As has so often been the case in recent weeks, unrestrained hope of economic recovery that comes with a vaccine is short-lived. Traction in the breakouts for risk appetite is difficult to maintain as markets always have a “but” as a restraining caveat. COVID-19 vaccine hopes and talk of more stimulus from Japan are helping to hold a degree of positive market sentiment, but the prospect of US sanctions on China are looming like dark clouds on the horizon. The US is opposed to China extending the security legislation in Hong Kong. Sanctions are being considered which would threaten Hong Kong’s status as a financial hub and would significantly ramp up tensions between the two economic superpowers of the world. According to President Trump, the US is doing something and will announce more at the end of the week. Subsequently, whilst equities are still climbing slightly today, there is a more mixed outlook for risk today. US Treasury yields are ticking lower, whilst the dollar is clawing back some of yesterday’s losses. The safe haven yen is also regaining some lost ground on higher risk cross currencies, whilst oil is giving back some recent gains too. For now these moves are only slight, but if the US pushes hard for sanctions on China, it would be something to really drag on market sentiment towards the end of the week.
Wall Street closed with decent gains, albeit off the highs of the session, with the S&P 500 +1.2% at 2992. US futures are showing positive moves this morning, with the E-mini S&Ps +0.5% but Asian markets still have something of a mixed outlook today. The Nikkei was +0.7% and Shanghai Composite -0.5%. European indices seem set to follow US futures, with FTSE futures +0.5% and DAX futures +0.3%. However, when FTSE outperforms DAX, historically the rally has tended to be on shaky ground. In forex, there is a risk negative bias, although only minor coming into the European session. USD is outperforming broadly with gains of around +0.2% against several of the majors, aside from a consolidating JPY. In commodities, there is a continues slide on gold, which is pulling back towards $1700, whilst oil is around -1.5% lower on both WTI and Brent Crude.
With a quiet European morning for the economic calendar, the Richmond Fed Composite Index at 1500BST is the first real data of note. The index is expected to suggest a bottoming out has taken place, with May’s reading at -40 (up from -53 in April). It will also be interesting to see what the Federal Reserve’s outlook for the US economy is currently, with its Beige Book released at 1900BST.
There will also be keen interest in what ECB President Lagarde has to say about the ECB’s COVID-19 response in a speech at 0830BST today.
Chart of the Day – AUD/USD
For a while we have favoured the outperformance of the Australian dollar. The latest breakout on AUD/USD reflects the risk rally and the continuation of a run of higher lows with higher highs. Yesterday’s strong and decisive positive candle closed AUD/USD at its highest level since early March and brings the market to directly test the key resistance at $0.6685. This was the March high, but also with the proximity of the 76.4% Fibonacci retracement (of the big $0.7030/$0.5505 sell-off), it could easily be an area where the rally begins to stall. Subsequently this is an important level to breach in the recovery. Since the market began to rally in mid-March, there has been a consistent theme of breakouts forming the basis of support for the next higher low. An uptrend has formed and comes in today around $0.6500 and given the tendency for this to not be a straight line recovery, we look to use weakness as a chance to buy now. There is a good breakout support band now $0.6570/$0.6615 as a near term buy zone. There is a technical underlying strength to momentum which backs buying into weakness, with the RSI holding above 50 since mid-April, and Stochastics also consistently positively configured. Whilst $0.6370 is the first important higher low, the bulls would not want to slip below $0.6505.
An impressive session where the bulls got stronger throughout has put EUR/USD once more within touching distance of the key near to medium term resistance band $1.1000/$1.1015. Although the market has ticked back lower this morning, the euro bulls are now in a better position to drive for a breakout above $1.1015. Momentum indicators are now improving, with the RSI consistently holding above 50 and pushing multi-month highs, whilst MACD lines have risen above neutral for the first time since March, and Stochastics are also positively configured. Momentum indicators are looking to lead the price for a breakout. The disappointment of last week’s failure at $1.1015 will still be fresh in the mind as the market slips back today, but this time, we see momentum of the move is far better developed to drive for a breakout. On the hourly chart we look for near term support building between $1.0915/$1.0940 to hold and build a higher low within the range above the $1.0890 pivot. A breach of $1.0890 would neutralise the range again and below $1.0870 turn it corrective again.
An impressive rally on Cable has threatened to change the outlook. A strong positive candlestick has broken a three week downtrend and seen the market close above resistance at $1.2295. Momentum indicators are swinging higher with near term positive signals. The question is whether this is a rally that begins a phase of sterling strength versus the dollar, of whether it is a move that will flounder again. We note the bull candles of last week were followed by a renewed corrective slip but this formed a higher low at $1.2160 again. Holding above this support (and forming another higher low will now be key for Cable as the market just begins to slip back again this morning. Ideally the bulls will be looking to hold on to breakout support at $1.2295. The RSI is now into the 50s again and for this near term bull move to be sustainable, this needs to become a consistent feature. The more optimistic bulls will be eyeing the lower high resistance at $1.2465. The hourly chart shows a support band now $1.2245/$1.2295 as a near term area for the next higher low, to maintain the improving outlook.