There is a sense of resilience beginning to develop on Wall Street. With the positive newsflow surrounding the massive easing measures from major central banks and the fiscal support packages by governments beginning to be priced in, the rally has begun to look less assured. After a weekend of scary headlines on the worsening of Coronavirus, there was an easy opportunity for a bull retreat. However, Wall Street is holding firm and closed higher. However, there are still warning signs, with Treasury yields still threatening to drop back and the dollar (which has acted as a key safe haven) beginning to pick up. This has not yet translated to renewed Wall Street selling pressure yet. Data out from China overnight should help to sustain support too. We got a first glimmer of hope out of China of green shoots of recovery in the wake of the Coronavirus and potential bottoming out of the economic shock. China is a couple of months ahead of other countries (being the first country to be impacted by COVID-19), and the March official PMI data has come in way ahead of expectation, even back in expansion territory above 50. This has helped to boost sentiment this morning. However, it is important to remember these numbers are coming from record lows last month and it will be months before any recovery can be confirmed. China Manufacturing PMI was 52.0 (45.0 exp) whilst China Non-Manufacturing PMI was 52.3 (42.1 exp) leaving the Composite PMI at 53.0. It will be interesting to see how sustainable the boost to sentiment is today. Certainly the oil price could do with the move holding, having rebounded from record 18 year lows of yesterday. We also had some Q4 UK data, with the final UK Q4 GDP confirmed at 0.0% (unrevised from the 0.0% in the second reading, and down from +0.5% in Q3). The UK Current Account was marginally better than expected in Q4 at -£5.6bn (-£7.0bn exp, -£15.9bn in Q3).
Wall Street closed +3.4% higher at 2626, whilst US futures are steady once more today (+0.4%). There was a mixed session in Asia with Nikkei -0.9% and Shanghai Composite +0.3%. In Europe there is an early positive picture forming, with FTSE futures +0.8% and DAX futures +1.5%. Forex majors are showing a worrying renewal of the USD strength. The main outperformer is AUD though, in the wake of yesterday’s fiscal stimulus package from the Australian Government. In commodities, gold continues to build its recent consolidation, whilst silver is also around the flat line. The massive selling pressure has eased on oil, with WTI bouncing sharply.
Although economic calendar is having less of a deciding impact on market direction of late, it still has a part to play in intraday volatility. For the European session, Eurozone flash HICP at 1000BST is expected to show a sharp drop in inflation with the headline HICP down to +0.8% in March (from +1.2% in February) whilst core HICP is expected to tick lower to +1.1% (from +1.2% in February). Into the US session, the US Case Shiller House Price Index is at 1400BST and is expected to see January prices improved to +3.2% (from +2.9% in December). The US Consumer Confidence for March at 1500BST will be the key US announcement and is expected to show a sharp deterioration back to 110.0 (from 130.7 in February) which would be the lowest since November 2016.
Chart of the Day – AUD/JPY
As the market has traded with volatility around a key crossroads in the recovery, it is good to see where the key risk-on/risk-off major cross, Aussie/Yen is positioned. The bulls will be interested to see that after a period of consolidation in the past few sessions, Aussie/Yen is looking to push forward once more. If this move is confirmed, it would suggest positive risk appetite is developing again. Given that the last few candles have been distinctly lacking conviction on the bull side, the bulls need to break the shackles once more. The market has formed a small uptrend over the past week and a half, and now having spent the past few sessions trading around the 38.2% Fibonacci retracement of the big sell-off 76.54/59.90, this is becoming the springboard for the move higher. The improvement in momentum indicators continues, and if this morning’s positive move can be confirmed into the close then the bulls will be taking strengthening RSI, Stochastics and MACD with them. After a run of small-bodied candles, effectively shuffling sideways, the bulls will be looking for a decisive session today. The hourly chart shows initial support 66.60/66.90, whilst holding above today’s low at 66.00 is an important gauge now. Key support is a pivot around 65.50 which if lost would confirm an uptrend breach and building corrective momentum. 67.60 is key near term resistance above which opens the recovery rally once more.
The euro recovery has just lost its way in the early part of this week. The question is whether this is the point where corrective momentum on EUR/USD builds once more. For that, the support at $1.0950 is key. This is the first key higher low of the recovery (and shows well on the hourly chart also as a pivot). The momentum of the move is also at an interesting crossroads, with the Stochastics and RSI both tailing off around 50 (their neutral points) and MACD lines also tailing off. We have already seen the sharp recovery uptrend being broken this morning, so the damage is being done to the bull move. The issue now is whether it is the renewal of the dollar strengthening move that would pull EUR/USD sharply back lower again. Support around the 38.2% Fibonacci retracement (of $1.1492/$1.0635) at $1.0965 is a key basis of support near term, just under the old November/December lows of $1.0980. This support area has supported the market initially this morning. The hourly chart shows that the bulls need to respond to the slip, with the hourly RSI again around 40 (where support has tended to form through the recovery) and MACD lines a shade below neutral. If hourly RSI moves below 30 it would be a negative signal and open the prospect of a deeper move below $1.0950 towards the 23.6% Fib around $1.0835.
The bulls have taken a step back on the recovery at the beginning of this week. A mild negative candle yesterday has been followed by additional downside early today. What are the factors that will determine whether this is renewed dollar strength, or just a pause in the recovery. For now we see it just as a pause, trading still above the 50% Fibonacci retracement (of the huge sell-off $1.3200/$1.1405) around $1.2300. The RSI has just tailed off slightly today, but Stochastics and MACD lines continue their recovery. The early signs will come through the hourly chart, with support of a pivot around $1.2300 important this morning (also around the 50% Fib) but als