Market Overview
Traders come to their desks on Monday with a cautious risk positive tone to sentiment. Europe is the focus this morning. There have been three days of intense discussions over the format of the proposed EU Recovery Fund, and as yet no agreement on how the push forward. However, the EU-27 are close. For now, the “Frugal Four” (The Netherlands, Austria, Denmark and Sweden) are still standing in the way of agreement, but apparently Denmark is wavering and there is not too much between the two sides. The proportion of grants and loans of the €750bn package seem to be the sticking points, and there could be potential rebates in the EU budget as further incentive to come to a deal. The talks resume at 1500BST today. However, the feeling is that the talks are making progress. Markets are taking this all positively as it would be a strong signal that the EU-27 is willing to push ahead with political union and in allowing the European Commission to raise common debt, is a huge step forward on the path to fiscal union. Core-periphery yield spreads are tightening (Italian 10 year BTPs over German Bund is around 162bps and the lowest since March) whilst the euro is strengthening. Aside from the euro move, there is little real other direction on major markets aside from a shade of yen weakness. Equities are mixed into the European session, although US futures are unwinding the gains of Friday.
Wall Street closed higher on Friday with the S&P 500 +0.3%, but futures have slipped back early today (E-mini S&Ps -0.5%). This has driven a mixed session in Asia, with the Nikkei almost flat +0.1% whilst the Shanghai Composite was +2.8% as buying took off again. In Europe there is a cautious start, with both DAX futures and FTSE futures around the flat line. In forex, the EUR gains are the main mover, whilst JPY underperformance is reflecting of the mild positive risk tone. In commodities, there is little direction on gold or silver, whilst oil is slightly lower by just over half a percent.
It is a quiet look to the economic calendar at the start of the week. The EU Current Account is at 0900BST and is expected to see the surplus widening to +€15.2bn in May (from +€14.4bn in April).
There are a couple of Bank of England speakers who are testifying to the Treasury Select Committee at 1610BST and could be of interest. Andy Haldane (the BoE chief economist) was the dissenting voter as the MPC extended QE last meeting, whilst Silvana Tenreyro has previously talked of the prospect of negative rates.
Chart of the Day – USD/CAD
Just as the oil price is struggling to break the shackles, we see the downside momentum on USD/CAD stuttering (CAD bulls are just taking a step back). The past month has seen a tight range formation which has broken a well-defined trend on USD/CAD (which is not the only major pair to see this). The market is now consolidating between the support at 1.3480 and resistance at 1.3715. This consolidation range has broken a four month downtrend as the Loonie bulls have been unable to breach the support at 1.3480. Despite this though, we still expect rallies to fade and our preferred move is a downside break to set in. As the market rebounded late last week, there is still a shallower downtrend (today at 1.3625) that is a good gauge for failing rallies. Momentum indicators remain negatively set up on a medium term basis, with RSI stuck between 40/50, MACD lines faltering under neutral and Stochastics swinging lower again. We look to use this latest rebound as an opportunity to sell now. Last week’s high of 1.3645 is initial resistance and the bulls can only realistically claim a recovery is underway above 1.3715. We position for a move below 1.3480 and a retest of 1.3310 in due course.
The euro has started the new trading week on strong ground. It is a testament to the belief that traders have that EU politicians can push the process of the EU Recovery Fund forward. Technically, Friday’s close above $1.1420 was a key moment, and continuing this move early today shows that the bulls are ready this time and the outlook for EUR/USD is ever-improving. Near term weakness is being consistently bought into as the market pushes higher within an uptrend channel of the past three weeks. Momentum is confirming the move higher, with the RSI into the high 60s (at five week highs), whilst MACD lines are rising and Stochastics strong. This morning we see the market looking to push above $1.1450 (last week’s high above the June high) to a level not seen since March’s spike high of $1.1490. This is a market moving towards the crucial resistance band of $1.1490/$1.1500 which has been a barrier for almost two years. Given the political decisions still to be made (discussions on the EU Recovery Fund resume today at 1500BST), there is still potential for near term volatility. We would though continue to view supported weakness as a chance to buy. There is strengthening support $1.1350/$1.1370, with the importance of $1.1255 growing as a higher low. Above $1.1500 there is resistance initially at $1.1570/$1.1620 but the way would essentially be open towards $1.1800 area.
