Market Overview
Has the sell-off started to turn a corner? Speculation is that central banks could now be ready to intervene to mitigate the impact of a spreading Coronavirus. Fed chair Powell noted on Friday that the virus “poses evolving risks to economic activity”. Some might suggest the “Powell put” is ready to kick in again. There was something of a capitulation feel to Friday’s session. Gold seemingly inexplicably fell over -3% at a time where conventional wisdom would believe the market should be moving higher. Digging into the move, shows record volumes in the gold futures markets, which paints a picture of margin calls needing to close out gold positions. Could this be a bottom (even if it is not “the” bottom)? It is interesting to see markets reacting positively this morning. Wall Street was well off its lows into the close on Friday and futures are holding these gains. The safe haven yen is lower, whilst equities are higher (and gold has also rebounded). What makes this reaction all the more intriguing is that it is coming on news of a massive decline in Chinese PMIs. Official PMIs saw manufacturing at 35 and non-manufacturing into the 20s! We will get a look at the European and US PMIs later today but if markets are trading positively as the major economies see PMIs falling off a cliff, it could be that markets are beginning to find a low. It is still too early to say, but could there be light at the end of the tunnel?
Wall Street closed with the S&P 500 -0.8% lower at 2954, but with futures also +1.0% higher, there is a sense of optimism today. Asian markets were broadly higher, with the Nikkei +1.0% higher and Shanghai Composite +3.1% higher. European markets look set for a strong positive reaction this morning too, with FTSE futures +2.5% and DAX futures +1.8%. In forex, there is a correction back on JPY, whilst AUD and EUR are performing well. In commodities, after Friday’s rout there is a rebound on gold (+0.7%, or +$11) whilst oil is looking better at +2.5% higher.
The first trading day of the month is for the manufacturing PMIs on the economic calendar. The key question is whether the fear over Coronavirus will begin to weigh on these forward looking indicators. Eurozone final Manufacturing PMI for February is at 0900GMT and is expected to be unchanged from the flash at 49.1 (47.9 final January). The UK final Manufacturing PMI is at 0930GMT and is expected to be revised a shade lower to 51.8 (from 51.9 flash, 50.0 final January). Into the afternoon, the US ISM Manufacturing is at 1500GMT and is expected to drop back to 50.2 (from 50.9 in January).
There are no central bank speakers today.
Chart of the Day – Silver
Precious metals selling off in a market riddled with fear makes little conventional sense. It smacks of something bigger at work, likely to be swathes of margin calls where investors are forced to sell. On technicals, silver had a massive down-day on Friday and sell almost -6% into the close, which was -12% from the $18.94 multi-month high just a week ago. However, these precipitous sell-offs tend to come at the capitulation stage and bouncing this morning suggests support is beginning to form again. As such, the basis of support formed between the 61.8% Fibonacci retracement (of $1425/$19.64) at $16.30 and the key December low at $16.50 (Friday’s spike low was $16.35) now takes on a far greater importance for the medium to long term. It is an area the bulls have to defend now. There is near term corrective conditions on momentum still, (RSI below 40, along with a bear cross on MACD and Stochastics falling with downside potential) however, they are back around key areas where medium term buying has previously taken hold. An early rebound is encouraging today and a close back above the 50% Fibonacci retracement at $16.95 would be a positive response to Friday’s sell-off. The issues of overhead supply then become the problem, with $17.20/$17.35 needing to be overcome.
The euro rally is now up into a key stage. Having put together a seven session recovery, the market is continuing higher once more today. The move is now back around a clutch of falling moving averages between $1.1035/$1.1050, however, more importantly now testing the key resistance band $1.1065/$1.1100. This has been a key pivot area for market turning points throughout August to January and once more will be a key gauge. The euro bulls come into this phase with the wind in their sails, with MACD and Stochastics accelerating higher, whilst RSI is into the 60s and a two month high. This is very much seen as a key crossroads for the medium term outlook. Closing above $1.1100 would be a big positive development now. The bulls will be wary of what market reaction would be to breaking this series of positive candles/closes. Having moved decisively clear of $1.0980 (an old key floor) to lose this as support again would be a negative sign. For now though, the bulls are happy to keep buying, with this morning’s early low of $1.1000 initial support.
