It has been a tumultuous week on financial markets, with majors swinging around on newsflow of the Coronavirus. The latest move has come overnight, as something of a relief rally is forming. The WHO has declared a global health emergency but interestingly did not recommend a travel ban on China. It also noted that it sees China’s response as being able to “reverse the tide”. It is far too early to say that this is a key turning point in the market response, but a relief rebound has been seen across markets. This has been added to by the Chinese PMIs overnight which has not deteriorated as perhaps they might have done considering the country is gripped by the Coronavirus. China Manufacturing PMI came in as expected bang on 50.0 (50.0 exp, 50.2 last) whilst China Non-Manufacturing PMI improved to 54.1 (53.5 last). A traditional risk knee jerk rally, with bond yields higher, gold and the yen slipping, whilst equities rebound and oil is back higher. The question is whether this can last? The Coronavirus is still spreading with thousands of new cases in China every day, whilst the death toll is also rising (and accelerating). Perhaps if people start dying outside China, that could lead to the next bear leg lower, but this morning, there is a more settled look to market moves. However, volatility remains elevated and traders are on edge. The choppy market moves are likely to continue for a while yet.
Wall Street bounced strongly into the close, with the S&P 500 rallying over a percent from its intraday lows to close +0.3% higher at 3283. US futures are a little more circumspect this morning -0.1%, however, Asian markets have taken heart with the Nikkei +1.0% higher. In Europe, there is an account for the late Wall Street rally, with FTSE futures +0.4% and DAX futures +0.5%. In forex, there is a continuation of the recent USD strength, but interestingly with less risk aversion. GBP also continues to rebound following yesterday’s BoE related gains. In commodities, there is a consolidation on gold, whilst oil has opened over +1% higher.
On the last day of the month, there is a lot of data to wade through on the economic calendar. Starting with Eurozone inflation for January which is throughout the morning for individual countries, but the Eurozone flash HICP is at 1000GMT and is expected to see the headline HICP improve to +1.4% (from +1.3% in December) whilst core HICP is expected to slip a shade to +1.2% (+1.3% in December). Eurozone flash GDP is also at 1000GMT which is expected to be +0.2% for Q4 (from +0.2% in Q3) and annualised at +1.1% (down from +1.2% in Q3). Into the US session is we have Core Personal Consumption Expenditure at 1330GMT which is expected to remain at +1.6% in December (+1.6% in November). The US Employment Cost for Q4 is also at 1330GMT and is expected to remain at +0.7%. Final University of Michigan Sentiment is at 1500GMT and is expected to be unrevised at 99.1 (from 99.1 prelim and 99.3 December final).
Chart of the Day – EUR/NZD
January has been a month where the strong performance of the New Zealand dollar has begun to unwind. Furthermore, in the past week, there has seen a sharp move out of higher beta risk majors such as the Kiwi, at a time where the euro has begun to consolidate. This has driven a decisive base pattern formation on EUR/NZD. Yesterday’s big bull candle through resistance at 1.6920 has completed a double bottom pattern which implies a recovery target of around 1.7180. The euro bulls are certainly running with the move, with momentum indicators turning strongly positive now, with RSI above 60 at multi-month highs and a “bull kiss” on MACD lines. Making it decisively through the old pivot at 1.7000 would also be a sign of growing strength. Given the sharp overbought position on the hourly chart, we would be looking to use weakness as a chance to buy. There is now neckline support at 1.6920 whilst another pivot at 1.6835 making this a buy zone for near term pullbacks. This support band is shown well on the hourly chart too. Above 1.7000 after yesterday’s high of 1.7030, there is little real resistance until 1.7150/1.7190.
We have been wondering in recent days whether there could be a near term rally building on the euro. Yesterday’s bull candle (which added around +25 pips) was the most positively configured one day candle for almost four weeks. Importantly, after putting pressure on $1.1000 repeatedly in recent sessions, this move has now started to pull away from the $1.0980/$1.1000 support area. The move is building small improvements in daily momentum indicators, with a tick higher on RSI and Stochastics, but it is on the hourly chart where the improvement can really be seen. Hourly RSI is building above 40 and taking a stronger configuration, whilst hourly MACD lines are consistently above neutral. A first lower high (at $1.1027) was broken yesterday, but the move needs to break above resistance at $1.1035/$1.1040 for confirmation of the near term improvement. Despite all this though, it is important not to lose sight of the multi-week downtrend channel that is still the dominant chart pattern of the moment. Overhead supply really does begin to weigh above $1.1065 and this rally could still be short-lived. Trading higher against the downtrend is a risky strategy and we have to be eyeing the next opportunity to sell.
