Market Overview
Equity markets are responding well to the rally into the close on Wall Street last night. It had looked as though a third and what could have been decisive bearish session in a row was forming, but the bulls managed to claw their way back and leave a decent legacy for Asian and European markets early today. However, despite this rebound on equities there is still a hint of negative bias for market sentiment as Treasury yields remain on a sliding track lower (especially at the longer end of the curve, to leave a “bull flattening” move, something that tends to be risk negative). Chinese economic data for April was somewhat mixed overnight, with the (broadly) two halves of the economy showing differing signals. Industrial production was better than expected, but retail sales was worse and fixed asset investment also missed expectation. This leaves the commodity currencies on the back foot where Aussie and Kiwi are underperforming across the major pairs today. There is a notable improvement across the key commodities though, with oil beginning o show signs of promise with another move higher this morning, whilst gold and silver are also increasingly strong again.
Wall Street rebounded strongly into the close to end the session with the S&P 500 +1.2% higher at 2852. There is an early consolidation on futures, with the E-mini S&Ps -0.1% which all translated to mild gains on Asian markets. The Nikkei closed +0.6% higher whilst Shanghai Composite was all but flat. In Europe, there is an early swing back higher with FTSE futures +0.9% and DAX futures +0.8% but with hints of negative sentiment across other asset classes, can this move last? In forex, the outperformance of JPY and USD smacks of negative sentiment. AUD and NZD are underperformers, along with further downside on GBP which is again eyeing its key April low on Cable. In commodities, the breakout on silver continues to run with further gains of +2% early today, whilst gold is also holding on to yesterday’s gains (+0.3%). The run higher on oil is also being extended by over +2% today for both WTI and Brent Crude.
There are a few important data releases to keep an eye out for on the economic calendar today. The flash reading of Eurozone Q1 GDP is at 1000BST and is expected to show -3.8% (which would be the same as the prelim reading, and down from the -0.1% Q4 2019). Onto the US data, the New York Fed Manufacturing for May is expected to improve slightly to 63.5 (from -78.2 in April) but this would clearly be still extremely negative. US Retail Sales will be key at 1330BST, which is expected to show core sales (an ex-autos) declines by -8.6% in April (after -4.5% decline in March). Industrial Production for April is at 1415BST and is expected to show a decline of -11.5% (after a decline of -5.4% in March). Capacity Utilization is expected to slide further to 68.0% (from 72.7% in March) which would be the lowest reading since July 2009. We are also looking out for the prelim Michigan Sentiment at 1500BST which is expected to show a further deterioration to 68.0 (from the 71.8 for April).
Chart of the Day – Silver
We have seen precious metals strengthening in recent days as risk aversion has taken hold. We have noted previously that silver is like “gold on steroids” and once more its performance over the past week reflects this. Having broken out to a two month high on a closing basis yesterday, the move is storming higher today. The April reaction high of $15.83 held for a month, but we can now take this as another range breakout and imply an upside projection of around $16.90. This comes as the RSI is confirming the breakout above 60 and MACD lines are accelerating above neutral. It is interesting to see that where the 50% Fibonacci retracement (of $18.93/$11.62) at $15.27 has now turned into a basis of support in the past week. This means that 61.8% Fib at $16.14 could be an initial source of consolidation. However, we look to use intraday weakness into the strong breakout support band $15.61/$15.83 as an opportunity to buy. There is now strong support at $15.24 and $14.48 is now a key higher low.
The negative pressure had threatened to build in yesterday’s session, but once more a move for decisive direction has been neutralised. Over the past month, EUR/USD has been consistently ranging, between the extremes of $1.0725/$1.1015. However, this has now tightened to a mini band within the lower half of the range, between $1.0765 support and pivot resistance at $1.0890. Two successive negative closes suggests that there is a slight negative bias for pressure on the lows. This is also reflected as daily momentum indicators are just edging lower again. However, this remains very much a market stuck in a rut for now. If the RSI begins to slip into the 30s (currently low to mid-40s), and Stochastics drop below 20 (which they are beginning to threaten), then it would suggest the support coming under growing pressure. For now though, even the hourly chart is stuck rangebound (hourly RSI oscillating between 30/70). Initial resistance at $1.0825 today.
