At a time where markets are trying to build the momentum to take the next step forward in this recovery, growing geopolitical risk between the US and China is not ideal. We are increasingly seeing the threat of renewing tensions between the world’s two most powerful economies. Moves in the US Congress to sanction China over potential Hong Kong legislation adds to tensions that are already fraying after President Trump has been firing off over the COVID-19 blame game and interference into his re-election campaign. Risk aversion is taking hold once more through markets (certainly not helped either by China reluctant to issue a 2020 GDP target). US Treasury yields are again heading lower, and the dollar gaining ground. Closing lower yesterday, equities are again weaker today. This renewed swing lower has come just as several key markets had been testing resistance of a risk recovery. Wall Street indices are pulling back, EUR/USD is backing away from $1.1000 again, whilst Brent Crude oil is falling under its April highs. How the bulls respond in these markets in the coming days could determine whether the multi-week ranges are set to continue to leave the risk recovery on ice. In other news overnight, the Bank of Japan held an unscheduled meeting and kept policy unchanged with -0.1% rates and a 10 year yield target of zero. Also, UK data has not been overly encouraging, where UK Retail Sales in April fell more than expected at -15.2% (ex-fuel) and public borrowing was way higher than expected at £61.4bn.
Wall Street closed lower (S&P 500 -0.8% at 2948) and futures are continuing this slide today with E-mini S&Ps -0.7%. This has weighed on Asian markets (Nikkei -0.8% and Shanghai Composite -1.8%). European markets are under pressure with FTSE futures -1.3% and DAX futures -1.6%. In forex, the risk aversion is pulling JPY outperformance whilst USD is broadly stronger. AUD is the big underperformer. In commodities there is a degree of support for gold after yesterday’s sell-off, rebounding +$9 (or +0.5%), whilst silver is -1% lower. Oil has pulled back by over -5%.
It is a quiet day for the economic calendar to finish off the week. There is only really the ECB monetary policy meeting accounts to consider at 1230BST. Traders will be looking for more details on the raft of acronyms and also the potential for further easing measures.
Chart of the Day – German DAX
Just when it looked as though the bulls were ready to take the next step forward in recovery, they have stumbled. The resistance of the 30th April high at 11,235 saw a slight intraday breach on Wednesday (to 11,247) but could not quite confirm the breakout. A subsequent negative session yesterday and early slip lower today leaves a lot of questions for the bulls to ponder. The RSI is again turning lower at 60, as it did at the end of April; whilst MACD and Stochastics are also struggling to move higher. Momentum has been rangebound in recent weeks and this points towards the continuation of the range, at least for now. How the bulls respond to this latest failure could be key. The hourly chart shows the importance of initial support now at 10,936 and a decisive breach (especially on a closing basis) would again turn the market corrective within what is still a six week trading range. It means that this is an important session today and the bulls really need to step up again. Subsequent support would be 10,675 which is Monday’s cash traded low. The bulls are still striving for an eventual closing break above what is now resistance at 11,247 which would complete a range breakout and imply further upside of around 1100 ticks in the coming weeks. For now they must fight the disappointment of a failed breakout.
After another attempt at the resistance of $1.1015 once more came up short yesterday (for a second successive session), the euro bulls are in an important moment. Daily momentum indicators have been pulling decisively higher in recent sessions but the impetus is threatening to slowdown once more just at the wrong moment. How they respond to being unable to breach this resistance could now be key for the near to medium term outlook. The hourly chart certainly has its warnings now for the bulls. The emergence of negative divergences on hourly RSI and MACD lines is a concern as it suggests that upside momentum is waning. Another early bout of dollar strength is weighing on EUR/USD again today. The support around $1.0915 needs to hold otherwise a corrective set up will have developed which would effectively neutralise EUR/USD within the range once more. The old pivot at $1.0809 would then come back into play. We retain a broad positive bias within the range whilst the market holds above $1.0890 and this remains a key pivot area. The euro bulls who were so prominent in the earlier part of this week, need to show that they are more stronger than they were back around the early May failure. Otherwise a much deeper retreat within the range will be seen.
The Cable rebound of earlier this week has run out of steam and the market is once more returning to its bearish path lower. A couple of negative closed in the past two sessions and the (slightly re-aligned) downtrend continues to drag Cable lower. The recovery that had hinted on momentum indicators earlier this week is rolling over. RSI is faltering in the mid-40s, whilst Stochastics are losing their way again and MACD lines have never even got going. This morning’s UK retail sales and higher than expected government borrowing will certainly not help a sterling recovery and we continue to sell Cable into near term strength. The supply of willing sellers in the resistance around the old April/May lows between $1.2160/$1.2265 still seems to be restrictive for Cable longs. This means that a new lower high at $1.2295 is being left. A renewed close below $1.2160 would be the next trigger point for selling pressure, and we expect a test of $1.2075 in due course. Hourly indicators show a growing negative configuration taking hold on momentum (as hourly MACD lines have just rolled over again under neutral). We look to use rallies as a chance to sell.