The exuberance of an attempted renewal of the risk rally has begun to peter out as a second wave of COVID-19 infections is yet to be contained. Newsflow surrounding additional measures put in place for Beijing to try and counter an emerging second wave of infections is beginning to weigh on sentiment once move. Schools shut, flights cancelled and now hotels shutting too are adding to a drip feed of concerning developments that have apparently previously not been factored into market pricing. Whilst this is not having a significant impact yet, it could develop into something more concerning if China extends its containment measures. Treasury yields have dropped back and there is a mild negative bias to major forex positioning. Equities are slipping back today too. Adding a degree of pressure to the downside bias on commodity currencies, the Australian unemployment data came in worse than expected overnight. The risk recovery has been built upon the massive support than major central banks (and governments) have provided. Focus will turn to how supportive the Bank of England will be today. An extra £100bn of asset purchases are expected to be announced, but could the BoE be another bank that begins to steer towards negative rates? Sterling would certainly be under pressure if so.
Wall Street closed slightly weaker last night as a rebound faded. The S&P 500 closed -0.4% at 3114, whilst US futures are lower again today (E-mini S&Ps -0.1%). This has weighed on sentiment in Asia, with the Nikkei -0.5% but Shanghai Composite was +0.2%. In Europe, there is a negative bias with FTSE futures -0.5% and DAX futures -0.3%. In forex, there is a mixed to slightly risk negative bias. AUD and NZD are the main underperformers, albeit only mildly, whilst GBP is also slightly weaker ahead of the BoE. JPY and EUR shade the outperformers. In commodities, there is an ongoing consolidation on gold, whilst silver has slid back by -0.5%. Oil is similarly lighter, although lacks conviction in the move.
There are a couple of central bank policy announcements to look out for on the economic calendar today. Early in the European session, the Swiss National Bank monetary policy is at 0830BST and is not expected to change rates from the current -0.75%, however, talking up currency intervention is never too far away. Later on the Bank of England monetary policy will be announced at 1200BST. There is no change expected on rates at +0.10%, but could there be some extra asset purchases? The dissenting voices in the last meeting calling for an extra £100bn of QE, along with the end of the current extra purchases are likely to mean an extension announced today. Increasing QE by £100bn is expected, whilst £150bn would be more bold. Onto US data, the Weekly Jobless Claims at 1330BST have been stubbornly high, but still falling recently. Consensus expects the number of claims to have fallen to 1.300m in the past week (from 1.542m previously). The Philly Fed Business index at 1330BST will also be watched. After the Empire States manufacturing positive surprise, is the US economic recovery broadening? The consensus expects an improvement to -23.0 in June (from -43.1 in May).
There is a Fed speaker to look out for today, with Loretta Mester (voter, hawk) speaking at 1715BST.
Chart of the Day – AUD/JPY
The risk recovery tends to be well touted by the movement on the cross of the Aussie (a key risk-on major currency) versus the Japanese yen (the ultra-safe haven play). So when fears over second waves in US and China have re-emerged, it is interesting to see that AUD/JPY has struggled. Is this key gauge of the risk recovery moving into reverse? The key level initially to gauge the mood will be the resistance at 74.50 which marked the old key February high and also a near term top neckline. The implied downside target of 72.25 was all but achieved, but the rebound has struggled around the old neckline this week. Above 74.50 is a source of overhead supply now, but if it can be overcome once more on a closing basis, it will be a key barrier breached. The bulls are backing away again this morning. Momentum indicators are tailing off again, with a “bear kiss” on Stochastics and sliding MACD lines the main concern that this is an ongoing corrective move. The rising 21 day moving average (today around 73.40) has again become the basis of support and is being tested. So this is a key moment now. The limit of last week’s sell-off came at 72.50 but a downtrend is forming near term and 72.50 could come under threat again and is key support near term For the moment, we have to still play Aussie/Yen as a buy into weakness strategy (much like the risk recovery generally), with a three month uptrend at 71.90 today. However, 72.50 support could quickly become key to this as a formation of lower highs and lower lows becomes a whole new corrective set up.
We have been talking up the prospects of a near term corrective move on EUR/USD for the past couple of weeks. In that time a range of conflicting signals are being thrown around by the pair, but as yet no serious correction has set in. Another test of $1.1210 support was seen yesterday, but the bulls prevented this from turning into a bigger correction. However there is growing negative pressure in momentum indicators, with the bear cross on MACD lines and Stochastics which are gathering downside pace. The negative configuration on candlesticks is also building up (four negative candles in the past five sessions). However, we would still see a corrective move as just unwinding within the more positive medium term outlook. There is underlying demand from the good breakout support in the band $1.1015/$1.1145 which we would look for the next buying opportunity if a downside move were to be seen. For now though, the support around $1.1210 is holding (yesterday’s intraday low was $1.1205) and the market is again consolidating today. This seems to be more of an orderly unwinding drift lower than a correction. We draw in a tentative near term downtrend to cap the recent lower highs at $1.1215 today as a gauge for whether the bulls are ready to make their move again.
