With COVID-19 spreading internationally, there has been a marked change in the outlook on financial markets in the past week. Traders are taking a view and that view is to sell risk. Last week, the concerns were around how Japan would be negatively impacted. Now, with comments from US health officials, noting “this could be bad”, the spread of the virus reaching the US in any significant way could be the next trigger signal to look out for. Already expectations of a Fed rate cut are being hauled forward and are now at a probability of around 65% for a cut in the meeting at the end of April. This helped to drive the US 10 year yield to record lows yesterday, below the previous low of 1.321% from July 2016. There is little reason for investors to not buy the safety of US Treasuries right now, so it is unlikely that yesterday’s low of 1.307% will be a turning point quite yet. The US dollar has slipped back amidst this move, however, taking a bigger picture view, it is difficult to see the US dollar not recovering amidst this preference for safe havens. Already this morning, we are seeing support returning. Wall Street equities are being smashed and the oil price is also under pressure. Intraday rallies on risk assets are seen as a chance to sell. Gold has seen some profit-taking in the past 48 hours, but already support is beginning to form again, and any weakness will likely prove short-lived.
Wall Street closed another session sharply in the red, with the S&P 500 -3.0% at 3128, whilst US futures are only +0.1% today (already giving up earlier gains). Asian markets have been sold off, albeit at a lesser extent, with the Nikkei -0.8% and Shanghai Composite -0.8%. European markets are taking account for the last US selling into the close last night, with FTSE futures -0.9% and DAX futures -1.0%. In forex, after a brief period of correction early this week, USD is beginning to regain its performance this morning, and outperforming the majors (aside from CHF which is holding ground). In commodities, safety is once more the name of the game, with gold bouncing back over +0.5% higher whilst oil is around half a percent lower as selling continues.
Once more today, it is a quiet European morning on the economic calendar, with only minor US data later in the session. US New Home Sales at 1500GMT are expected to improve to 710,000 in January (from 694,000 in December). The EIA crude oil inventories at 1530GMT are expected to show stocks building by 2.5m barrels (after a build of +0.4m last week).
There are also a couple of Fed speakers on the agenda, with Robert Kaplan (voter, centrist) at 1445GMT, whilst Neel Kashkari (voter, and significant dove) is at 1800GMT.
Chart of the Day – AUD/JPY
Selling pressure on risk assets has really taken off in recent days amidst the fears of the impact of COVID-19. A great indicator of this is the move lower on AUD/JPY, as the higher beta (higher risk) Aussie falls relative to the safe haven Japanese yen. The move is now testing the key medium term support at 72.40 which is the January low. Since mid-January (when the Coronavirus really became an issue on major markets) we have seen AUD/JPY under pressure. A failed rally has since bolstered key resistance of a pivot at 74.50 and four successive bear candles reflect the growing downside momentum. The concern is that intraday rallies in each session have been successively sold into with greater magnitude. Momentum is bearishly configured but also with further downside potential. The RSI is into the mid-30s, whilst MACD and Stochastics have only just bear crossed. The market is set up to sell intraday strength once more, with an initial resistance band 73.00/73.20. A closing breach of 72.40 opens the October low at 71.75 as the next test of support.
We have been seeing a prospective technical rally developing in recent sessions, as the euro has now formed three positive candles in a row on the daily chart. The question is whether real traction can be found in recovery, or whether this is simply a move that falters once more. Taking a step back, we see this as a rally within a bigger bear phase and a move to simply help renew downside potential. For now though, the market is running higher, and the bulls will be taking heart from the improvement in momentum indicators. With the RSI rising back above 40, bull crosses now on MACD and Stochastics, the near term rally is progressing. Trading decisively clear above the overhead supply and resistance in the band $1.0865 (near term base neckline) and $1.0875 (old key October low) opens a +90 pip further recovery and a $1.0950 target area. The next real resistance is not until $1.0980 now, with the 8 week downtrend resistance around $1.1000. With higher lows and higher highs in each of the past thee sessions, the near term rebound is doing well. But it is an unwinding move and is unlikely to last too long. Yesterday’s high of $1.0890 is initial resistance, with support at $1.0830.
The outlook on Cable remains as choppy as ever. A recent three week trend lower has now been broken as the market has rebounded from the $1.2840 low last week. However, this latest rebound that has once again scuppered any sense of traction, is struggling to build on its own recovery momentum. The rebound is now encountering a confluence of barriers with a batch of faltering moving averages, psychological resistance at $1.3000 and the 38.2% Fibonacci retracement (of $1.2195/$1.3515) at $1.3010. It is also notable that given the jagged configuration of the rally (again the market is stuttering lower today), there is little real traction through momentum indicators either. The MACD lines are flat, whilst RSI and Stochastics are again around their neutral points where the mid-February rally faltered. The important resistance to now watch is the lower high at $1.3070. Unless this barrier can be overcome, there will be a building run of lower highs. Initial resistance is at yesterday’s high of $1.3017. The hourly chart shows that moving clear below $1.2980 (an old near term pivot) would see the move deteriorate again. Below $1.2950 opens $1.2885.