Market Overview
In a stunning move, the Federal Reserve met over the weekend and announced just before markets opened for the Asian Monday morning, that they would cut rates to near zero, engage QE and coordinate with other central banks to try and reduce overnight swaps rates. The dollar has surged in value in recent sessions as swaps rates of overnight funding in money markets had clogged up. The Fed has sought to free this log jam. There has been a degree of dollar corrective move initially today, but nothing too substantial. After another -100bps off the Fed Funds rate (that is a total of -150bps in the past couple of weeks, all of which in emergency cuts) and the Fed engaging in QE of $700bn, conventional would suggest that this incredible move would be positive for risk appetite (or at least supportive). Nothing of the sort, the move has resulted in massive renewed selling pressure on risk assets. Oil is falling sharply again, US futures on equities are limit down (c. -5%) and commodity currencies are all weaker. This mammoth easing move smacks of the Fed panicking that there is something of concern much greater than markets have anticipated even after the enormous falls of the past few weeks. The S&P 500 rebounded by over 9% on Friday, the way markets are shaping up early today, this could all be given back, and more. In an ocean of incredible stats of recent weeks, is that gold is actually trading lower than it was since Coronavirus was even heard of. The more margin calls are triggered, the more the yellow metal has to be sold. Volatility remains at stunning levels. Even with this action from the Fed, markets are continuing to spin with ever greater centrifugal force down the plug hole.
Wall Street closed with huge gains on Friday (S&P 500 +9.3% at 2711), but they will be giving much (perhaps more) back today with the US futures limit down -4.8%. Asian markets showed broad selling pressure with the Nikkei -2.9% and Shanghai Composite -3.4%. European futures show massive early selling of over -5% in early moves. In forex, there is a spilt on major currencies, with a dollar correction back against EUR, GBP and JPY but the commodity currencies are all under further pressure. In commodities, gold is marginally higher (+$4), but silver is getting smashed (-4% lower) and oil is similarly lower.
There is a light economic calendar today aside from the Empire State Manufacturing Index from the New York Fed at 1230GMT. Expectation is for continued growth in March but less than February, with a drop back to +3.0 (from +12.9 last month).
Once more, there are no central bankers due slated to speak today, and FOMC members remain in their blackout period until Wednesday’s FOMC announcement.
Chart of the Day – EUR/CHF
Looking at major forex currencies, the direction of Euro/Swiss gives a hint about the broad outlook for markets. The euro has been trading as a safe haven recently, but that is nothing compared to the performance of the Swissy. Subsequently, since December there has been a bear leg lower on EUR/CHF. However, the move lower has been slowing in recent weeks, in a move that could now be the early signs of a recovery. Despite the continued run of lower highs and lower lows, the momentum indicators are looking to develop medium run positive divergences (over a number of weeks). The falling 21 day moving average has often been used as a basis of resistance (and again on Friday) but momentum in the sell-off continues to slow. The key for recovery in EUR/CHF (which would also be a signal for broader risk sentiment recovery) would be a near term closing move above 1.0605 which has become a pivot over the past month. The negative sentiment is still running into this morning as Friday’s failed rally is pulling lower once more again today. It is too soon to call recovery yet. We will be watching support at 1.0540 which has been forming in the past week and reaction around the 21 day moving average again. A close above 1.0605 opens the key near term resistance at 1.0710.
There can be no surprise in EUR/USD reacting higher in the wake of the Fed’s latest surprise dovish moves. Perhaps the only surprise is that it is not trading even higher! Technically, the corrective move which has been developing over the past few sessions is still developing. Momentum indicators have been busy pulling lower and are now back at an interesting crossroads. The near term correction turning more sustainable would come with RSI and Stochastics below 50, and a MACD bear cross. These are close, but are on hold this morning as the market has traded higher. The resistance of $1.1200/$1.1240 has already limited this morning’s rebound. On the way lower, the levels to watch are again $1.1100 (an old medium term pivot) and the 61.8% Fibonacci retracement (of $1.0775/$1.1492) around $1.1050. Closing clear of this Fib level (especially in the wake of the Fed move) would be a strong signal of ongoing dollar strength. A very interesting crossroads for the pair.
