There has been a sense of panic spreading through markets in recent sessions. With fears over the long term impact of Donald Trump’s international trade policy, investors are flooding into the safety of Treasuries. In less than two weeks, the 10 year Treasury yield has fallen from 2.44% to yesterday’s low of 2.06%, or 38 basis points. The shorter, 2 year yield has fallen 45 basis points in the same time. Expectations of a rate cut for this year (not even guided by the Fed) are now not just whether one will be seen, but how many. Could there even be two rate cuts this year? The decline in bond yields certainly hints as much. A December cut is now 97% probable according to CME Group FedWatch, whilst one as soon as September is 90% probable. This sharp accelerated move into Treasuries has hit the dollar hard in recent days. Yesterday’s disappointment in ISM Manufacturing certainly did not help. Neither did the comments from VFOMC voting member James Bullard who suggested that a rate cut could be seen soon. Bullard being dovish is nothing new, but if this is reflected across other more centrist Fed members, then the market could really be impacted. However, this re-pricing already looks to be maturing, and bond yields are beginning to find some stability today. Markets have a tendency to over-react and this could start to see a pullback on this move in the days ahead. It is though interesting to see the market accepting the Reserve Bank of Australia cutting rates by 25 basis points to 1.25% today (-25bps exp to +1.25%, +1.50% last). For now the dollar is still slipping against the G4 majors, but the traction of the sell-off of recent days has dissipated.
Wall Street closed mixed yesterday with a 4 tick gain on the Dow, whilst the S&P 500 fell a further -0.3% to 2744. US futures are steady around the flat line today whilst Asian markets have also been mixed (Nikkei flat, Shanghai Composite -1.0%). In Europe, the outlook is still looking corrective today with FTSE futures -0.4% and DAX futures -0.5%. In forex, there is a continued push higher for EUR, with GBP also edging higher. With little move on the commodity currencies, it is interesting to see AUD ticking mildly higher despite the RBA rate cut. In commodities, there is a degree of consolidation on gold after breaking through the March high yesterday, whilst oil is slipping half a percent lower although the selling pressure has dissipated slightly.
Eurozone inflation comes as key focus on the economic calendar, but first up the UK Construction PMI at 0930BST will be interesting after yesterday’s disappointment from the manufacturing PMI. Consensus expects mild expansion at 50.5 (50.5 in April). However, then attention turns to Eurozone flash inflation which is expected to unwind again following April’s jump. Headline Eurozone HICP at 1000BST is forecast to fall to +1.3% (down from +1.7% in April), with Core Eurozone HICP back to +0.9% from April’s final reading of +1.4%. Eurozone unemployment is expected to have remained at 7.7% in April (7.7% in March). US Factory Orders at 1500BST are expected to fall by -1.0%. There is also another key event, with Fed chair Powell who speaks at 1455BST. Given the sharp move out of risk, Powell’s comments will certainly be key for markets.
Chart of the Day – Silver
There has been a decisive shift in the attraction of the precious metals (of which silver is considered) with risk appetite faltering so badly recently. This has resulted in gold rallying hard, but also silver. There has been a run of four successive positive candles on silver. This move has broken several barriers and is opening continued recovery now. A breach of the three month downtrend has been confirmed. Furthermore, a break above resistance at $14.64 is the first time a lower high has been breached since the corrective move kicked in back in February. Throughout the past three months, the RSI has continually failed around 50, but yesterday’s move above 53 took it to a three month high. This comes as both MACD and Stochastics are beginning to accelerate higher. With intraday weakness now being bought into, the move is now on course to test the key pivot at $14.90 which is a barrier overhead. If silver can continue the momentum of the past few sessions then a key breakout could be seen. The move above $14.64 effectively completed a small base pattern implying a move to $15.00. This breakout is also now supportive initially at $14.64.