Once more weakness has been bought into as Cable has dipped into the medium term support band $1.2900/$1.3000. A bullish engulfing candlestick formed yesterday as the Bank of England opted not to cut rates. This move has re-affirmed the triangle of converging trendlines and turned a slight corrective bias into a slight positive one again. The top of the triangle comes in around $1.3140 today and is now being eyed. However, until there is a closing breach of $1.3170 resistance this near to medium term phase of consolidation will continue. An early consolidation of today’s Asian session has been met with buying pressure as the Europeans have taken over and there is a more positive outlook beginning to take hold. This is pulling Stochastics higher and the bulls will be looking for moves above 60 on both RSI and Stochastics to suggest upside traction is forming. The hourly char is looking more positive now and holding a break above $1.3110 would, keep a test of $1.3170 open. Initial support is now at $1.3080 and a break back below this would see a retreat back towards $1.3000 again.
The mixed signals continue to come for Dollar/Yen. Throughout this week, we have been looking at a consolidation between 108.70 and 109.25. For a brief time yesterday it looked as though the next leg lower would be forming, but an intraday rally into the close has once more re-affirmed the market around 109.00. This simply adds to the consolidation now. Momentum indicators are beginning to look far more settled, with the RSI spending the past five sessions now hovering a shade above 40, whilst Stochastics and MACD shallow their deterioration. The hourly chart is also looking more of a consolidation play too. We are still looking for a closing break either way to affect the outlook, which is increasingly at an inflection point now. A close above resistance at 109.25 opens a recovery of around 70 pips, whilst a close below 108.55 would be a continuation towards a test of the 107.65 key low. On balance we are still medium term positive on Dollar/Yen and are buyers into near term weakness. However, we know that with the Coronavirus, this could create extreme moves.
Gold continues to make headway along the six week uptrend. However, with yesterday’s slip back into the lose turning a positive session into a concerning one, there is less conviction in the run higher. For now, the market remains positive, trading around the support of the 23.6% Fibonacci retracement (of $1445/$1611) which comes in at $1472, whilst also maintaining the support of the six week bull trend. This trendline comes in as a basis of support today at $1570 and there is the support of the recent breakout support band is at $1562/$1568. However, the failure to push on above $1586 (Monday’s high) could begin to weigh on the run higher. Momentum reflects this, as the MACD lines continue to edge lower and Stochastics begin to wane under 80. The 21 day moving average is a good gauge at $1562 today, whilst this week’s low coming in also at $1562 adds to the importance of this as support near term. We remain positive on gold whilst the $1538 key support remains intact, but the gold bull move is beginning to look a little tired. Yesterday’s failure again at $1586 adds to the resistance.
The outlook on oil has been rather choppy in the past few sessions. An initial rebound failed in the wake of the EIA crude inventory build to leave a couple of bear candles threatening lower once more. However, a sharp early rebound today is adding recovery potential once more. Given the trend was sharply lower last week, this is a shift in sentiment and the bears seem to no longer be in control. The proximity to the crucial support band $50.50/$51.00 should also not be ignored. The prospects of a sustainable rally would really be determined by the 23.6% Fibonacci retracement (of $51.00/$65.65) at $54.45 which would also be above this week’s rebound high of $54.35. With this morning’s rebound, RSI is also threatening a move above 30, but needs a closing break. For now, this is too early to suggest a recovery, it is more of a basis of support. However, the hourly chart configuration is far less bearish now and at least the bulls have something to build on. Support at $51.65 initially.
Dow Jones Industrial Average
News flow surrounding the Coronavirus has been throwing equities around in recent sessions, but there seems to continue to be an appetite to buy into weakness. Yesterday’s initial selling pressure was sharply turned round into the close to leave a strongly positive candle. Furthermore, the move has now finally closed Monday’s downside gap (at 28,843). Technically, this reaction higher could have a significant impact on the outlook. The bulls will now be looking to build on this move, but a close back above this week’s high at 28,944 would now be a strong signal. Coming as the Stochastics begin to cross back higher, it would be back above the 21 day moving average and suggest the bulls are back in control. The appetite to buy into weakness is also helping to strengthen the support of the key higher low at 28,376 too, adding 28,490 (yesterday’s low) to 28,440. The hourly chart needs to just settle down with the RSI back above 60 and MACD lines above neutral to confirm the improvement in outlook. A failure to overcome 28,944 would increase uncertainty over the outlook once more.