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.
As the tepid momentum of a tentative recovery has once more rolled over, we see a continuation of the consolidation on Dollar/Yen. There has been a mild positive bias to the moves over the past three weeks, but with yesterday’s negative close, impetus of what has been there is dissipating. This comes as the positive momentum bias threatens to deteriorate again. Stochastics are the most sensitive of the indicators are now beginning to cross lower. With MACD lines plateauing around the neutral point and RSI around 50, this suggests that the market has unwound back to a neutral position as the recent range between the May low of 106.00 and April/May highs of 108.10 remain intact. Initial support (of the past week) sits at 107.30 and with the doji candlestick of today’s session this is very much a market desperately in need of a catalyst.
With broad risk appetite turning positive in recent sessions, we have seen gold slipping lower. The positive near term outlook been gradually replaced by a corrective one. The support of a three week uptrend was decisively broken by a strong negative candlestick yesterday. This is the third decisive negative move in the past seven completed sessions and is ushering in near term weakness which is continuing today. With these successive negative sessions, a new trend lower is forming, whilst momentum indicators have become corrective. The RSI is below 50 this morning (at least for now) which if closes below, would be the first time in eight weeks. Coupled with MACD and Stochastics accelerating lower, the supports are under pressure. An old pivot at $1702 has lost its support and resistance traits in recent weeks, but will be seen as a gauge for sentiment now. Gold trading back in the $1600s would be a considerable disappointment in the wake of the attempt to break to multi-year highs. Next real support is $1690 and then $1681 and reaction around those will determine whether the market has momentum for the key medium term support band $1660/$1668. The near term importance of resistance $1735/$1740 is growing.
Brent Crude Oil
The bulls are just taking a pause for breath this morning as Brent Crude continues to test the resistance of the key April peaks around $36.40. For the past week, Brent has been bumping up against this barrier and although there have been a couple of intraday breaches, the bulls just cannot break decisively through. Subsequently, another phase pf consolidation has formed within the rally. Since the bottom of $16 back in April, the recovery has been characterised by periods of strong recovery followed by consolidation. The uptrend formation (supportive around $33.80 today) and strength of momentum (RSI in the mid-60s, Stochastics strong above 80, MACD rising above neutral) suggest that these consolidations are opportunities to buy for the next breakout. Given the importance of a breakout above $36.40 and the size of the unfilled gap up to $45.20, the next breakout could be a crucial move. The hourly chart shows initial support at $35.25 from yesterday’s low and then $34.45. The key near term support is around last week’s low of $33.50. We favour longs and using intraday weakness as a chance to buy.
Dow Jones Industrial Average
After weeks of trading in a sideways range, finally we see the Dow breaking to multi-week highs. Is this the release of the shackles the bulls have been hoping for? Breaking above 24,765 resistance (the late April high) has taken almost four weeks, but was achieved as the Dow gapped higher through the resistance at the open and never looked back. With RSI rising to 60 and confirming the breakout, we see this move as valid, however, it may still be subject to a pullback correction. The breakout at 24,765 and the open gap at 24,480 leaves a near term buy zone now. However, it was interesting to see that last week’s gap at 23,370 was never filled and this could be part of a phase of trading where the bulls are able to sustain their moves. With the strength of the daily momentum indicators, this is certainly a decisive breakout, however, the hourly chart shows perhaps a little caution is needed today. A slight pullback into he close leaves some near term corrective aspects coming into today’s session. Although futures are positive initially, the potential for a pullback at least to the breakout at 24,765 is high. For the breakout, next resistance above 25,225 comes in at the early March lower high of 27,100. Below 24,060 aborts the breakout now.