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Dust looks to settle on a massive risk sell-off but second wave concerns still remain

Market Overview

There have been signs of strain in recent days, but the risk recovery came to a shuddering halt yesterday as Wall Street sold sharply lower. The Federal Reserve remains highly accommodative but is rightfully very cautious on the economic recovery. However, coming amidst news that states in the US are suffering from increased second wave infections have hit markets that have been seemingly priced for perfection of a serene V-shaped recovery. A bump in the road to demand recovery for oil has hit the oil rally hard and similar -6%/-7% declines on Wall Street also ensued. Investors who have been seen a rally going only one way until this week are waking up to a sobering reality that markets can often take the stairs higher but the elevator back down. How they respond to this realisation in the coming sessions will be key. If this is a sell-off that gathers momentum, then a reversal back lower could really take some stopping. Right now, this morning, there is an element of stability, with US futures clawing back +1%. The sharp -30 basis points move of recent days in the 10 year Treasury yields has stabilised early today and the yield is slightly higher. Forex markets took a hit of risk aversion yesterday but are also settling down. Newsflow surrounding the potential for re-imposing “stay at home” orders for certain parts of the US (Houston in Texas has been suggested) could be triggers for selling pressure. In the UK, the impact of the lockdown was worse than feared in April, with monthly GDP falling by worse than expected at -20.4%. With the suggestion that the UK will also formally rule out a Brexit transition period extension today, it may be of little surprise that GBP is an underperformer.

Wall Street closed with huge losses as the S&P 500 fell -5.9% to 3002.However, with US futures rebounding today (E-mini S&Ps +1.1%) there is an element of stability to Asian markets (Nikkei -0.7%, Shanghai Composite +0.1%). Europe is playing catch up on the US decline last night with FTSE futures -1.2% and DAX futures -1.1%. In forex, the dust is settling on a big risk-off day yesterday, with little real direction aside from a mild degree of JPY underperformance along with GBP also weakening. In commodities, gold is steady at around +$3 higher whilst silver is still pressured slightly -0.7%. Oil is concern though, with another -3% decline today.

It is a quiet end to the week on the economic calendar, however there is still important US data to look out for. The prelim reading of June Michigan Sentiment is at 1500BST and is expected to show an improvement to 75.0 (up from a final reading of 72.3 in May. This is expected to be driven by an improvement in both current conditions (to 85.0 from 82.3) and the expectations component (to 70.0 from 65.9). How these two components move will go some way to determining the reading of the data. A big beat on forward looking expectations would be positive.


Chart of the Day – USD/CAD   

Commodity currencies have performed very well throughout the risk rally, but the moves have turned corrective. The question is, for how long. With the oil price turning lower, the Canadian dollar is under pressure near term. This is driving a rebound on USD/CAD. After posting (almost) a bull hammer in the wake of the FOMC meeting, the sell-off out of CAD took flight yesterday with a big bull candle on USD/CAD. This move comes with positive rebound signals on momentum indicators. The daily RSI rebounding above 40 (from below 30), whilst Stochastics are confirming a near term bull cross higher today and MACD lines clos e to a bull cross. The hourly chart shows positive divergences building in recent sessions whilst a move above 1.3485 resistance (also a near term pivot) and 1.3570 opens a bigger recovery. The Fibonacci retracements of the big 1.2950/1.4665 December to March bull run could hold the key as to how this recovery moves now. They have acted as a key gauge throughout recent months for USD/CAD. The recent bounce off 1.3310 was around the 76.4% Fib (at 1.3350) and through 61.8% Fib (of 1.3605) has opened a retracement to 50% Fib at 1.3805. This Fib level is a confluence of resistance between 1.3800/1.3850. We see this move as a near term kick back retracement within a three month downtrend channel, but for now it still has upside potential. Holding above 1.3600 area into the close will be a signal that the recovery is set to continue and there is little real resistance until 1.3710/1.3800. There is good near term support in the band 1.3450/1.3485.



Our conviction in this bull run on EUR/USD has been seeping away for the past week. In that time, the market has made another higher high to $1.1420, but we still feel caution with this move. EUR/USD has now broken our redrawn uptrend (the second time that a derived two week uptrend has been broken in recent sessions) and another decisive negative candlestick formed yesterday. Although there is nothing overtly corrective yet, the bull run higher seems to be at least hitting the buffers. This is reflected in momentum indicators now beginning to tail off. The daily RSI is below 70 for the first time in nine sessions, whilst Stochastics are hinting at negative divergence. The hourly chart has taken on a ranging configuration, where hourly RSI has now been oscillating between 30/70 for the past week and MACD lines are below neutral around three week lows. A move below 30 or above 70 could hint at the next breakout. We spoke of the 144 hour moving average yesterday being a gauge for the recovery (currently $1.1320) and has been broken. Furthermore, there is a near term pivot also at $1.1320 which has been broken and is now an initial gauge of resistance today. The key is whether this move turns into a correction. For that, we look to the support at $1.1240 as being key. A closing breach would complete a top pattern a d a downside target of around $1.1080 would be implied. For now, this choppy near term trading is still within a range $1.1240/$1.1420, but one thing that is emerging is that the bulls are no longer as strong as they were.



