recent two week downtrend, another bear candlestick and a closing breach of $50.00 (this is a 12 month low now). With momentum still deeply negative and showing little real sign of sustainable recovery, intraday rallies are a chance to sell still. This has been a feature of each of the past five sessions. Once more the overnight move is for a rebound to build, but there is resistance now around $50.50/$51.00 initially, before the resistance around $52.00 which is more pronounced on the hourly chart. Beyond the early $49.30 low, there is little real support until $42.00.
Dow Jones Industrial Average
Another huge swing in sentiment has seen the bulls pulling the Dow sharply higher again. This time, the move was held to close the session with strong gains. The problem with trading over anything longer than an intraday time frame, is whether this time is the real move to back. There is now a gap at 28,630 which remains unfilled from yesterday’s session which is needs to be filled. Furthermore, until the resistance at 28,944 (last week’s key lower high) is breached, then the corrective outlook will also sustain. However, in the least, there is a moderating of the corrective momentum indicators, with the Stochastics flattening off and RSI ticking back to 50. The reaction to the 28,630 gap and the resistance at 28,944 could become the key near term signals now to build a renewed positive outlook. Above 28,944 would re-open the all-time high again at 29,373. Last week’s low at 28,170 is growing in importance as a near to medium term support.
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