A remarkable breakout rally continues on equities, however it is interesting to see slightly more of a cautious outlook beginning to develop across other areas of major markets. Concerns are beginning to mount over relations between the US and China. Moves by the White House and Congress to sanction China over its imposition of security laws in Hong Kong are set to put the world’s two major economies on a collision course once more. Markets are beginning to show the strain. The weakening of the Chinese yuan versus the dollar has tended to be seen as a warning signal for markets during the trade tensions of the past couple of years and once more USD/CNY is breaking higher. It comes as the oil price is also beginning to lose its recovery momentum (with questions over the recovery in demand being posed). Treasury yields also ticked lower yesterday as demand to buy US debt came even as equities closed strongly higher. For now, these are just warning signals, and there is still positive sentiment which is broadly dominant on major markets this morning. Equity futures are again higher today, whilst Treasury yields are also ticking slightly higher. Commodity currencies are performing well and the euro is looking to breakout (after further information on the EU Recovery Fund). However, if tensions between the US and China escalate, then there could be an excuse for some profit-taking. How far that profit-taking may could would then be the next question. For now, broad outlook remains positive, but perhaps the need for a little more caution is coming.
Wall Street staged a strong rally into the close last night with the S&P 500 +1.5% (at 3036) and a close above 3000 for the first time since 5th March. Futures are also positive again today with the E-mini S&Ps +0.4%. Asian markets were strong overnight with the Nikkei +2.3% and Shanghai Composite +0.3%. In Europe, markets are playing catch up on the late Wall Street run higher into the close, with FTSE futures and DAX futures both +1.2%. Forex majors, have regained their positive risk bias today, albeit only marginal. JPY is underperforming again, whilst EUR and GBP are positive against the dollar. The one concern is a mild weakness on AUD, with a nod to concerns over China perhaps. In commodities, there has been a decent rebound on gold, up around +$10, but oil is lower again by around -2%.
There is not too much on the economic calendar through the European morning, although German HICP inflation is released at 1300BST and is expected to fall to +0.5% year on year in May (from +0.8% in April). The US data begins at 1330BST with a number of data points. Prelim US Q1 GDP (the second reading) is expected to show no revision from the Advance reading, with -4.8% annualised. US Weekly Jobless Claims are expected to show another hefty number with 2.100m (although down from last week’s 2.438m). There is also core US Durable Goods Orders (ex-transport) at 1330BST which is expected to show a month on month decline of -14.0% in April. Finally later in the session, there are the US Pending Home Sales at 1500BST which are expected to show a decline of -15.0% in April.
The FOMC’s John Williams (centrist, voter) speaks at 1600BST today..
Chart of the Day – FTSE 100
Anyone used to trading UK equities will know what a hard slog it has been in recent years. Compared to markets such as Wall Street and the DAX which have been breaking out with bullish momentum set-ups recently, FTSE is once more a significant laggard. FTSE 100 may have rallied +25% from its March lows, but when compared to the DAX which is over 40% higher, this reveals the context of underperformance. The technicals also look to be a real battle for the bulls too. Whilst the DAX has broken decisively higher from its consolidation rectangle, the FTSE is still yet to confirm a breakout through the key 6152 late April high. The market is higher once more this morning and is now through resistance, but this needs to now be consolidated. Momentum indicators have been tentative in calling for a breakout, with RSI struggling to move above 60 and MACD lines just timidly positively. Despite this, the bulls are now in a position to break higher. A close above 6152 would finally see the FTSE joining to breakout gang in completing an upside break from its consolidation rectangle of 5641/6152. This would then imply around +500 ticks higher in the coming weeks. There is a small uptrend of the past two weeks to take note of, with its support rising as a good gauge at 6055 today. The important near term support is last week’s higher low at 5889, as a breach would once more suggest disappointment.
The euro is pushing towards breakout of what is now an eight week consolidation range between $1.0725/$1.1015. An intraday breach of the resistance at $1.1015 could not be sustained into the close yesterday but the bulls are having another go this morning. We have been arguing that momentum indicators have been increasingly positively set up in recent days for a breakout and the euro appears to be on the brink of a next phase. EUR/USD yesterday posted its highest close since 31st March and a close clear of $1.1015 today would be a breakout. It would effectively complete a consolidation rectangle breakout which would imply around +250 pips of upside target (towards $1.1250) for the coming weeks. Whilst we would not anticipate this breakout would be a straight line move we would then be looking to use pullbacks and near term corrections as a chance to buy. Closing above $1.1015 would leave $1.0870./$1.0890 as a good basis of support. Yesterday’s reaction from the low at $1.0930 leaves good support too. Momentum indicators are certainly leading the way, with MACD lines rising decisively above neutral and Stochastics strong. RSI pulling above 60 also leads a breakout. The market just needs that next step forward of a closing above $1.1015. Next key resistance is at $1.1145.
