Equities have stormed higher in this risk recovery, with the promise of ever more supportive major central banks and the hugely better than expected US jobs report to fuel the optimism. However, with so much good news now priced in, there are signs of a pause in the risk rally. Whisper it quietly, but could a pause even turn corrective. I know it sounds incredible to think it, but risk markets can go down as well as up. There are signs of a near term retracement in bond yields and also threatening to take hold on forex markets. Although this is yet to filter into equities, with markets so overbought the risk of a correction is growing. US Treasury yields are falling back. A “bull flattener” of the yield curve (where longer dated yields fall quicker than shorter dated ones) is a retracement of last weeks “bear steepener”. It is a risk negative move. In the past 24 hours we have seen the yen in recovery mode, whilst the US dollar is performing well too today, especially against the commodity currencies. These moves need to have the context that the are turning back from multi month highs (on AUD, NZD and EUR) versus the dollar. However, as the FOMC begins its two day meeting, the dollar sell-off has at least for now been curbed. The question is whether this stalling of risk appetite on forex markets begins to lead to profit-taking on the equities bull run?
Wall Street closed strongly higher again, with the S&P 500 cash index recovery now meaning the index is higher for the year, at +1.2% and 3232. US futures are just off the top slightly this morning with the E-mini S&Ps -0.2%. We have seen mixed moves in Asia, with the Nikkei -0.4% (with a nod towards the stronger yen) and Shanghai Composite +0.4%. In Europe there are mixed moves too, with FTSE futures -0.1% and DAX futures +0.2%. In forex, the risk negative and dollar support is showing, with JPY being the main outperformer, whilst USD is outperforming the rest. A slide back on AUD and NZD is also a feature. In commodities we see gold consolidating but silver back lower again by -1.5%. After yesterday’s pullback, the early moves today are seeing oil supported by around +1%.
Once more it is a fairly quiet economic calendar today. The European morning will have traders eyeing the Eurozone revised Q1 GDP at 100BST. This is the third reading of first quarter growth and is expected to be unrevised from the -3.8% GDP QoQ decline of the second reading (after Q4 2019 was +0.1%). Into the US session, the US JOLTS jobs openings for April is at 1500BST and is expected to show a decline of -13% to 5.375m (from 6.191m in March).
Chart of the Day – EUR/JPY
We have been discussing the bull run on the euro for several days now. In the wake of the ECB move, we have seen an exhaustion signal, and a rare three day candlestick pattern. An “evening doji star” set up is a reversal signal, and a good one at that. A strong bull candle (in the wake of the ECB), a doji candlestick (with a blow off bull failure), followed by a third strong negative candle yesterday. Add into the mix, Friday’s session was entirely outside some very wide Bollinger Bands, with Monday’s session closing back decisively inside. Again, this is a Bollinger Bands exhaustion signal. Momentum indicators are now posting profit-taking signals (although nothing is confirmed yet). The daily RSI falling back under 70 (from above 80) is a basic sell signal as are the Stochastics crossing lower (although not yet a confirmed signal). Closing yesterday’s session back under the support of the old breakout band 122.85 (January high) and 123.35 (old July 2019 high), could now usher in a correction back towards 121.00/121.40 again as the market retraces back towards the trend support (today c. 119.80). The hourly chart shows how hourly RSI went below 30 for the first time in three weeks yesterday, whilst MACD lines have turned negative. Closing under yesterday’s low of 122.55 for a second successive negative session would add corrective momentum. The bulls need to quickly get back their control with a close back above 123.35/123.60 initial resistance.
Following the potential exhaustion of the euro rally post-ECB and the payrolls report which helped the dollar to rebound slightly, we still find EUR/USD at an intriguing crossroads. Friday’s strong negative candle threatened to usher in at least some near term profit-taking, but in a mixed session yesterday, the bulls held ground. Nonetheless, the very small bodied candle does signify uncertainty and this could be enough to still encourage some profit-taking. The lack of conviction early today suggests the market is still at that crossroads. The sharp uptrend of the past two weeks has been broken and momentum indicators are just beginning to wane now. The daily Stochastics are the first to cross lower (although no confirmed sell signal yet. The RSI falling back below 70 would also be a corrective signal. The early warning signals are beginning to slip below recent levels where support has previously formed. Hourly RSI went below 40 yesterday whilst hourly MACD lines have gone below neutral and are at two week lows. Support to watch initially is the breakout of $1.1255 and a breach would begin to see the market losing trend momentum. A move below $1.1180 would open for a deeper correction. Initial resistance is $1.1320/$1.1345 for the bulls to get back on track to retest the $1.1385 rebound high.
It was a relatively quiet session yesterday, but with another solid positive candlestick, the Cable bulls are still in control of the recovery. We talked previously about our concerns that the move higher may begin to come under corrective pressure, but for now the bulls are standing tall. The strength of momentum remains impressive with daily RSI in the high 60s, whilst Stochastics are strongly configured and MACD lines rise above neutral. Clearing the old resistance of $1.2645 for a second day is a positive signal too and this now needs to be the basis of support for the bulls. There is a slight pause in the move this morning and there is just a slight tailing off of the hourly momentum signals. The bulls need to focus on holding above an eight day uptrend (shown on the hourly chart around $1.2660 this morning and the 89 hourly moving average which is flanking the run