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?