We have been seeing an increasingly negative outlook forming on Cable in recent weeks as the market has been forming lower highs and lower lows. Friday’s decisive negative candle has added to this run as the support at $1.2845 was decisively breached. Having breached $1.2820 and also $1.2765 on an intraday basis, the bulls are under real pressure. A close clear of $1.2765, the key November higher low would be a significant move. This is effectively the lowest level on Cable since Sterling shot higher in the wake of Boris Johnson securing the Brexit agreement with the EU. Losing $1.2765 as support would be an outlook changer and be a significant corrective signal. Already we see momentum indicators increasingly deteriorating, with RSI below 40, and MACD lines resuming their move lower. The Stochastics have crossed back decisively lower and are also reflecting downside potential. The market has opened slightly higher early today, but rallies are consistently being sold into now. The latest lower high is at $1.3015, but a failure around the 50% Fibonacci retracement (of $1.2192/$1.3515) at $1.2855 would be negative. There is now resistance of old lows at $1.2845/$1.2880 which is also a near term sell zone for any intraday rallies.
The traditional hierarchy of risk on forex majors resumed on Friday. The dollar had a broadly strong session across the majors, but the yen was absolutely head and shoulders above the rest. Subsequently, Dollar/Yen had a massive downside move. However, coming into Monday morning, this looks to be flipping on its head again. After another initial decline hitting a low at 106.97 (over -100 pips lower), an intraday recovery now has the market trading higher. A remarkable rebound also has a positive candle formation too. However, in these highly volatile times, it is far too early to know whether this can be a move to be trusted. Closing higher on the session would be a first step, but also reclaiming what is now overhead supply at 108.30 would also be an important move for a prospective recovery. The dollar bulls would also point out that the RSI is again looking to bottom around the 35 mark, as it did for the early Jan and late Jan corrections. The market is clearly a different animal now, but at least these are positive early signs this morning. The hourly chart shows initial support at 107.50 needs to hold to maintain the intraday recovery momentum.
Gold
Conventional wisdom cannot explain why gold was sold off so massively on Friday. The explanation seems to have been more behind a capitulation of selling across assets as portfolios were struck by margin calls. Gold closed -3.5% lower on Friday (-$57) in a move that effectively rebounded off the 50% Fibonacci retracement (of $1445/$1688) at $1567. We have been advocates of buying gold into weakness and whilst this corrective move has gone beyond our expectation of an unwind from the February rally, we now see this move as being a real buying opportunity. The positive reaction today on gold is encouraging for support levels and close back above $1591 (old breakout) and the 38.2% Fib (at $1595) would be an encouraging sign. Momentum indicators have been unwinding from their bullish positioning are still with the unwind, but RSI is around 50 so the bulls at least have renewed upside potential to factor now. The hourly chart is beginning to show more positive indication this morning, but the bulls need to build on this move and hold the initial support $1579/$1590. Furthermore, the hourly RSI needs to move into the 60s to suggest recovery momentum is more than a bull trap this morning. Closing back above $1611 would suggest the bulls back on track.
WTI Oil
The huge selling pressure of the past week is threatening a technical rally this morning. Opening sharply lower, the bulls are buying into the weakness and as things stand this morning, there is a decisive positive candle. The question is whether this move can be sustained? The hourly chart shows the resistance now $45.90/$46.40 and this needs to be overcome. Hourly momentum indicators have shown signs of promise, but need to prevent this promise from slipping away again. Several times during the course of the big sell-off there have been initial rallies that have been just used as a the next chance to sell. A positive close today (and ideally with a decisive positive candle) could begin to change this. The daily RSI closing back above 30 would also be a positive signal. Today’s low at $43.30 is support which is above the crucial long term low of $42.35.
Volatility on Wall Street shows little sign of abating. Another session on Friday where the Dow was well over -1000 ticks down at one stage, however the bulls clawed it back into the end of the session. Closing “just” 350 ticks lower is seen as a good result. Technically, also the candlestick formation developed into a “bull hammer”. Taking positive signals in isolation is still at this stage massively risky and could easily be a bull trap, however, the US futures are a few ticks higher early today and there are at least chinks of light breaking through. Support levels have meant almost nothing in recent sessions, but it was interesting to see Friday’s rebound off 24,680 which is almost to the tick the key May 2019 low. The first thing to achieve in building for a recovery would be a positive close. Once the market knows this is possible again, then a technical rally would be possible. Certainly with the RSI around 17 and very stretched. There is a gap open at 25,752 which has to be the target for the bulls, as if this can be “closed” then it would be a real sign of progress again. The Average True Range is currently 538 ticks, so it will still be a wild ride.
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