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.