We have been seeing more fight from the Cable bulls recently, however on a renewed swing back to the dollar during US trading yesterday, a decisive negative candle formed to once more damage the prospects of a recovery. Losing over -100 pips from the day high yesterday will have been a disappointment, and seriously questions whether this is a recovery that can be trusted. Were the bulls to have been in control they would have been looking to find a higher low within the support band $1.2245/$1.2295, but this move seems to have failed before it has even seriously got going. The hourly chart shows a shallow uptrend of the past week and a half that certainly needs to hold (comes in today at $1.2200), but it is interesting that an intraday rebound into the close blast night is testing $1.2245 again. This will be an initial gauge today, otherwise the failing of the rally will begin to pressure the newly laid support at $1.2160 again. Momentum indicators are struggling to sustain the traction of their initial recovery positions and the bulls need to begin to form some positive daily candles again. Otherwise, once more we can add $1.2360 resistance to a list of failed bull moves.
A small positive candlestick has continued the run of contradictory candlesticks and uncertainty over the near term outlook on Dollar/Yen. Although we are still none-the-wiser over the direction of the next breakout, there is a slightest shade of dollar strength (or should that be yen weakness) that is forming as the price ticks higher again early today. This is backed by RSI and MACD edging higher and Stochastics positively configured around 80. However, these indications are still very minor on the daily chart and have little direction either on the hourly chart, that they are difficult to take with any real conviction. Resistance remains in place around 108.0/108.10 and until this is breached it is very difficult to get overly excited about moves on Dollar/Yen. Over the course of recent weeks, we have a mild preference for upside (certainly whilst broad market sentiment remains risk positive), and support continuing to hold at 107.30 underpins this. However, this remains a market that lacks any conviction or drive for a breakout. Above 108.10 the next resistance is 109.10/109.40. Under 107.30 would once more neutralise the outlook.
Gold has been under pressure for much of the past week, but a pick up into the close yesterday and a further run higher today brings the price back towards an important crossroads. Since topping at $1764 early last week, the market has formed a corrective trend, forming lower highs and lower lows. This shows as a near term downtrend channel on the hourly chart. However, finding support at $1693 yesterday, it lends the potential that gold could still be in positive trend, but just a much shallower trend (dating back to the early April low at $1640). Subsequently with the market rebounding this morning again the importance of the previous pivot at $1722 and the mini downtrend (falling around $1727 today) becomes key for the near term outlook. Despite the near term correction, we continue to be buyers into weakness as we look for the next leg higher. A failure around the $1722 pivot and maintaining the near term downtrend, in the next session of so would suggest that the near term correction has further to go. Momentum indicators are still corrective and run this risk too. So we find gold at a very important crossroads and how the market reacts around the low $1720s today could be key for the next move. A move above $1735 would mean the bulls back in the driving seat.
Brent Crude Oil
A huge rally on oil in recent weeks has been a key driver of the risk rally and so as another consolidation sets in, this must be watched as it could have wider reaching implications. For over a week now, Brent Crude has been butting up against the $36.40 resistance of the April highs but failing to make the key breakout. An intraday failure last week at $37.00 came and the market has never managed to close above $36.40. Yesterday’s negative candle and -4% decline is a warning. Testing initial support at $33.55 is mounting and momentum is beginning to slip away. Stochastics are tracking lower and RSI is back under 60. An uptrend that has underpinned the five week recovery is threatened today and a retreat back towards the $32.25 previous breakout is possible. The bulls need to respond otherwise a more considerable retracement of the rally could set in. The band of support $28.85/$32.25 could then become the focal point. Subsequently, the bulls will be fighting to hold the support at $33.55 and prevent this current phase of consolidation from turning corrective. We are still happy to buy into weakness on oil, but become far more cautious bulls were the $33.55 support to see a closing breach.
Dow Jones Industrial Average
Another impressive session for the bulls has more than confirmed the breakout from the seven week consolidation range. With Tuesday’s gap through the resistance at 24,765, the market continued its strong run higher yesterday. There were moments during the session where it had looked as though the profit-takers were about to take control, but once more, weakness was bought into and the Dow closed around session highs with another strong bull candle. Decisively closing an old gap at 25,226 the next resistance is the March high at 27,100. The technical set up for the continuation of this rally is strong, with the consolidation rectangle breakout implying a target of 26,700 in the coming weeks. Momentum is strong with RSI rising into the mid-60s and at its strongest since the market was hitting all-time highs back in February. MACD and Stochastics are also strengthening too still. With bull runs such as this, there will always be the risk of some near term profit taking, but the strength of the pullback support at 24,765 is growing by the day now. Initial support at yesterday’s low at 25,010.