With a second consecutive negative close, the outlook for GBP/USD is beginning to deteriorate, albeit only slightly. The failure to close above $.12645 has weighed on the market recently and as Cable has drifted off in recent sessions, the recent four week uptrend is beginning to come under threat (currently at $1.2470). However, for now this is not a move lower with any real conviction. The small body of yesterday’s candle reflects a lack of conviction in the decline despite four negative daily candlesticks in the past five sessions. Momentum indicators are tailing off but only within what is still a relatively positive medium term configuration. Whilst the trend support holds and price support of the low at $1.2450 is intact, this will remain a benign negative drift on Cable. All moves into the $1.2450/$1.2500 support area have been bought into in the past week. The Bank of England will certainly need to be watched though today as extra QE would be conceivably sterling negative, but if the $1.2450/$1.2500 support band holds into the close today then the bulls will be relatively content.
After a couple of extremely dull sessions, there are signs that a negative bias is taking hold on Dollar/Yen once more. A bout of selling pressure into the close last night completed a renewed negative candle and the move lower has continued today. Breaching initial support at 107.00 has now increased the pressure back on the recent key near term support at 106.55. Momentum indicators are tailing off again to reflect this. The RSI is worth watching as 40 seems to be a gauge for support recently. The bias is now towards a test of 106.55 and a breach would open the key May low around 106.00. Resistance at 107.60 is growing in importance now too. For now, we continue to view Dollar/Yen as a medium term trading range between 106.00/109.85 but there is now a negative bias within the range pointing towards pressure on the range lows.
Several of the major (forex) markets we cover consistently have been lacking conviction recently, and gold goes into that category too. The past week has been one of false signals and sessions lacking conviction. A run of small candlestick bodies reflect this, where the last five closing levels have all been within $6. This has flattened out momentum indicators amidst this consolidation. The argument would be that there is still a mild positive bias within the medium term range between $1660/$1764 and moves into $1700/$1720 seems to be still supported. However, the lack of conviction suggests caution is required. Will near term support continue to be found in the band $1700/$1720? The hourly chart shows the outlook is all but flat, with consistent resistance between $1730/$1733. Hourly RSI struggling under 60 for the past week and MACD lines struggling around neutral are the momentum reflection of this. We look for sustainable moves away from these positions to signal the next move. Above $1733 the resistance of $1744 is a key medium term barrier. For a near term corrective move to take hold, a close below $1704 is needed. For now though, gold is struggling for real traction.
Brent Crude Oil
As the latest three session rally has just tailed off, there are still a few question marks over the continuation of the recovery on oil, but holding above the key $36.40 breakout continues to be the important technical factor that sustains the medium term recovery. However, as the near term signals are beginning to slip slightly and suggest that this pause in the recovery may be extending. The medium term configuration for momentum remains positive, and we are still happy to use weakness as a chance to buy, however immediate upside impetus is lacking. With MACD lines sliding and Stochastics just losing their way again, yesterday’s small bodied candle and early dip today suggests the bulls are just having a pause for breath again. Resistance initially at $41.65 adds to the $42.00/$43.40 barrier overhead. Despite this though, we continue to expect that downside will be supported. The hourly chart shows a good basis of support around $40.00 and whilst above $38.95 there will be a positive outlook. Hourly momentum is also still positively set up.
Dow Jones Industrial Average
Ever since the “island reversal” was completed by last week’s huge downside gap to leave 29,295/26,940 as a gaping hole in the recovery, our concern has been that this is now a corrective pattern than dominates the outlook now. So it is with interest that we see the strong rebound of earlier this week now just tailing off again. In the past two sessions, the market has had the opportunity to mend the damage from the island reversal, but in both sessions has failed to do so. Momentum indicators remain positively configured for the medium term recovery, but are once more now at risk of rolling over on a near term basis which could threaten this recovery. The hourly chart highlights this rolling over as the hourly MACD and Stochastics post bear cross signals. Resistance of the latest rebound high at 26,610 (inside and not filling the previous big downside gap) is growing now. The bulls need to respond in the next session or two to prevent this being a bull failure and part of a bigger corrective move. If the Dow falls over again and moves below the support at 25,810 then the deterioration will grow and threat will grow back towards the 24,765 key breakout support again.