Market Overview
A slight tempering of the recent surge in risk appetite has taken hold today. Positive newsflow in recent days over the progress of COVID-19 vaccines (one from US pharma company Moderna (NASDAQ:MRNA), and one out of Oxford University) show that vaccines are in the pipeline. If this turns out to be the case, this will be the one true way that risk appetite can sustainably recover. However, economic data out of China overnight, suggests that in the meantime, economic recovery may be wobbly. Whilst GDP for Q2 came in ahead of expectations (at +3.2%, versus expectations of +2.5%), there was concerning data regarding consumers in China. Retail Sales showed a disappointing -1.8% decline in June, a point at which China was fully out of lockdown. The consumer may still only account for around half the Chinese economy, and industrial production grew as expected, however, it is the read through to other, more consumer driven economies, which is the concern. The US is struggling to get its economy out of lockdown as infection rates are at record levels. This does not bode well for consumer confidence and retail sales in the coming months. June’s Today’s data will show a strong rebound in June, but concerns are for the months in Q3 which will be impacted by the second wave of infections (that’s if the first wave ever really finished). We have a major central bank today on the docket, but the ECB is likely to be very much in wait and see mode, with the extended easing measures undertaken in June.
Wall Street closed solidly higher last night with the S&P 500 +0.9% at 3226. However, with US futures ticking lower this morning (E-mini S&Ps -0.5%) there is a mildly corrective feel to equities today. Asian markets have taken the data out of China quite negatively, with the Nikkei -0.8% and more considerably the Shanghai Composite -4.4%. In Europe there is a risk negative bias, with FTSE futures -0.6% and DAX futures -0.8%. In forex, there is a risk negative and dollar positive skew. This is meaning slips back on AUD and NZD, whilst GBP is also weaker. In commodities, the dollar rebound is weighing on gold (-0.3%) and silver (-1.0%), whilst oil is slightly lower after a move by OPEC+ to taper its production cuts in the coming months.
The ECB rates decision and US Retail Sales dominate the economic calendar today. The ECB monetary policy decision is at 1245BST and is expected to be a muted affair. No change is expected to the main refinancing rate of zero or the deposit rate of -0.50%. There are also no changes expected to the Pandemic Emergency Purchases Program (PEPP) after it was extended in June. The press conference by ECB President Lagarde is at 1330BST and is expected to show the Governing Council very much in wait and see mode. The US Retail Sales data for June is at 1330BST and is expected to show core ex-autos Retail Sales grew by +5.0% in the month of June (after a rebound of +12.4% in May). The Philly Fed Business index at 1330BST is expected to slip back slightly to +20.0 in July (from +27.5 in June). Weekly Jobless Claims are at 1330BST and are expected to show claims of another 1.25m last week (after 1.31m in the previous week).
Chart of the Day – NZD/USD
The risk currencies have been ranging for the past month, but are they preparing for another breakout? Looking at the chart of the Kiwi, we see NZD/USD once more swinging higher within the $0.6370/$0.6600 trading band. Using the support of a pivot around $0.6500 as support the bulls are getting ready. Since the recovery began in mid-March, the Kiwi has already been through one multi-week phase of ranging, only to break to the upside. Holding on to the support at $0.6500 is growing in importance for the next upside break to be seen in the coming sessions. However, despite the positive medium term configuration on momentum indicators, there is still a slightly more cautious look to near term signals, which could question the conviction of a breakout. The MACD lines need to cross higher, whilst Stochastics need to hold above 80 and RSI needs to push into the high 60s (preferably above 70) to really suggest conviction. Subsequently, with the market slightly struggling still around $0.6586/$0.6600, we are minded to wait for a closing break above $0.6600. This would then imply a 230 pip upside projection target and at least a test of the December high of $0.6755. A failure back under $0.6500 would simply continue the month long range.
After a run of strong bull candles, the bulls had a look at a breakout to a new multi-month high yesterday, above $1.1420. The move could not be sustained into the close, but the sentiment is still strong. The question is now of whether confidence in a run higher has been damaged. A failed break coming ahead of the ECB monetary policy meeting today and the EU Recovery Fund discussions tomorrow is slightly concerning. However, for now, the bullish outlook for EUR/USD remains intact. In breaking above $1.1420 yesterday, the support of the previous resistance around $1.1350 grows in importance. With momentum of the move higher still strong (despite yesterday’s slight disappointment) we would now view supported weakness within this $1.1350/$1.1420 band as being an opportunity for the bulls. With the MACD lines rising off a bull cross, Stochastics strong above 80 and RSI above 60, these are momentum conditions set up for a sustainable upside break. Once these key fundamental events are passed (i.e. by Monday), a close above $1.1420 would be a key break. It would then open a test of the hugely importance resistance $1.1490/$10.1500 which has been a barrier for the past two years. A close back under $1.1350 is a disappointment, but only under $1.1255 have the bulls lost control.
