Coming into the European session today we see risk sentiment edging positively once more. The newsflow on COVID-19 still seems to be centred around the re-opening of economies, which if managed in the right way, should allow growth measures to pick up once more. US Treasury yields are edging higher, US equity futures are ticking positively again; whilst in the forex majors, we see the Australian and New Zealand dollars outperforming. The oil price has also seen a sizeable recovery in recent sessions. These are all risk positive moves. On the surface, all seems good, but under the bonnet, there are some concerns which question the longevity of the recovery. Risk premia in the euro has risen in the wake of the German constitutional court ruling against legality of the ECB asset purchases. The Japanese yen is also performing well, and when the classic safe haven performs well, the bulls will be wary. In the equities space, it seems that the mega-cap stock in the US are a key driver of the index moves, whilst market breadth looks a little more shaky. These are all warning signs that the perception of an all out continued risk recovery may not be as solid as the optimists would have you believe. The vice Fed chair Richard Clarida is suggesting that there may be a requirement for more policy support from the Fed. Markets tend to love it when the Fed acts as a backstop (the “Powell Put”), but this would also come amid signs of renewed deterioration, which the market would presumably react to first. The wild ride may not be quite over yet.
Wall Street closed well off its highs yesterday to have the S&P 500 end the session +0.9% at 2868. US futures are ticking higher again though, with the E-mini S&Ps +0.8%. Asian markets are still impacted by public holidays, but the Chinese Shanghai Composite was +0.5% today. European markets are looking mixed around the open with FTSE futures +0.1% and DAX futures -0.1%. In forex there is an early slip on EUR again, whilst mixed moves on USD, with mild outperformance from the commodity currencies (AUD, NZD and CAD) at the same time as broad outperformance from JPY. In commodities gold and silver continue their recent consolidation, whilst oil is also consolidating its recent huge recovery.
The staggered nature of the May PMIs (due to Labour Day) means it is the turn of the Eurozone for its final PMIs today. The Eurozone final Services PMI is at 0900BST and is expected to be confirmed that the flash reading of 11.7 will be correct (final March 26.4). The final Eurozone Composite PMI is also expected to be 13.5 (13.5 flash, 29.7 final March). The UK Construction PMI could get more interest than normal this time, with an expectation of 22.0 (down from 39.3 in March). Into the afternoon, the focus is on US jobs, with the ADP Employment change at 1315BST. Seen often as a proxy for Nonfarm Payrolls, this number could cause the hair to stand up on the back of the neck with an expected -20.050m. The EIA Crude Oil Inventories at 1530BST tends to be a market moving event for oil and is expected to show another strong build of +8.1m barrels which would be a slight reduction on last week’s 9.0m barrels build and a 15th consecutive week of increasing stockpiles.
Chart of the Day – AUD/USD
We often talk about risk proxies, so when we see a pick up in the Aussie dollar it tends to come hand in hand with an improvement in risk appetite. The recent corrective move on AUD/USD has brought the Aussie back to an area where the bulls seem to be happy to support again.. A “bull hammer” candlestick on Monday had looked to sling shot the market higher on Tuesday. However, yesterday’s bull failure has pegged the bulls back as a false start in the renewed bullish outlook took hold. The resulting candle (effectively a shooting star) has put the shackles on the bulls once more. Despite this, there is now important support at $0.6370 which has formed the bottom of an uptrend channel of the past five weeks. This trend support sits around $0.6400 today. The market is also now using the 21 day moving average as the basis of support (having previously found it as the basis of resistance throughout Q1 2020). Yesterday’s false start has also come with momentum indicators showing slightly less strong positive momentum now. However, whilst the RSI remains above 50, there is yet to be a build up of any real negative momentum and so little corrective moves (such as the latest one back from $0.6570) will still be seen as a chance to buy. The bulls will now be eyeing a retest of resistance at $0.6570, but need to also maintain the integrity of the five week uptrend channel. Therefore, we see the support at $0.6370 as important to this.
The euro took a sizeable blow from the ruling of the German constitutional court yesterday. What had been developing into a consolidation around the mid-range pivot of $1.0890 (within the range that is now broadly $1.0725/$1.1000) has turned into a near term negative configuration once more. Taking a step back we can see that as the volatility of February and March has settled down, we see a broad barrier for EUR/USD around $1.1000 where this had previously been a floor throughout November to January. This is now the ceiling and with two decisive negative candles, there is a more corrective configuration that is developing once more, which will be looking to use the pivot at $1.0890 as resistance. As momentum indicators tail lower again, there is a negative bias towards a test of $1.0725/$1.0770 now. The hourly chart shows a spike back higher failed at $1.0885 yesterday to firm up the pivot as resistance again. The next support of note is $1.0810, which is another old level and a breach would open the lows once more.
Despite a drop back in recent sessions, the outlook for Cable remains very marginally positively biased within a growing medium term range. This comes as e failure at the resistance of the range high of $1.2645 last week has begun to form support again around the mid-range pivot. A band of support around $1.2385/$1.2405 is helping to maintain Cabl