Another small bodied candle on Cable around the support at $1.2540 leaves the market in a state of consolidation. However, this consolidation is just edging towards a more neutral outlook within the medium term range once more. Seeing a bull rally fail at $1.2670 and stumble under the falling 7 month downtrend (today at $1.2660) has resulted in the market dropping back to a band between $1.2435/$1.2540 which has often been where key moves have turned in recent months. We see this as being broadly in the middle of the $1.2075/$1.2810 multi-month range, and with it also into the midst of a clutch of flat moving averages brings the market into neutral configuration. Momentum indicators are drifting back towards neutral too, with the RSI unwinding towards 50 and MACD lines tailing off a shade above neutral. Given the weight of overhead barrier and the neutralising technical indicators, we now turn neutral on Cable, both near term and medium term. We now look for the next signals that will enable us to take a decisive view on Cable once more. Given the struggle to overcome the 7 month downtrend, it will be difficult to turn bullish now without this being breached. Below $1.2435 would turn the market corrective again towards the range lows.
Consolidations are breaching trends across several major pairs, and with Dollar/Yen it is a similar story. Once more we see buyers returning to support the pair between 106/107 as selling pressure has once more faded. This move has now broken a near term two week downtrend and formed consolidation once more. The trend breach has also cone with momentum indicators beginning to edge more positively too. The Stochastics bull crossing is encouraging, whilst if the RSI can also begin to move into he 50s, it would add to an improving momentum. The bulls will be looking for a close above 107.40 which is near term resistance. This would complete a small base pattern and imply a move towards a test of the mid-range resistance around 108.00/108.15. Support at 106.60 is growing in importance, whilst 106.90/107.00 needs to hold for the immediate prospects of a move higher to continue.
For the past week and a half since the breakout above $1789, a consolidation has been developing on gold. This has taken the formation of a mini-trading range between $1790/$1818. The consolidation has broken a five week uptrend and resulted in strong momentum indicators just losing their impetus. However, there still seems to be an appetite to support gold into near term weakness. Since the big March volatility surge, gold has been consistently building foundations at higher levels for the next push into multi-year highs. There have been phases of near term weakness, lasting usually around a week, but time and again, the bulls return stronger than before. We still see further upside in the gold run higher, with implied targets from the April to June trading range breakout, implying anything from $1820 (on a conservative basis) towards $1868. In the coming weeks. Holding support at $1789 would be strong, but any supported weakness to between $1764/$1789 would be bullish too. It would be a move below $1744 which would seriously question the bullish outlook. This is key breakout support from the old range, but also now below the rising 55 day moving average (currently $1745) which has so rarely been breached over recent months.
There is still an edge of uncertainty over the outlook on Brent Crude. After moving promisingly early last week, two successive small bodied negative candles have once more pulled the bulls back from the test of $43.95. For now, there seems to be little real appetite to sell though, as there remains a run of higher lows intact over recent weeks. The first support of note comes in at $41.30. Momentum indicators are in consolidation mode as RSI continues to oscillate between 55/63 and MACD lines drift slightly lower. We take this to be a market biding time, rather than anything else, looking for the next catalyst. If supports begin to be breached, then perhaps the threat of a corrective move will begin to develop, however, for now, the overall pressure remains to the upside on $43.95 initially and then potentially closing the gap at $45.20.
The Dow sits tantalisingly close to a bullish break, but just cannot quite break free from the shackles of resistance. The downside gap from 26,940 may have been “filled” last week, but as yet has not been “closed”. The two daily candles since having filled the gap last Wednesday have reflected a market sitting with uncertainty. There is still the positive bias to moves, with momentum still ticking in positive configuration. The RSI a shade under 60 is still at five week highs and points to an upside break, whilst Stochastics are strong and MACD lines positive. However, it needs to “close” the gap at 26,940 to truly open the upside to test 27,580 again. This is our preferred move in due course. There is a growing support band 26,300/26,610. Below 25,995 would begin to question the potential upside, whilst 25,525 is a higher low with growing importance.
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