Market Overview
Appetite for risk has begun the new trading week with a zestful skip as sentiment seems to be looking more positive today. Despite record daily infections of COVID-19 in the US, and concerns over the trading relationship between the US and China, some good news on coronavirus treatment (from Gilead (NASDAQ:GILD)) have seen the glass half full once more. It will be interesting to see just how long it lasts this time, as markets have still got a ranging feel to them over recent weeks. It is the start of US earnings season this week and the focus will be on the forward guidance, given the recent resurgence of infection rates across several major US states. Treasury yields ticked higher on Friday and are sustaining that move today. It is interesting to see though that even as yields have been trading around multi-month lows recently, the dollar is coming under growing pressure once more. The dollar is suffering amidst improved risk appetite, but is also not seeing a great deal of traction in risk off either. It would appear that the dollar is becoming the fall guy for the rising COVID rates in the US. Forex major pairs continue to reflect this relative weakening of the dollar, whilst the Chinese yuan rate below 7.00 is also a gauge. Today, we see the dollar struggles continue.
Wall Street closed solidly higher on Friday with the S&P 500 +1.0% higher at 3185, whilst futures are pushing on again today (E-mini S&Ps +0.6%). In Asian there was a decisive positive session, with the Nikkei +2.2% and Shanghai Composite +1.7%. European markets also reflect the strong moves, with FTSE futures +1.2% and DAX futures +1.7%. In forex, the theme is risk positive and dollar negative, with both USD and JPY struggling. The only anomaly to this is that NZD is also slipping. In commodities, we see support building again for gold and silver, whilst there is a mild drop of almost -1% on oil.
There are no key data releases for the economic calendar today.
There are a couple of central bankers to keep note of though. The Bank of England Governor Andrew Bailey is speaking at 1630BST and is expected to be asked audience questions, so the prospect of further QE and potential for negative rates will be the focus. At the same time the FOMC’s John Williams (NYSE:WMB) (centrist voter) also speaks at 1630BST.
Chart of the Day – GBP/AUD
We tend to be a little cautious of calling sterling long against anything right now, but the improvement on Sterling/Aussie may have as much to do with a sliding Aussie as it does a sterling rebound. The past few sessions have posted a succession of positive closes and four bull candles in a row has now been seen for the first time since the strong bull run of Q1. Is a decisive recovery from the 1.7865 now taking hold? A move above 1.8090 may have only been a minor bull break higher but it was a pivot line broken and suggests that the old lows which have been for so long a basis of resistance, can be broken. A small upside target is implied at 1.8315 initially, but technical indicators are now decisively turning positive. The 21 day moving average has been an excellent basis of resistance and flanked a nine week downtrend, but the rebound has now breached both. There is a decisive recovery underway on MACD and Stochastics, whilst on Friday the daily RSI moved towards 50, to a three month high. The reaction to this morning’s early slip back will be an interesting gauge. Holding the 1.8090 neckline as a basis of support is important in the coming days, and 1.8055/1.8090 is a near term “buy zone”. If this area holds, then the bulls will begin to eye a move to test the key June resistance at 1.8450.
It has been interesting to see how the market has dealt with the initial failed break above $1.1350. Pulling back into near term support around $1.1255 (effectively the mid-point of a near term range) was used as an opportunity as the bulls bounced back on Friday. Ticking higher again today, they are looking to push forward once more to test $1.1350. For a while we have been looking for the breakout of this range to be to the upside and a close above $1.1350 is favoured in the coming sessions. This would then open key resistance of $1.1420 and on towards $1.1490 in due course. This rally has been a slow burn for EUR/USD bulls (and still is) but the market is once more positioning for a move to break higher. The positive medium term bias to momentum points towards buying into weakness, although on a near term basis we continue to see momentum indicators are ranging (daily RSI between 52/61 for the past three weeks). The mild positive bias on the hourly chart has seen the market edging back above $1.1300 which is an initial basis of support today. Thursday’s high of $1.1370 is a barrier.
