Central banks and governments are coming out with measures to mitigate the economic impact of the Coronavirus. The commitment for ever easier monetary policy was cranked up several notches by the Federal Reserve yesterday on a pledge to expand its balance sheet as much as is necessary (rather than its previous commitment for a set amount of additional asset purchases). Countries of the EU now allowed to spend whatever they like too, as the conditions of the Stability and Growth Pact have been eased. Sentiment has turned more positive this morning, but the final signal that the market may need to develop meaningful support will be the US Congress agreeing on a package of fiscal support. For now at least, equity futures are higher, commodity prices are recovering and the strength of the US dollar is dissipating. These all need continue to move in this direction for confidence to build. With US Treasury yields plunging back (on the enormity of the potential Fed easing) this has weighed on the dollar, but yields are fairly steady today. How the dollar responds to this will be key. It is weakening still this morning, and if yields are steady as the dollar falls further, this should be seen as a positive sign for broader markets.
Wall Street lurched another leg lower last night with the S&P 500 -2.9% into the close (to 2237) but US futures are strongly higher today (+4.3% currently). Asian markets were strong in response overnight, with Nikkei +7.1% and Shanghai Composite +2.3%. In Europe a similar positive response with FTSE futures +4.5% and DAX futures +5.5%. In forex the USD weakness is the main mover, with a risk positive bias to the majors. The AUD and NZD are the main outperformers, with EUR and GBP also performing well. CHF and JPY are performing less well in their rallies against the dollar. In commodities, the sharp rebound on silver (+3%) is also dragging gold higher (+1%), whilst oil is the big beneficiary over +4% higher.
The flash PMIs for March will be a crucial early snapshot of how the Coronavirus is impacting across major economies. Eurozone data is at 0900GMT and is expected to show economic growth indicators falling off a cliff. The Eurozone flash Manufacturing PMI is expected to drop alarmingly to 39.0 (from 49.2 in February. The flash Eurozone Services PMI is expected to be just as bad, at 39.0 way down from the 52.6 of February. This would all add up to the flash Eurozone Composite PMI dropping back to 38.8 (down from 51.6 in February). March data for the UK at 0930GMT is expected to show performance also cratering, with Flash UK Manufacturing PMI expected to drop to 45.0 from 51.7 in February. Flash UK Services PMI is expected to also plummet to 45.0 from 53.2 in February, meaning the Flash UK Composite PMI is expected to drop to 45.1 from 53.0 in March. Into the afternoon we get a gauge of how the US is performing at 1345GMT with the flash US Manufacturing PMI which is expected to drop sharply to 42.8, down from 50.7 in February. The flash US Services PMI is expected to fall back to 42.0 (from 49.4). Given the alarming deterioration in the regional Fed surveys, the risk will certainly be for a downside surprise. US Hew Home Sales are at 1400GMT which is expected to show 750,000 units in February (down from 764,000 in January).
There are no central bankers expected to speak today.
Chart of the Day – Silver
Silver got absolutely panned in the course of the past couple of weeks, however with three positive candles in the past three sessions, is this a serious recovery building? The precipitous decline started to dissipate in the early part of last week, with the market making a new low at $11.62. The daily chart shows an improvement with the price picking up and RSI crossing back above 30 (a basic buy signal) and Stochastics also bull crossing. Last week saw the RSI hit a closing level of 12, the lowest ever recorded so this looks to be a decisive recovery now. However, it is the hourly chart which really shows improvement in momentum configuration (hourly RSI consistently above 40 and pushing above 70, whilst MACD is solid above neutral). Resistance in the band $13.00/$13.25 had been a barrier for the past week but this has been overcome overnight. This completes a breakout to imply c. $15.00 of recovery target. With the market so fast moving on the way down, a recovery could also be fast through the little real resistance until $15.10. For the prospect of recovery to be sustained, the bulls will be looking to use $13.00/$13.25 as a news basis of support, something which is already showing overnight. Initial overnight resistance is at $14.10.
Whilst the market remains volatile (yesterday’s range of 190 pips was almost bang on the massively broad Average True Range of 194 pips), at least the euro bulls can be said to be fighting against the selling pressure. The past three daily lows have all come within 20 pips of one another, leaving yesterday’s low at $1.0635 as a level to keep an eye on now. A positive close in yesterday’s session also suggests that the bulls are trying to fight back. The hourly chart looks more constructive too and a base pattern is threatening. The resistance to overcome now is at $1.0830. This has been the daily high of the past two sessions and above here would complete a base pattern of around +195 pips of implied recovery target. Hourly RSI is building above 40 now and MACD lines are looking to push above neutral. Furthermore, the hourly RSI pulling consistently above 60 would be a positive sign as would MACD lines consistently above neutral. The 23.6% Fibonacci retracement (of the $1.1492/$1.0635 sell-off) comes in at $10837 and adds extra importance to the breakout above $1.0830 resistance. Above here, the hourly chart shows resistance around $1.0950 and then $1.1050.
Has the selling pressure begun to subside? Last Friday’s low at $1.1405 has remained intact (a multi-decade low) during yesterday’s session and with Cable over +100 pips higher today, there are tentative signs of support. RSI is picking up (from 17 which was also the low of October 2016) whilst Stochastics are steadying too. There is more evidence of hope on the hourly chart, where the 7 day downtrend has been broken (and is now becoming a basis of resistance). Also the hourly RSI is now beginning to consistently hold on to 40, which suggests at least consolidation, for now. Initial resistance for today is $1.1700/$1.1740 but the main level to watch is $1.1930 as a break above here would be formation of a near term base pattern. The Average True Range remains wild at 289 pips (once more even yesterday’s more relatively settled session beat that) so given that today’s range is “just” c. 190 pips, we can expect more volatility as the session goes on. Support at today’s low of $1.1445.