Market Overview
Coming into the European session today we see risk sentiment edging positively once more. The newsflow on COVID-19 still seems to be centred around the re-opening of economies, which if managed in the right way, should allow growth measures to pick up once more. US Treasury yields are edging higher, US equity futures are ticking positively again; whilst in the forex majors, we see the Australian and New Zealand dollars outperforming. The oil price has also seen a sizeable recovery in recent sessions. These are all risk positive moves. On the surface, all seems good, but under the bonnet, there are some concerns which question the longevity of the recovery. Risk premia in the euro has risen in the wake of the German constitutional court ruling against legality of the ECB asset purchases. The Japanese yen is also performing well, and when the classic safe haven performs well, the bulls will be wary. In the equities space, it seems that the mega-cap stock in the US are a key driver of the index moves, whilst market breadth looks a little more shaky. These are all warning signs that the perception of an all out continued risk recovery may not be as solid as the optimists would have you believe. The vice Fed chair Richard Clarida is suggesting that there may be a requirement for more policy support from the Fed. Markets tend to love it when the Fed acts as a backstop (the “Powell Put”), but this would also come amid signs of renewed deterioration, which the market would presumably react to first. The wild ride may not be quite over yet.
Wall Street closed well off its highs yesterday to have the S&P 500 end the session +0.9% at 2868. US futures are ticking higher again though, with the E-mini S&Ps +0.8%. Asian markets are still impacted by public holidays, but the Chinese Shanghai Composite was +0.5% today. European markets are looking mixed around the open with FTSE futures +0.1% and DAX futures -0.1%. In forex there is an early slip on EUR again, whilst mixed moves on USD, with mild outperformance from the commodity currencies (AUD, NZD and CAD) at the same time as broad outperformance from JPY. In commodities gold and silver continue their recent consolidation, whilst oil is also consolidating its recent huge recovery.
The staggered nature of the May PMIs (due to Labour Day) means it is the turn of the Eurozone for its final PMIs today. The Eurozone final Services PMI is at 0900BST and is expected to be confirmed that the flash reading of 11.7 will be correct (final March 26.4). The final Eurozone Composite PMI is also expected to be 13.5 (13.5 flash, 29.7 final March). The UK Construction PMI could get more interest than normal this time, with an expectation of 22.0 (down from 39.3 in March). Into the afternoon, the focus is on US jobs, with the ADP (NASDAQ:ADP) Employment change at 1315BST. Seen often as a proxy for Nonfarm Payrolls, this number could cause the hair to stand up on the back of the neck with an expected -20.050m. The EIA Crude Oil Inventories at 1530BST tends to be a market moving event for oil and is expected to show another strong build of +8.1m barrels which would be a slight reduction on last week’s 9.0m barrels build and a 15th consecutive week of increasing stockpiles.
Chart of the Day – AUD/USD
We often talk about risk proxies, so when we see a pick up in the Aussie dollar it tends to come hand in hand with an improvement in risk appetite. The recent corrective move on AUD/USD has brought the Aussie back to an area where the bulls seem to be happy to support again.. A “bull hammer” candlestick on Monday had looked to sling shot the market higher on Tuesday. However, yesterday’s bull failure has pegged the bulls back as a false start in the renewed bullish outlook took hold. The resulting candle (effectively a shooting star) has put the shackles on the bulls once more. Despite this, there is now important support at $0.6370 which has formed the bottom of an uptrend channel of the past five weeks. This trend support sits around $0.6400 today. The market is also now using the 21 day moving average as the basis of support (having previously found it as the basis of resistance throughout Q1 2020). Yesterday’s false start has also come with momentum indicators showing slightly less strong positive momentum now. However, whilst the RSI remains above 50, there is yet to be a build up of any real negative momentum and so little corrective moves (such as the latest one back from $0.6570) will still be seen as a chance to buy. The bulls will now be eyeing a retest of resistance at $0.6570, but need to also maintain the integrity of the five week uptrend channel. Therefore, we see the support at $0.6370 as important to this.
The euro took a sizeable blow from the ruling of the German constitutional court yesterday. What had been developing into a consolidation around the mid-range pivot of $1.0890 (within the range that is now broadly $1.0725/$1.1000) has turned into a near term negative configuration once more. Taking a step back we can see that as the volatility of February and March has settled down, we see a broad barrier for EUR/USD around $1.1000 where this had previously been a floor throughout November to January. This is now the ceiling and with two decisive negative candles, there is a more corrective configuration that is developing once more, which will be looking to use the pivot at $1.0890 as resistance. As momentum indicators tail lower again, there is a negative bias towards a test of $1.0725/$1.0770 now. The hourly chart shows a spike back higher failed at $1.0885 yesterday to firm up the pivot as resistance again. The next support of note is $1.0810, which is another old level and a breach would open the lows once more.
