We continue to see markets trying to break key resistance levels, underpinned by an accommodative Federal Reserve. However, once more sentiment has just been dragged back by US President jabbing at China. The US is dealing with the worst numbers of the COVID-19 epidemic and President Trump is looking to deflect the blame, with the Presidential election less than six months away now. It has been often the case in recent weeks where these periods of weakness have tended to be an opportunity to buy risk once more. We continue to believe that you “don’t bet against the Fed”. For now though, we see equities coming off once more, and the dollar clawing back some lost ground. There is a raft of data to chew over today and how markets respond to the flash PMI data for May which is released throughout the day will be key. Data has been showing hints of bottoming as we start to see what May has to offer. Positive surprises in these flash PMIs could add to the growing hope that April will have been the nadir of the economic crisis. Perhaps then (second waves permitting) we can begin to look forward.
Wall Street closed with strong gains, with the S&P 500 +1.7% higher at 2971. However, US futures are pulling back, with the E-mini S&Ps -0.7% today. Asian markets have been mixed to mildly lower with Nikkei -0.2% and Shanghai Composite -0.7%. Europe is a similar picture to US futures, with FTSE futures -0.7% and DAX futures -1.0%. In forex, there is a USD rebound after a few days of losses. The higher risk AUD and NZD are underperformers, whilst EUR is still holding up relatively well. In commodities, the dollar resurgence is hitting gold by -0.7% and silver by -1.9%. The continued rally on oil is the standout performer today to fight against the dollar strength.
There is a packed economic calendar today, with the flash PMIs for May key today. Eurozone flash manufacturing PMI is at 0900BST and is expected to improve slightly to 38.0 (from 33.4 in April), whilst Eurozone flash Services PMI is expected to improve to 25.0 (from 12.0 in April). This would improve the Eurozone flash Composite PMI to 25.0 (from 13.6). UK Flash Manufacturing PMI is at 0930BST and is expected to improve to 36.0 (from 32.6 in April), whilst UK flash Services PMI is expected to improve to 25.0 (from 13.4) leaving the UK flash Composite PMI to improve to 25.0 (from 13.8). US Weekly Jobless Claims are at 1330BST and area expected to reduce once more but still add millions more to the jobless numbers, with 2.400m (2.981m last week). Philly Fed Business index for May is at 1330BST and is expected to improve slightly to -41.5 (from -56.6 in April). US flash Manufacturing PMI is at 1445BST and is expected to improve slightly to 38.0 (from 36.1 in April) whilst US flash Services PMI is expected to improve to 30.0 (from 26.7 in April). Finally we have Existing Home Sales at 1500BST which is expected to have declined by almost 19% to 4.30m in April (from 5.27m in March).
There are a few FOMC speakers to watch for today. Fed chair Powell is obviously the most important and he is speaking at 1930BST. However, the FOMC’s John Williams is also speaking at 1500BST and FOMC vice chair Richard Clarida is speaking at 1800BST. Further comments on monetary easing and negative rates will be watched for.
Chart of the Day – EUR/JPY
There has been a significant shift in sentiment on the euro this week (after the move by Germany and France to push for grants from the EU Recovery Fund and positive on debt mutualisation). This has come as broad risk appetite has improved, pulling traders away from the yen. This has had a significant impact on the EUR/JPY cross. The recovery really took off on Monday and subsequently three decisively strong positive candles have formed, a move which has completely changed the outlook. Breaking the six week downtrend, a move above 117.75 on a closing basis is also the first time a key lower high has seen a closing breach since January. This is a key technical development and suggests a new trend formation. Momentum indicators are sharply improving now, with the Stochastics rising towards bullish configuration, RSI at multi-month highs and MACD lines accelerating higher. The bulls now need to lay down some foundations for the move to be trusted and generate serious recovery momentum now. There is now a key trading band between 116.50/117.75 in which the bulls need to support an unwinding slip back. Ideally this would come between 117.00/117.75 which is a near term buy zone now. If this can be seen, then the bulls will be looking towards 119.00 as the next resistance and beyond.
The euro recovery is building up a head of steam now. Three positive closes in a row with some strong bull candles are threatening to change the complexion of the medium term outlook. Suddenly the bulls are considering the key range resistance $1.1000/$1.1015. A tick back lower this morning, tempers an immediate test, but recent moves in momentum are encouraging. The RSI broke to two month high yesterday, whilst MACD lines are rising towards neutral for their own nine week high. The hourly chart shows weakness is increasingly now being bought into, with good support growing between $1.0900/$1.0930 for the bulls to buy into. Holding on to the $1.08090 pivot will also be important too. The bulls will be looking to use this intraday pullback today as an opportunity if they can build support between $1.0900/$1.0930. Attention can then turn back towards $1.1000/$1.1015 again.