The outlook for Cable remains under pressure. Having broken below $1.2245 the market has made a move on the support at $1.2160 which is the key April low. So far this support remains intact as the market rebounded into the close yesterday. However, negative momentum is growing and is now implying that the $1.2160 support is likely to be broken. The 14 day RSI is falling below 40 at seven week lows, whilst MACD lines pull decisively below neutral and Stochastics are in bearish configuration. A downtrend has formed in the past two weeks and any near term rally within that downtrend looks to be a chance to sell now. The hourly chart shows resistance in the previous band of support at $1.2245/$1.2265 whilst the hourly RSI is struggling consistently under 60 and hourly MACD lines failing under neutral (both signs of a classic bear move). There are successive lower reaction highs this week at $1.2340 and $1.2375 whilst the bulls need at least a move above $1.2400 to shift the corrective outlook now. Breaking $1.2160 confirms the move for a downside target of $1.1845, with very little real support until $1.2000 area.
Throughout this week the price action on Dollar/Yen has been swinging first one way and then the other. As we approach the end of the week, we are no closer to finding out who is in overall control of the market. After the early strong dollar move was retraced, the outlook has become somewhat more clouded. Given this uncertainty, we take a step back on our expectation of renewed negative outlook on Dollar/Yen (i.e. the yen being strong than the dollar). Looking on the daily chart, the market is trading between (broadly) 106/108 and there is a pivot at 106.90 around the mid-point of this range. The move back from 107.75 never closed below the pivot and has ticked back higher again. There is an argument to say there is a very mild positive bias that has formed now. Trading above the 106.90 pivot this morning, whilst daily momentum is ticking slightly higher. However, the hourly chart lacks conviction as the overnight rally has dissipated to leave resistance building at 107.40. We are now neutral on Dollar/Yen between this 106/108 range and the near term bias will be taken from the reaction around the 106.90 pivot.
Gold
After more than two weeks of trading with little or no conviction from one session to the next, we finally see the gold bulls beginning to position for the next move. With an uptrend forming over the past two weeks, the bulls have now strung three positive closes together, with some strong candlesticks too. A breakout above $1722 has brought the market to a three week high and the market is testing the key resistance of the range highs $1738/$1746. There has been a shift in momentum indicators too, where RSI is back in the 60s, Stochastics accelerating higher and even MACD lines are on the brink of a bull cross. Trading decisively clear of the old $1702 pivot now means that the support is now at $1722 for the basis of the upside test. We continue to expect the breakout to be seen and a move to new multi-year highs. Above $1746 would see gold at its highest levels since November 2012, where it formed a high at $1754. The next key upside level is $1795 which was a basis of resistance throughout 2012. The hourly chart shows that the bulls have consolidated yesterday’s move and are looking to go again today with momentum strong. There is a near term buy zone now between $1722/$1726. A move back under $1709 (yesterday’s low) would revert to the ranging outlook again.
Brent Crude Oil
The bulls have responded remarkably well in the past 24 hours. With the market drifting back to increase pressure on the support around $28.65/$29.00, yesterday’s strong bull candle reflects a renewed strength in the market. Previously we have seen rallies faltering (especially in front of last month’s WTI May contract expiry) and selling pressure resuming. However, there seems to be a shift in sentiment now. Yesterday’s bull candle has broken a mild corrective slip of a downtrend and is now threatening the resistance of the May recovery high at $32.25. Importantly, we also see that momentum indicators are calling for a breakout, with RSI this morning (not yet confirmed) at a four month high, whilst Stochastics are ticking higher in strong configuration and MACD lines are also close to moving positive for the first time in four months. A closing breakout above $32.25 would be a key moment, given the correction that was threatening earlier in the week. This would be a mini range breakout that would imply $35.90 which would bring Brent in range of the key April highs of $36.40.
Early in yesterday’s session it had looked as though Wall Street was ready to throw in the towel on the rally. For the Dow, the important support at 22,940 had been breached and the market was trading at a five week low. However, the bulls managed to pick themselves up off the floor and posted a remarkable rally that once more threatens to change the complexion of the outlook. The result was a hugely encouraging candlestick that has reclaimed the original breakdown level of 23,360 but also prevented the formation of three negative candlesticks (which would have been the first time this had been seen since the rally began). However, this move now needs to be built on. A second decisive positive candle today would certainly help. Given the rolling nature of the market in the past month, technical indicators have lost their recovery impetus. MACD lines have recently crossed lower, whilst Stochastics are tracking lower. This comes as the market has recently formed a lower high (at 24,380) and now a lower low (at yesterday’s low of 22,790). For the bulls to regain control of this outlook, the building blocks of this new downtrend need to be broken. At the very least 22,790 has to now be a key low. A move above the now flat 21 day moving average (around 23,835 today) would help to improve the outlook. On the hourly chart a bull failure on hourly RSI under 60 would be a concern that this rebound is a bear rally. Resistance 23,660/24,080.
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