Cable remains under pressure after four days of massive selling pressure. The reaction early today has been higher, in the wake of the Fed’s loosening of monetary policy, but for now, the question is whether the recovery can stem the tide of dollar strength. As yet, the recovery is small fry, so it may take a few days to know whether the market’s view on dollar strength are changing. Technically, there has been a slowing of bearish selling pressure on Cable, but nothing yet to suggest a decisive change in tack. No real buy signals yet (aside from a slight tick higher on RSI back above 50 (a very basic positive signal). Breaching $1.2505 (the 76.4% Fibonacci retracement of $1.2193/$1.3515) opens for a full retracement to $1.2193. Nothing has changed sustainably this morning yet to suggest this full retracement will not be seen. The 76.4% Fib level at $1.2505 also becomes a basis of resistance now. Early morning resistance is $1.2430. Support is initially the early low at $1.2250.
The record levels of volatility through Dollar/Yen continue. The huge swing higher into the close Friday has been followed by a huge swing lower this morning. We have talked about the Fibonacci retracements of the 112.20/101.20 sell-off being a gauge for the recovery, and the volatility has been at such an extent, that 61.8% Fib at 108.00 was a basis for Friday’s close, whilst now the market swinging back lower is more concerned with the 50% Fib at 106.70 and the 38.2% Fib at 105.40. This move is clearly questioning the sustainability of a recovery. However, given the massive uncertainty of any moves holding from day to day, any outlook remains very short term. The RSI and Stochastics are back around their mid-points again, so any renewed move will have potential legs. Once the dust begins to settle (if that is even possible) on the Fed’s move, we will know more about near term direction. For now, the move is back lower. Support around 105.00/105.40 is in focus.
Gold
We have been seeing an acceleration in the correction on gold. It had looked early on Friday that there was support beginning to form, but as the US session took over a near -6% decline wiped away those hopes. Even into today, with the initial reaction higher on the dovish Fed, gold is again pulling lower. This reaction gives us concerns over our long held view that weakness will be bought into. Right now, the momentum of this selling pressure is a huge weight on the price. The market has now closed below $1536 which was the key support from January and momentum is increasingly turning negative now. To say that gold is trading lower than it was since before the market had even heard of Coronavirus, is incredible. The bulls will hang on to the fact that an uptrend dating back to July 2019 has held, but the negative near term technicals are eating ever more into the medium to longer term outlook. The rising 144 day moving average is at $1525 today. The RSI shows that near term corrective moves have found support consistently around 35 before the bulls resume control. This is a crucial moment for the bulls now. With Coronavirus and astounding levels of dovish central bank moves, all convention says that gold should be moving higher. Right now, the technicals say differently.
WTI Oil
The prospect of a recovery on oil was given a mixed bunch of signals on Friday. Whilst the support around $30.00 held well, the intraday failure at $33.85 left a mixed close on the day. An early rebound today has also been sold into and the support is under pressure once more. Taking a step back, the continued struggle on momentum indicators suggests that the bulls will find it hard to trust even intraday recoveries right now. The outlook remains deeply negative and as such, rallies continue to be sold into. Leaving initial resistance at $33.85, the bulls realistically need to overcome $36.35 for a sustainable recovery. The renewed negative momentum puts $30.00 support once more in the spotlight. A close below $30.00 opens $27.35 once more.
Calling moves off a single candlestick is impossible right now. Conventionally, a hugely positive move of +9.4% would be extremely bullish, but we live in incredibly volatile times. With futures limit down today (-5%) the market reaction could even be to (incredibly) unwind Friday’s rebound. It is impossible to call markets on a time horizon of over 24 hours right now. Resistance of an open gap at 23,328 and Friday’s high of 23,190. We still may not have seen the bottom either, with Thursday’s low at 21,155 not for sure a support that is sustainable. Given the Fed’s actions, how the market responds when it does open today could be crucial. Hitting new multi-year lows after those huge moves from the Fed, could be catastrophic.
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