Market Overview
The Federal Reserve has come to the rescue of the risk recovery once more. Just as the momentum of a corrective move was building, the Federal Reserve has announced that it will sweep in and buy up US corporate debt. A move to support liquidity and the availability of credit to large US companies. Market focus has switched from concerns over a building second wave of COVID-19 infections in Beijing, to the “Powell put” once more. The old adage “don’t fight the Fed” has again come to the fore. Risk appetite has picked up and Wall Street turned completely on its head again. What had looked to be a session of sharp losses turned positive into the close and US futures are continuing higher today. US Treasury yields have jumped (the US 10 year Treasury yield is around +7 basis points higher as risk appetite indicators have rallied. Moves out of the Japanese yen and US dollar in the forex space, whilst rallies on equities and oil are re-engaging. The question will be how long this latest little spurt higher for risk can last. If the second wave threat in Beijing develops into something bigger, this renewed risk-on phase will dissipate very quickly. The Bank of Japan as expected, did little on its monetary policy decision overnight, with rates at -0.1% and a 10 year yield target around zero. Sterling has been given a little boost this morning, with much better than expected UK employment data. Unemployment has stuck at 3.9% where markets had expected a jump to 4.7%, although this good news is slightly tempered by weaker than expected wage growth.
Wall Street closed the session higher with the S&P 500 +0.8% higher at 3006, whilst futures are also pointing for a continuation of this move, with the E-mini S&Ps +1.0% this morning. This helped to boost Asian markets, with the Nikkei +4.9% and Shanghai Composite +1.2%. In Europe, there is a strong handover, with FTSE futures +2.2% and DAX futures +2.6%. In forex, there is a continues risk positive bias, with GBP outperforming and EUR gaining ground. JPY is the main underperformer. In commodities, gold is steady, whilst silver is slightly weaker. The bounce back on oil has just turned into consolidation this morning.
On the economic calendar, how the Eurozone’s largest economy is emerging from lockdown will be gauged today as the German ZEW Economic Sentiment is released at 1000BST. Sentiment is expected to pick up to 60.0 in June (from 51.0 in May), whilst the current conditions component is expected to improve to -84.0 (from -93.5). Into the US session , US Retail Sales for May are expected to bounce back month on month by +5.4% on an ex-fuel basis (after plunging by -17.2% in April). US Industrial Production is at 1415BST and is expected to improve by +2.9% on the month (after a huge decline of -11.2% in April). In the months to come it will also be interesting to see how the Capacity Utilisation level recovers, with an improvement to 66.9% expected in May (from the record low of 64.9% in April).
Later in the US session, be on the lookout for the Congressional testimony of Fed chair Jerome Powell who is speaking with the Senate Banking Committee at 1500BST.
Chart of the Day – Silver
We have remained positive on silver as the breakouts of May have pulled the market higher. However, into June, the performance has struggled both on an absolute but also relative basis (when measured against major forex). With risk appetite turning sour in recent sessions, silver has been under growing pressure with just two positive candlesticks in the past two weeks. This has started to drag on the price, with an intraday breach of support at $17.20 yesterday. Whilst the move could not be sustained into the close, there is a growing sense that the bulls are being pushed back. Following the latest support from the Fed, the question is, does this stoke the fires of the recovery once more? Momentum indicators are still deteriorating, with the RSI at five week lows, MACD lines pulling lower off a bear cross and Stochastics lower on another bear cross. We draw in a tentative three month uptrend off yesterday’s low which is supportive around $17.00 today. The bulls will also argue of a willingness to defend the 76.4% Fibonacci retracement (of $18.93/$11.62) around $17.20, but can the bulls hold on? A close below $17.20 would complete a small top and imply a retreat towards $16.20. The hourly chart shows that yesterday’s bounce has pulled silver into a band of near term resistance $17.35/$17.55. Initial support comes in at $16.93, whilst $16.65 is key support now preventing a retreat to $15.83. A failure to break back above $17.55 would increase the growing negative pressure on silver. Above $17.75 improves again.
For just over a week, we have been talking up the prospects of a near term corrective move on EUR/USD, and whilst this has been developing, it would appear that you just cannot fight the Fed. A big late session turnaround yesterday in the wake of the latest supportive measure from the Federal Reserve has improved risk appetite on major forex and completed a strong bull candle on EUR/USD. Whilst our expected near term pullback towards $1.1100 may still be in the pipeline, we now cannot see as a likely scenario. The corrective bias that was forming on the hourly chart has been dispersed and the rebound back above the near term $1.1320 pivot means that an improving configuration has taken hold. It could still be that this is now just a ranging formation between $1.1210/$1.1420, but if the bulls can now begin to develop support between $1.1275/$1.1320, the pressure towards the $1.1420 high can build. Threatening corrective daily momentum is easing and we will need to see how this phase develops now, however, for the time being we are neutral again on EUR/USD.
