After days of negotiation, Congressional leaders and the White House have seemingly agreed to the delivery of a fiscal relief package of $2 trillion to help the US economy through the biggest economic shock since the 2008 financial crisis. Markets were quick to respond to the prospect of this yesterday driving Wall Street to its largest one day rally for many years. The question is whether this move is just “buy the rumour, sell the fact”. Traders still have no clarity on the true financial impact of the Coronavirus on the world economy, and may be still reluctant to support risk assets even at these massively depressed levels. Despite this, there is still a positive bias to markets today. This is driving the US dollar lower (USD was a huge safe haven as the market plunge took hold recently). Equities look supported again today, but it is way too early to determine whether this is now “the” low in place. One market that is interesting to watch is that Treasury yields have begun to settle. The wild swings lower and higher throughout March beginning to see reduced volatility can reflect a degree of stability returning to markets and able to support risk appetite once more. It is not all good news this morning though, as the Eurozone finance ministers failed to agree on the use of the European Stability Mechanism (the ESM) as an extra form of support for countries. The old divisions of northern/southern European economies playing out once more is not too encouraging in this time of need.
Wall Street closed with record gains last night. The Dow had its biggest one day rally since 1933 (+2112 ticks, or +11.4%), whilst the S&P 500 was +9.4% higher at 2447. US futures are mildly higher early today by +0.8% currently. Asian markets have reacted strongly overnight with the Nikkei +8.0% and Shanghai Composite +2.2%. Chinese equities outperformed on the way down, and are beginning to underperform on the way back up again. In Europe, the outlook is again strong with FTSE futures +3.0% and DAX futures +3.0%. In forex, there is a risk positive bias, with AUD and NZD again outperforming, whilst GBP (which had been slammed recently) also performing well. The safer end of the spectrum (JPY, CHF and USD) currencies are laggards. Commodities are taking a more traditional pattern of risk. Gold is slightly lower, silver slightly higher whilst oil is around 3% higher.
Data announcements continue to play second fiddle to Coronavirus responses from politicians and central banks, however, there are still some indications of how economies are reacting. Mostly they are absolutely terrible, but still they could drive some intraday volatility so we need to keep an eye on the calendar. German final Ifo Business Climate for March is at 0900GMT and is expected to be unrevised at 87.7 (from 87.7 last week, which would be down from 999.0 in February). US data comes in the form of US Core Durable Goods Orders (ex-transport) at 1230GMT which is expected to fall by -0.4% in February (after an increase of +0.8% in January). The Weekly EIA Crude Oil Inventories are at 1430GMT and are expected to show stocks increasing by +2.9m barrels last week (after a build of +2.0m barrels the week before. That would be a ninth consecutive week of stocks building.
Chart of the Day – EUR/JPY
It has been a remarkably choppy period for Euro/Yen but is there finally starting to be a bit more clarity on market direction? The past two weeks has been racked with volatility with huge swinging candles but little direction. However, there have now been four positive closes in a row for the pair and a move to a two week high. This move is coming with momentum indicators starting to pull higher, with Stochastics now rising at multi-week highs and MACD lines also finding upside traction. The RSI pulling above 60 (which would be a two month high) would be a good indication of a growing bull move. The market seems to be positioning for a test of the resistance from February and early March highs between 121.00/121.40 which stand in the way of a pull higher to the January high at 122.85. The hourly chart shows support initially today at 119.50 whilst the bulls will be looking in the driving seat whilst the support band 118.80/119.30 remains intact. Intraday weakness is now a chance to buy.
Although a false breakout of a small base pattern has just pulled the reins on the bulls hankering for a recovery, the recovery potential is still developing. The market closed decisively higher on the day, and even though the bulls gave up a large chunk of earlier gains to leave a slightly spluttering positive candlestick, this was a third consecutive positive close and the market is again looking positive today. We are still looking for a close above the 23.6% Fibonacci retracement (of $1.1492/$1.0635) at $1.0835 to be confirmation of a decisive recovery, but for now this is still a move to be seen with caution. Momentum reflects this, with Stochastics in the process of bottoming (but no confirmed bull cross yet), whilst RSI is ticking higher but not yet decisively. The resistance of a two and a half week downtrend comes in at $1.1900 today, whilst the hourly chart shows resistance between the old $1.0830 breakout and yesterday’s $1.0885 high. Hourly momentum is still encouraging though, with RSI consistently above 40 and MACD positive. The bulls will be looking to hang on to $1.0745 as a basis of support, whilst a move back below the higher low at $1.0720 aborts the recovery. To maintain the rebound potential, a close above $1.0830 is needed now.
It looks as though the building blocks of a sustainable rebound in sterling are being laid now. The precipitous sell-off has been quelled with a low left at $1.1405 and positive candles are being formed. This is helping to pull momentum indicators higher, with the RSI crossing back above 30 from a record low of 16. The hourly chart shows how the market is increasingly encouraging now, with positive configuration to momentum (RSI consistently above 40 and pushing 70, whilst MACD and Stochastics are positive. What is effectively a 525 pip base pattern is forming. Usually this depth of pattern would take weeks, but this is over the course of just five days so far. So the bulls will be eyeing resistance at $1.1930 which if breached on a closing basis would imply a significant improvement in outlook. There is a basis of initial support forming at $1.1680/$1.1700 but there is little resistance until $1.1930. The daily chart then shows overhead supply between old key lows of $1.955/$1.2195 as potential resistance.