Sterling continues to struggle. We have recently been discussing the importance of the rally breaking through the overhead supply of the old April and early May lows. The rebound faltering Tuesday at $1.2295, closing lower yesterday and falling back again today is a worry for Cable bulls now. In the wake of the previous key breakdown below $1.2160, we noted that the outlook had shifted from a neutral range play, to negative one. How the bulls respond to a key breakdown is a key feature of confirmation of this move. With the rally rolling over once more, it affirms our outlook that rallies are a chance to sell. A slight redrawing of what is essentially now a three week downtrend, sits today at $1.2270. Momentum indicators are rolling over in areas that suggest that the rebound was simply another chance to sell. RSI faltering in the mid-40s, whilst Stochastics and MACD lines have barely got going in recovery. A close under $1.2160 would see the selling pressure gather momentum for another test of the recent low at $1.2075. We see further weakness to test $1.2000 area once more in due course.
Dollar/Yen remains stuck in its tight band of around 200 pips (c. 106/108) of the past five weeks. The 108.00/108.10 resistance area has been tested this week but continues to restrict the bulls. There is though still this mild positive bias within the range, with a two week drifting uptrend forming. It is interesting that the trajectory of this trend is not dissimilar to the previous drift downtrend of April into May. With momentum indicators drifting mildly higher this points to buying into near term weakness. However, the traction is slow and there is little real conviction in the move. A close above 108.10 would open the April high of 109.35. A closing breach of 107.30 (yesterday’s low) would break the mini trend higher, and effectively neutralise the range once more. The old 106.90/107.00 would then likely be the draw for the market.
Although gold has now posted two positive sessions in a row since Monday’s shooting star candlestick, with today’s early tick lower, there is a sense that this move to new multi-year highs will be a slow and steady move. Despite this, we still see weakness as a chance to buy. Having spent much of the week looking to breakout, there is now an uptrend channel that can be derived of the past three weeks. The basis of this channel continuing to pull higher remains the pivot around $1722. Channel support comes in around $1710 today and we would still view this near term corrective slip as a chance to buy. Momentum indicators reflect a mild positive bias still, with RSI consistently above 50 and MACD lines above neutral. It is important for this slide back to find support above $1722 (which has held throughout the past week) for the near term bulls to remain in control. Below $1722 there begins to be a slightly more corrective outlook. Resistance is now at yesterday’s high of $1753, under Monday’s $1764 multi-year high.
Brent Crude Oil
The oil rally has been one of the key recovery stories of recent weeks. With oil sentiment helped by another surprise EIA Crude Oil inventory drawdown, Brent Crude is now pushing through the April highs of $36.40. If seen on a closing basis, this breakout would be a crucial positive next step for the recovery. Already this is the strongest rally on oil since the December 2018/April 2019 bull run and there is no signs of it losing momentum yet. RSI continues to climb to the mid to high 60s (with upside potential), MACD lines are rising strongly above neutral and Stochastics are in bullish configuration. It all suggests that intraday and near term weakness is a chance to buy. There is an uptrend of the recovery taken around $32.80 today, with Tuesday’s higher daily low at $34.20 being initial support. The bulls will though be eyeing greater recovery, as if they can confirm a breach of $36.40 then there is realistically only an intraday spike high of $39.70 as resistance before the massive gap back at $45.20 to fill.
Dow Jones Industrial Average
The swing higher and lower managed to get the bulls back higher once more yesterday as the Dow pulled higher to pressure the 24,765 resistance once more. However, with futures again ticking back lower today, the rollercoaster of moves looks set to continue. The bulls will certainly point to the market sitting around the resistance but this is still effectively a six week trading range following the breakout above 22,595. Momentum indicators are responding to the gains that have been posted this week, but the RSI needs to move into the 60s (and three month highs) to really suggest positioning for an upside break of the range. There is however, now a positive bias to moves, with higher lows posted in each of the past four sessions. The higher low at 24,203 (which was Tuesday’s low) is the first support of note and the bulls will be keen to hold on as a failure would complete a near term topping pattern. This would suggest the gap at 23,730 would likely then be filled which would then neutralise the 22,595/24,765 range once more. A close above 24,765 would be the key move as it would complete an upside break from a c. 2100 tick consolidation range. Next resistance would be the gap at 25,225.