The Fed move has hit the dollar, and Cable bulls are seeing the benefit. What had looked to be a corrective near term move has been completely switched on its head and the bulls are suddenly back in control. A strong bull candle into the close yesterday has been followed by further buying pressure today. The near term corrective move seems to have now played out and the bulls are looking to be in the ascendancy. With yesterday’s intraday bounce of $1.2450 we can now derive a four week uptrend on Cable, whilst it is also interesting to see how the now rising 55 day moving average has become a gauge for Cable moves in recent months (first resistance during April and May, now turning into a basis of support). Previously, we discussed about the $1.2645 old resistance becoming renewed, but this morning’s further bid for Cable seems to have taken out this resistance. A close above $1.2645 today would put to bed this as a ceiling and the bulls would then be eying the $1.2810 reaction high once more. Momentum indicators have taken all this positively, turning what had looked to be corrective moves, into renewed positive signals. Below $1.2645 the bulls would be looking to hold $1.2350/$1.2375.
The selling pressure has abated on Dollar/Yen and there is more of a positive bias starting to develop. The Federal Reserve’s risk positive move plays into this as the ultra-safe haven yen will suffer the most (even if the US dollar is also hampered). Friday’s positive candle has been followed by one of consolidation yesterday. A “doji” candle reflects uncertainty, but there is an edge of positive bias forming today. This is helping to bolster the view that Dollar/Yen remains a range play (between 106/109.85) and that corrections within the range will be supported. What had been previously corrective daily momentum indicators have now settled and are starting to turn higher once more. The Stochastics crossing higher and RSI picking up is positive for playing the range again. The RSI holding above 40 is an important gauge for this, as are MACD lines being neutralised around zero. The hourly chart shows a basis of support forming at 106.55, whilst 107.00 as a potential higher low. There is resistance at 107.60/107.85 which needs to be broken to free up the potential for a swing higher to develop within the range.
Gold continues to throw out a mix of signals as it trades around the middle of the medium term range $1660/$1764. The 21 day moving average has been all but flat for almost a month now and reflects this lack of conviction in these near term moves. Yesterday’s session could be taken as a snapshot summary of what is increasingly the outlook for gold now. An initial upside move which fell over before a move lower which bounced into the close. The market is showing little real direction this morning either. It is difficult to read too much into the outlook for yesterday’s candlestick. However, taking a step back, we see the resistance of the range highs between $1744/$1764 remains solid. Momentum indicators continue to make their way into a medium term neutral configuration. The daily RSI faltering in the mid-50s and drifting back to 50, whilst MACD lines tail off again and Stochastics roll over. We continue to hold a positive view that this will be a range that breaks to the upside, but for now there is little real traction that can be trusted in either direction within the trading range. Yesterday’s session is a case in point. The hourly chart has a mild swing lower this morning, and we re-iterate our view from yesterday, that moves below $1720/$1725 pivot band lend a mild negative bias towards $1700/$1704.
The risk story has taken another turn once more. The near term corrective move on oil that has formed in the past week has been given a boost in the wake of the latest supportive move from the Federal Reserve. The question is, whether it is a sustainable move that reinvigorates the recovery once more. The late session pick up into the close has meant that Brent Crude has now completed two positive daily candlesticks in a row. A mini corrective downtrend is being tested this morning and momentum indicators are on the turn. We have been looking for the near term pullback to the neckline of the big medium term base pattern. Response in the past couple of sessions, with support around $37.00 suggests that this may now have played out. The hourly chart shows $40.00/$40.75 resistance and a breakout would open for renewed upside momentum. Initial support around $38.75/$39.00 holding today would build on what now looks to be the improving outlook.
It seems that the Fed just cannot countenance equities going down. Another step up in its supportive actions has seen a corrective move on the Dow nipped in the bud. What was building into a strong negative session, turned on the Fed announcement to form a strong positive candlestick into the close. A big threat to the recovery uptrend (which had breached a near three month uptrend on an intraday basis) now has become an opportunity. US futures are pointing to further gains once more today and the market is shooting higher. The big technical question remains though, how the bulls react to the big gap left by the island reversal. The gap runs from 26,295/26,940 and needs to be closed for the bulls to be back in total control. The hourly chart shows the intraday recovery on momentum and if the futures are correct today, the bulls will be looking to turn 25,595 resistance into a basis of initial support. Yesterday’s reaction low at 24,845 becomes key support too.
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