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.