The run higher on Cable has been lacking conviction in recent days and came to a juddering halt yesterday with a loss of -145 pips on the day. The question is now how the bulls can respond today. We have frequently bee referencing how Cable has responded both higher and lower in recent months. The downside break below $1.2160 rebounded almost instantly to then find support again at $1.2160 on an initial test lower. Given how this range has played out, the upside breakout above $1.2645 falling sharply below $1.2645 now faces the prospect that this becomes a basis of resistance. If a near term bound (which is already threatening this morning) fails around $1.2645 and turns lower, this will re-affirm the multi-month ranging outlook. The bulls need a confident close above resistance $1.2615/$1.2645 to clear their heads this morning and re-assert themselves. Momentum indicators are falling over on the daily chart but with no confirmed sell signals yet. So on the hourly chart we look to see what sort of recovery can now be developed from initial support of the overnight low at $1.2545. Hourly RSI moving above 50/60 would signal a real prospect of improvement once more. A move below $1.2500 would confirm the range has become neutralised again.



The big retreat in risk has seen the safe haven flow for the yen soar. However, after four consecutive bear candles in a row and the pair  breaking support after support, there are signs of respite today.  Rebounding for a second day from 106.55, the pair has move above yesterday’s high of 107.25 and at least for now, the selling pressure has eased and a move to 106.00 is on the backburner for now. The RSI holding up above 40 is also encouraging for this to begin to settle and a more ranging outlook to take hold again. The key as for whether this turns into a sustainable recovery will be reaction around the resistance that has been left on the way down. The hourly chart shows 107.45/107.85 now overhead. With momentum improving, this resistance needs to be breached otherwise the rebound could simply just fizzle out again. This morning’s rebound is helping to form the view that whilst volatility may have picked up in the past two weeks, the market is still effectively ranging.



Gold closed -$9 lower yesterday in a session where risk appetite was smashed and safe haven assets outperformed. This is not a great set up for gold bulls looking for a breakout of the medium term trading range. Technically, there is a near term positive bias still within the range as the market is still eyeing a test of the $1744 June resistance, however we see the ranging configuration re-asserting once more. The RSI rolling over again for another lower high around the mid-50s, whilst MACD lines meekly edge higher does not bode especially well for this being the time where gold breaks higher. There is still a move that is holding on to the near term pivot band support $1720/$1725 (shown well on the hourly chart) this morning. The hourly chart also shows a five day recovery also intact, whilst the hourly RSI holding above 40 will encourage the bulls. The question is whether this positive near term bias within the range can translate to a move that drives a breakout. Yesterday would have been an ideal day for such a move, but the bulls failed. Resistance at $1744/$1746 is the initial barrier, before $1753 and the key high at $1764. A failure back under $1720 today would once more neutralise the range.


Brent Crude Oil

With the risk rally going into sharp retreat, the recovery on oil has taken a sizeable hit. With a huge negative close yesterday (-7.5% lower) Brent Crude has now broken a key seven week uptrend. Signals are moving into reverse, with bear cross confirmed on the daily Stochastics and the MACD lines being the most stark warning of all. If the RSI confirms below 50 then it would be a decisive negative signal. The recovery has seen its first major blow in seven weeks. The key will now be how the bulls can respond. Brent Crude is lower again today and is now approaching the key test of the big base pattern neckline support. The band between the low at $33.55 and the breakout of $36.40 is a crucial area of support. The base pattern has not seen a pullback yet and this could yet be an opportunity still. The support $33.55/$36.40 needs to hold for this to still be a near term pullback within the recovery. The hourly chart shows what is effectively a top pattern forming below $38.75, a move which implies a minimum corrective target of $36.40. There is resistance of previous lows now $38.75/$39.85 and the bulls will need to move decisively above $40 again to negative this near term corrective move.


Dow Jones Industrial Average

The “island reversal” topping pattern came through with a vengeance yesterday as the Dow gapped lower and pretty much did not stop falling throughout a precipitous session of losses. The question is what damage this does to the bullish outlook. For one it will make investors understand that markets can go up as well as down. The past few weeks seemed to lose sight of that fact and it has come back to bite in a big way. Taking the stairs up and an elevator back down. The key will now be how the dust settles. As can often be the case there is a knee-jerk rebound setting up on futures today. However, if this move quickly dissipates then there will be a real threat to the first really important breakout support at 24,765. The recovery has been built on positive momentum configuration, and the daily RSI between 45/50 (where it is now RSI) has been a basis of support throughout recent months. However, if we see another move lower today which takes RSI  below 40 it would be the lowest since the rally kicked off in March. If this came with the Dow breaking support at 24,060 then the selling pressure would be really accelerating. The hourly chart shows very little real resistance until 26,080 and then the 26,295/26,385 start of the big island reversal gap.

Richard Perry

Richard Perry

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