The near term importance of holding on to the neckline of the small base pattern at $1.2540 is key as it maintains the prospect of a continued recovery on Cable. An uptrend formation of the past two weeks is also holding. It means that this near term recovery is now testing the resistance of a much bigger, seven month downtrend on Cable, which comes in at $1.2690 today. A strong start to Monday’s trading is now building on the strengthening of momentum now, with RSI into the low 60s, MACD lines finding positive traction from a bull cross at neutral. There is a confluence of resistance overhead though, with an old rebound high at $1.2685 to overcome too. This would mean that if Cable can start to trade consistently in the $1.27s it would be a signal that the bulls are gaining a solid stronghold on the market. Initial support of Friday’s low at $1.2565 is leaving $1.2585/$1.2600 as an area to look for long positions were this morning’s rally to fade.
USD/JPY has been under pressure in recent sessions, but there was just a hint into the close on Friday that the downside move was just beginning to lose impetus once more. On a medium term basis, the pair is back into an important zone of support 106/107. Since March, this area has frequently been tested, but has held as a basis of support. It has become the lows of a medium term trading band 106/109.85. Once more we have seen the market drift back into the 106/107 band. However, as the selling pressure just began to ease slightly on Friday there are a few signs that this could once more be an area to start forming a recovery from. Hitting a low around 106.60 on Friday, the market has begun to tick higher. On the hourly chart we see a downtrend of the past few sessions coming in at 106.95 this morning (also where Friday’s rebound into the close hit). Hourly indicators suggest this is a near term inflection point, with hourly RSI around 50 (where unwinds on recent days have failed). So if the bulls can build on their rebound and move back above 107.00 again then in the least it would suggest the selling pressure is dissipating again. It would also though raise the prospects of a near term recovery taking hold. Resistance lies over head initially between 107.10/107.40. Initial support at 106.75.
The decisive breakout above $1789 was a key moment last week. It continued the run higher which has been flanked by a now five week uptrend and once more broke through a previous high to move to multi-year highs. We are backing this bull run on gold and although the bulls took pause for breath towards the end of last week, importantly, there has been little damage to the breakout. There is still an appetite to support gold into weakness. We see anything into the $1789/$1800 area as a chance to buy. Momentum indicators remain strongly configured, with RSI in the high 60s, MACD lines still advancing and Stochastics still in strong configuration (even if they have slipped slightly in recent days). We look for further upside pressure above Wednesday’s high of $1818, with our implied target range from the April/June consolidation rectangle suggesting moves towards $1820/$1858 in the coming weeks. The bulls would lose some of their control under $1764 but the bullish outlook would only begin to come under considerable strain under $1744.
Given how the oil price saw a decent rebound during the US session on Friday, how the bulls respond today will be very interesting. Having breached the support of eight week uptrend, the positive outlook for oil has been questioned. We discussed on Friday that if the bulls were able to find support between $41/$42 then there would be little serious damage to the outlook (seeing as it was only really one day of selling). Friday’s “bull hammer” candle swung the market for an instant rebound, leaving support at $41.30 and back within touching distance of the key $43.95 resistance again. Despite this, a slow start to trading on Monday morning, the bulls are still the dominant force in the oil market. The question is whether they can close above $43.95 resistance and then close the key March gap at $45.20. It would be a significant relief if they can and would open the upside once more. Support at $41.30 is now of growing importance above the key higher low at $39.50.
The Dow completed a choppy week with a decent rebound on Friday. However, having seen a run of six contradictory candlesticks in a row, direction is very mixed. The market continues to trade under the resistance of the 26,300/26,610 highs of the past four weeks, however, selling pressure still seems to be limited. Reacting to leave support at 25,525 means the bulls come into this week with designs on seriously testing the 26,300/26,610 resistance. There is a positive bias still to the medium term configuration of momentum (MACD lines consistently above neutral for ten weeks) which suggests that near term weakness is still a chance to buy. Despite this, a four week consolidation rectangle shows little sign of coming to an end. Futures are ticking higher this morning and this will give some encouragement early today. However, even if 26,610 is broken, then the biggest task of closing the gap at 26,940 is still ahead.
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