Although there is still a positive bias to Cable, the fact that the resistance of the falling 7 month downtrend continues to hamper the move higher is an increasing concern. The big trend line falls today around $1.2675 which is all but at the resistance of last week’s rebound high of $1.2670. Bouncing from $1.2480 was important to sustain any semblance of a positive skew to the medium term trading range, however, pulling back to that same neckline to leave further resistance at yesterday’s high of $1.2650 threatens to see that positive bias fizzle out again. The positive momentum configuration of early July is just beginning to lose its way now, as RSI tails back towards 50 and MACD lines flatten. A close back under $1.2540 would suggest the bulls are losing their control and would turn the outlook neutral once more. Below $1.2435 would turn into a more negative bias within the range. Given the frequent failures just under the seven month downtrend in the past week, the bulls need to break decisively above $1.2670 to really stamp their control.
With the attempted rally from earlier this week, failing at a two week downtrend (which is today at 107.25) this leaves a continued mild negative bias within the medium term trading range on Dollar/Yen. However, we have seen an ongoing appetite to support the pair between 106.00/107.00 over recent months. Once more, picking up from initial support around 106.60, a rebound into the close reflects a lack of decisive selling pressure. There is a mild negative drift to momentum, however, the RSI is sitting steadily above 40 and MACD lines only drifting slightly lower a shade under neutral. With the two week downtrend intact, we cannot rule out further pressure on 106.60 and perhaps towards 106.00, however, there just does not appear to be an appetite to pull Dollar/Yen sharply lower. As such, we are again watching for near term reversal signals within the 106/107 band. The hourly chart shows initial resistance between 107.00/107.10, and closing above there would be something for the bulls to work with, before testing the downtrend around 107.25.
Since hitting the multi-year high of $1718 last week, there has been a consolidation on gold. A series of candlesticks all posted within a $29 range above the $1789 breakout. With the support of the five week uptrend still underpinning the move higher, gold has posted three positive closes in a row. The relatively small candlestick bodies does suggest a cautious approach for now, but we are still happy to back the breakout and look to use any near term weakness as a chance to buy for continued upside. However, as the market slips back slightly once more today, there is a feel that this is still a consolidation, and one which may breach the trend support (today at $1801). Even if this rend is breached, if the market continues to build support above $1789, then the outlook remains strong. It would only really be a move below $1764 (another previous breakout) where the bulls begin to lose their control. Momentum indicators remain strongly configured, even if they are slightly hampered by the consolidation. We still look for another breakout above $1818 and a move towards an implied target from the April/June consolidation range breakout of $1820 and perhaps as far as $1868 in the coming weeks. A move below $1744 support would neutralise the medium term outlook.
For the first time in two weeks, Brent Crude has managed to pull two decisive positive candles in a row. The latest strong close, with a gain of +2.0% on the day, has put Brent Crude within tantalising grasp of the key June rebound high of $43.95. This is a resistance that has lasted for more than three weeks and which protects the key gap resistance at $45.20. During the past three weeks, the price has consolidated, breaking another uptrend, however, buying into weakness has continued to leave a succession of higher lows. With the last couple of sessions suggesting the bulls are gaining in confidence, we see Stochastics now at a one month high. A close above $43.95 would be a positive signal but the bulls would really be encouraged by a close above $45.20. Aside from minor resistance at $48.40 there is little real resistance then until $53.10/$53.90. Support at $41.30 is growing in importance, but the key support is the higher low at $39.50.
The Dow jumped higher last night to finally “fill” the gap of the early June island reversal at 26,940. It was interesting to see that the bulls could not quite “close” the gap (as the market closed at 26,870 yesterday, but the bulls will certainly be looking to rectify this today. Momentum indicators are now gradually turning more positive as the market has pulled higher in recent sessions. With RSI above 60 and confirming a one month high, along with strong positive configuration on Stochastics, the bull cross on MACD lines is also encouraging. The bulls will now be looking to use weakness into the 26,300/26,610 near term breakout support band as a chance to buy. The bulls would only lose their control of the outlook on a move below 25,525 higher low now. Near term weakness will now be seen as an opportunity to buy.
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