It would appear that yesterday’s rally was drive just on the notion that China’s state run media encouraged its people to buy stocks to foster a “healthy bull run”. So perhaps it is of little surprise that a rally fuelled by hot air looks set for a retracement today. China may have managed to pull further equity gains, but other Asian markets are more cautious, also futures elsewhere are turning back. The focus in recent weeks has been far more on the concern that COVID-19 infection rates are rising alarmingly in the US and hampering the re-opening of the economy. There are also pockets of lockdowns being reinstated across other countries such as Germany, Spain and Australia. A bull rally seemingly priced for a perfect global economic recovery may need to prepare for disappointment. It is our view that disappointment could become a theme for Q3. The headline of the ISM Non-Manufacturing data, beating expectations at over 57 sounds great. However, this only notes expansion versus the month of May, which could simply be negligible but broad based. Also the employment component remains at 43 and in contraction. As many US states are hit by rising infection rates, July and through Q3 it could be a difficult period for a sustainable economic recovery. Sentiment across major markets has a negative bias today. Yields are falling back, the dollar is looking to reclaim some ground lost from yesterday’s risk rally. Oil is lower and equities are lower as higher risk assets are hit. The Aussie is also in the firing line today as the Reserve Bank of Australia held rates at +0.25% and did little to change its recent message of forward guidance (will not increase rates until there is progress towards employment and inflation goals). With the city of Melbourne re-imposing a lockdown, this is hitting the Aussie today.
Wall Street closed strongly higher last night with the S&P 500 +1.6% at 3180, but futures have dropped back today (E-mini S&Ps -0.4%). Asian markets are split with the Shanghai Composite +1.3% but Nikkei -0.4%. European indices are faltering early today with FTSE futures -0.6% and DAX futures -0.6%. In forex, the dollar is performing strongly across the major pairs, with AUD and NZD being the main underperformers. In commodities, gold is flat as it consolidates yesterday’s gains, whilst oil is around -1% lower.
The second week of the month is usually fairly quiet on the economic calendar, and this week is fairly typical of that. The US JOLTS jobs openings for May are expected to be 4.85m. This is down from 5.05m in April, with it having been over 7.00m in February. It is important to say that this data is quite old now, with June’s economy re-opening and data rebound expected to show up in next month’s JOLTS.
Aside from the data, it will also be worth keeping an eye out for FOMC board member Randall Quarles who speaks at 1800BST.
Chart of the Day – EUR/JPY
With the EUR/JPY bulls starting to find their feet in the past week, the technicals are taking on a far more encouraging configuration for long positions again. A retreat to what is now an eight week uptrend is again starting to post a succession of higher lows and higher highs. The past couple of weeks have been characterised by the market testing the old resistance band 121.00/121.40 which has been capping the highs. However, a strong bull candlestick yesterday with a close (just) above the 121.40 resistance is steadily pulling the market higher once more. Momentum indicators are now making progress higher, with RSI close to the 60s again, a bull kiss on Stochastics and MACD lines on the brink of a bull cross. The next step forward will be for a close above the 23.6% Fibonacci retracement (of 114.40/124.40) around 122.05 which would open for a full retracement to 124.40. The consistent near term retreats to find support at the uptrend, suggest that weakness is a chance to buy. The trend line comes in at 120.85 today, with any supported weakness into 121.00/121.40 being a good opportunity for renewed long positions. The 38.2% Fib at 120.60 is added support, whilst a failure below 120.25 would abort the immediate bullish outlook.
After more than a week lacking conviction, a decisive positive candlestick suggests that the bulls are looking to make a move again. EUR/USD has been ranging for around a month now. Support forming between $1.1165/$1.1190 has provided the platform, however, the bulls have been unable to take on the move higher, to push above resistance initially at $1.1350 and then the June high of $1.1420. So it is notable that the resistance at $1.1350 once more held back the bulls yesterday as they pulled back slightly into the close. There is clearly more that they need to do. Momentum indicators are looking to build on an improvement, but again, need more to suggest this is the time that a breakout will be seen. Trading in the Asian session shows a market struggling to hold traction from yesterday and the hourly chart shows a breach of initial support at $1.1280/$1.1300 would see the move again disappointingly unwind. A closing break above $1.1350 would be the move the bulls are looking for to signal real conviction is returning.
In a session where the US dollar came under broad pressure, Cable managed to add less than +10 pips with a small bodied (“spinning top”) candlestick. The resistance between $1.2530/$1.2540 remains a key near term barrier. A fourth small bodied, candle in a row suggests that the market is lacking conviction under this resistance. Although the price is still edging with a slight positive bias, momentum indicators reflect a growing consolidation, with RSI stuck in the low 50s and MACD lines flattening at zero. The hourly chart shows indicators settling down in the last couple of sessions, although a mild bias towards buying into weakness will sustain whilst the support between $1.2435/$1.2450 holds. There is little real indication that there is about to be an imminent break above $1.2540 but this would be a near term game changer, opening $1.2685 as next resistance and the highs of the medium term trading band once more.