Sentiment has swung decisively against the dollar in the past couple of sessions. This is having a significant impact on EUR/USD. Yesterday’s move above $1.1220 broke a four week downtrend and the pair is now testing key confluence of resistance. The key six week resistance at $1.1265 has been a barrier on numerous occasions, whilst the old nine month downtrend comes in at $1.1285 today. However, this move has ignited something in momentum indicators, with RSI up towards 60 again as Stochastics and MACD lines accelerate higher. This is a key crossroads now (not least because RSI has failed around 60 on the key rallies for six months now). A break into the $1.13s would be a significant statement by the bulls. $1.1220 is now a basis of initial support today, with the hourly chart showing $1.1175/$1.1190 a further band to consider.
Cable is building on the rebound of Friday. The bull hammer has been followed by a second successive positive session and candlestick. This is the first time in over four weeks this has been seen. It comes with momentum indicators improving now. A positive divergence on RSI is in play and a move into the mid to high 30s represents a positive failure swing. MACD and Stochastics also hint at turning points. A broken four week downtrend this morning adds to the improvement. The first significant technical improvement on price would be a break back above the lower reaction high at $1.2755 but the initial resistance to note today is $1.2700. This is an old floor and overhead supply still. The hourly chart is looking far more positively configured too. Yesterday’s low at $1.2605 is a higher low to work from, with a near term pivot at $1.2650. At last, is this a chink of light for the Cable bulls?
Risk aversion and continued dollar weakness adds up to Dollar/Yen under pressure. Falling below key support at 108.50 has not tempted a recovery yet and another bearish candlestick formation yesterday adds to the gloom. Falling further today suggests no let-up quite yet. The market is now eyeing a test of early January basis of support between 107.50/107.75. However, the outlook does not look pretty, with RSI falling towards the mid-20s (precedent has it in the low 20s with January’s sell-off). Also MACD and Stochastics swinging lower add to the negative outlook. 108.50/109.00 is now overhead supply for a technical rally. This is reflected in yesterday’s intraday high of 108.45. Just as a caveat, it may be worth keeping an eye on the hourly RSI as a potential positive divergence is threatening. For now though the outlook remains negative and further downside is likely.
The breakout certainly looks to be a key move now. Three huge bull candles and the rally has stormed through the key long term pivot band $1300/$1310. This pivot now becomes a basis of support. The momentum of the rally is impressive and is worth still backing. A sharp acceleration in the MACD and Stochastics still have upside potential. Even the RSI which has quickly moved to 70 would not necessarily be restrictive seeing as this seems to be a decisive trending move. Closing above $1310 is a key breakout and this is the initial support for any intraday unwind. The market is well on the way to breaking clear of the $1324 key March high. If this can be decisively overcome, the way is open for a move back to the February high at $1346.70. The strength of momentum is reflected in the hourly chart, but near term traders should keep a look out for any negative divergences on hourly RSI or a failure under 60 which could be a signal to suggest the initial run is faltering. Holding on to support between $1300/$1310 is key now for the bulls to maintain their renewed control of the market now.
A degree of respite from the recent selling pressure as the market began to stabilise yesterday. However, for now, it is too early to suggest this is the end of the sell-off. A small bodied candlestick with long upper and lower shadows reflects a day of uncertainty, but yesterday’s close lower continues to suggest the bears are still the driving force. Despite this though, with the RSI stretched at 25 and support forming at $52.10 yesterday, there is a hint of consolidation forming today. Can this turn into a recovery? The intraday high at $54.65 is a gauge to watch initially. A recent sharp decline was followed by near term unwinding rebound before renewed selling. With momentum becoming stretched there is a growing risk of another rebound.
Dow Jones Industrial Average
The mildest of gains on the session for the Dow has just seen the selling pressure just ease off, for now. Can the market engage in some sort of recovery now? There is plenty of overhead supply now to get through for it to happen. Firstly, the 61.8% Fibonacci retracement at 24,950 is an initial gauge. Acting as a basis of resistance yesterday, it is an initial turning point. However, with the RSI at 30 (similar to where the mid-May low was posted), the bulls may be eyeing an opportunity for a rally as the selling pressure just looks to ease off. The hourly chart is showing less negative momentum now (a positive divergence on hourly RSI and the MACD histogram is hinting). A close above 24,950 (also a pivot on the hourly chart) would be a positive first step. However, then the bigger barrier of the big neckline resistance at 25,210 comes in. Initial support at 24,680, with the main support at 24,333.