Despite a drop back in recent sessions, the outlook for Cable remains very marginally positively biased within a growing medium term range. This comes as e failure at the resistance of the range high of $1.2645 last week has begun to form support again around the mid-range pivot. A band of support around $1.2385/$1.2405 is helping to maintain Cable in the upper half of the range between $1.2160/$1.2645. Despite this though, there is still a very mixed near to medium term outlook, where it is difficult to take a view with much conviction. There is a distinct lack of direction once more on momentum indicators, with RSI flattening around 50, MACD lines also plateauing around neutral and Stochastics rolling over. Hourly indicators reflect this lack of clarity too. It is important for the bulls to now hold on to the support at $1.2385 as a breach would effectively complete a top pattern which would open the lows of the range around $1.2160/$1.2245. There is near term resistance at $1.2485 and this is becoming a market in need of a catalyst.
The continuation of the yen strength versus the dollar remains a warning sign for the longevity of any risk positive moves on other markets. Momentum in the move against the dollar has been quite slow over the past week and a half, but just in the past couple of sessions there has been more conviction in the move lower. The decline on USD/JPY is still fairly orderly and is becoming more decisive. The market now closing clear below the 50% Fibonacci retracement (of 112.20/101.20) at 106.70 for the first time since mid-March is a negative development in the outlook. This now opens 38.2% Fib at 105.40. Momentum indicators continue to track lower and confirm the downside break, with RSI below 40 for the first time since mid-March. We continue to use intraday rallies as a chance to sell. The daily chart shows the resistance of a shallow four week downtrend is a barrier to gains at 107.10 today. It is also notable that the resistance on the hourly chart is forming now around 106.60/106.90, as a near term sell zone. There would need to be a decisive move above 107.25/107.50 resistance to change the tone of the market now. With the breach of 106.35 this morning, a closing breach would open old levels between 104.55/105.85. The 38.2% Fibonacci retracement at 105.40 is also a target area.
Gold
The neutral position on gold that we took up mid last week seems to be about right now. The market continues to gravitate around the pivot of $1702 (the old March high). This is seeing the market consolidate within the growing three week range that has formed between $1660/$1746. The range is a growing consolidation and is something that is moderating the momentum indicators. We see that the daily RSI has settled in a position just above its 50 (neutral point), whilst the Stochastics are very similar. The MACD lines are still on a drift lower from a strong positive position, which coming in conjunction with moves on RSI and Stochastics, is a sign of consolidation. Taken together, this is still a consolidation within a bullish medium to longer term outlook. The positive candles of the last three sessions have just rolled over and the price is still stuck under the shallow two week downtrend. We retain our neutral outlook for now, but see any supported weakness towards the range support $1660/$1668 as a chance to buy. The bulls need to breakout initially above $1711 but for conviction need a move above $1721 to suggest they are gathering momentum again. We continue to expect the range highs of $1738/$1746 will be tested before further upside in due course.
Brent Crude Oil
Despite a little wobble over the weekend, we see that the recovery in the oil price continues. Another huge run higher yesterday added almost +14% to the price and what we now see is a decisive recovery trend in place over the past seven sessions. Momentum is also increasingly strong in this move. Throughout the first few months of 2020 when the oil price was trending lower, we repeatedly saw the RSI failing around 50 as rallies were sold into. This situation is now changing, with the RSI up into the high 50s, which is the highest level since the beginning of January. MACD and Stochastics are also riding this wave higher and suggest that weakness is a chance to buy. The near term uptrend is rising fast and is a good gauge now (currently at $28.80) but this is still -7% back from yesterday’s close. The market looked to push on early today but has just pulled back as we approach the European session. Still though, weakness is a chance to buy. Beyond today’s early resistance at $32.35 there is little real barrier to gains until the key April highs of $36.40. We still see $27.15/$29.00 as a good area of support.
Despite the Dow closing higher last night, the bulls will have come away shaking their heads. A gain of +133 ticks or around 0.5% sounds decent, but in the context of an earlier gain of 1.7% and a close below the open, this was a disappointment. A mild negative candle on the daily chart as a rally attempted to get hold is a real concern now for the bulls. A failure to close the gap at 24,186 (the market has also all but filled it now too from the 24,170 high) is a negative development too. The momentum indicators are rolling over, as the Stochastics now continue to decline and MACD lines tail off around neutral. The RSI closing decisively below 50 (which would be a four week low) would be a big signal that momentum could be about to lead the price lower. The support at 23,360 (Monday’s low) is becoming massively important now. Resistance is certainly building around 24,170 and this is developing into the most important phase for the recovery since it began.
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