After the monetary policy bazooka from major central banks in the past week, now the fiscal response. The question is whether it is enough. A package of €300bn in fiscal support from the French Government, €200bn from Spain, and £330bn in credit guarantees from the UK Government (all the equivalent of around 15% of GDP) has been announced in the past 48 hours. Donald Trump’s US Government has also waded in too, “We’re gonna go big”. The US Government is on the hook for at least €850bn of fiscal support. Measures such as tax deferrals and perhaps even helicopter money of $1000 per citizen (around $250bn of the package) are possible now. Markets have needed the twin response of monetary and fiscal response, but given that there is broad uncertainty as to whether this will be enough to contain what is potentially an economic crisis, market response is still one of uncertainty. Just how big a shock to the global economy will the Coronavirus be? The initial reaction was risk positive in the wake of Donal Trump’s press conference, with yields higher and a strong close on Wall Street. However, this rebound on Wall Street looks set to once more be sold into today. Although the 10 year Treasury yield is back above 1.00% (a two week high), the US dollar has remained the go to asset of choice. Whether this is a function of liquidity issues still or just seen as a classic safe haven, until the dollar begins to correct back, the prospects of a sustained risk recovery will be limited. Oil has broken to its lowest level for over four years, whilst gold is also once more back under pressure (which has been a feature of big selling days). Markets are seemingly not ready yet to trust a recovery, and as such rallies remain a chance to sell.
Wall Street closed with a strong rebound yesterday with the S&P 500 +6% at 2529.However, this has turned on its head again today, with US futures around -4% lower today. Asian markets have been pulled back and forth overnight but closed in the red, with the Nikkei -1.7% and Shanghai Composite -1.8%. European markets are set for big losses again with FTSE futures -4.1% and DAX futures -4.3%. In forex, there is a little respite from the stronger USD today, but with a risk off theme. With consolidations on EUR and GBP, the big outperformer is JPY, whilst AUD and NZD continue to struggle. In commodities, gold continues to decouple from its safe haven status and is giving up 1.7% (-$25), whilst oil is around -2% lower.
There is a gaping hole in the economic calendar as today’s FOMC meeting has been cancelled. With the emergency action taken over the weekend, the Fed has decided against the need to hold another meeting today. The next scheduled meeting is now on 29th April, although we cannot ruled out any further emergency meetings at this stage. Back on the calendar, the main concern for the European morning is Eurozone final HICP for February at 1000GMT. Final headline inflation is expected to be confirm the flash reading of +1.2% (which is down from +1.4% in January), whilst final core inflation is also expected to be confirmed at +1.2% (a shade higher than the +1.1% of January). Into the US session, US Building Permits for February at 1230GMT are expected to slip back to 1.50m (from 1.55m in January) whilst the US Housing Starts are also expected to drop to 1.50m (from 1.57m in January). The EIA Crude Oil Inventories at 1430GMT are expected to show a build of +2.9m (from a build of +7.7m barrels last week).
There are no central bankers expected to speak today and this may well be the case for a while as Coronavirus restricts public engagements. FOMC members are out of their blackout period with the cancellation of today’s scheduled FOMC policy meeting.
Chart of the Day – AUD/NZD
Within major forex there are winners and losers as safe havens outperform higher beta commodity currencies. However, but even within the commodity currencies the underperformance of Aussie versus Kiwi has been significant. However, this move is approaching the crucial level of parity. It comes after nine consecutive bear candles. This move has taken the RSI to levels not seen since December 2018 at a very stretched 21. Parity is the big level traders will be eying now. In April 2015 the market bounced from 1.0017 whilst parity has never been hit (in the course of our charts which go back to 1980). An intraday low at 1.0007 was seen yesterday (now an all-time low) from where the market rebounded. But given the precipitous momentum, parity and below is still the big risk. However, the bulls will be on the lookout for recovery potential and this means initial resistance at 1.0130 is important. The hourly chart shows a succession of old supports becoming resistance over the past week. But hourly indicators are showing some sign of improvement an if the hourly RSI can hold above 50 it would be a positive signal for a turnaround. A move above 1.0130 would suggest a test of the 1.0220, beyond which 1.0300 is resistance. Can the Aussie bulls prevent parity being hit?
The unwind of dollar strength did not last long as another huge negative candle on EUR/USD has pulled the pair well clear of the 61.8% Fibonacci retracement (of the $1.0775/$1.1492 rally) at $1.1050 which is a gauge that the prospect of a full retracement is growing ever more likely. Momentum of the move is accelerating with RSI now back under 50, whilst Stochastics drive below 50 and MACD lines have bear crossed. The old support around $1.1050 which had been holding in previous sessions, also now becomes an area of resistance. This has already been seen in the Asian session and a continuation of this would increase the likelihood of pressure on the 76.4% Fib level (around $1.0945). The run of lower highs how forming in this move lower would suggest a continued strategy of selling EUR/USD into strength. A bull failure between $1.1050/$1.1100 would be another such opportunity today. Momentum indicators deteriorating with further downside pressure suggests this too.
Momentum of the sell-off on Cable continued yesterday amidst a wave of dollar strength flooding through forex major pairs. Another huge bear candle took Cable decisively below the old key November low at $1.2193 to open the September 2019 low of $1.1957. Going purely on technicals, the move has taken RSI to its lowest level since August 2018, and although this reflects the extent of the bearish momentum, is also stretched. It was therefore interesting to see a rebound (to the pip) from $1.2000. Having seen that rebound and prevented from testing the crucial $1.1957 September low is the market looking towards a near term recovery? The bulls have a lot of work to do but reaction to the $1.2193 old key low will now be a gauge for the prospect of a recovery. This is overhead supply now and the hourly chart shows a resistance band between $1.2200/$1.2275. A decisive move above 50 on the hourly RSI could be an early indication to watch for too. Given the huge and precipitous run lower in the past seven sessions (which cut as much as -1200 pips off Cable), if a rebound sets in, there could be a sizable retracement. For now though, there is a continuation of rallies being sold into and pressure on $1.2000 has to remain the most likely scenario. However, a positive close tonight would be a start. Key near term resistance is at $1.2430.
The uptrend channel of the past week and a half continues to build, but the Fibonacci retracements of the 112.20/101.20 massive sell-off are also becoming key gauged again. The big focus has turned to the 61.8% Fib at 108.00. In the past three sessions, this level has been a gauge for key levels for the candlesticks. Volatility remains massively elevated but once more yesterday the bulls could not decisively overcome the 61.8% Fib. The market has turned back again this morning and the traction in the uptrend channel is being lost. It is also interesting to see that early in today’s session the 50% Fib level (at 106.70) has been a basis of support. These levels are certainly worth considering now. Although momentum indicators are ticking positively now, there is a lack of conviction beginning to creep in. This is reflected in the hourly chart too, where the RSI and MACD are beginning to look more benign. The hourly chart also shows the channel uptrend in better detail with its support around 106.50 this morning. Key support is at 105.15 with the resistance building around 108.00 as the outlook begins to look less certain.
After days of being smashed from pillar to post, the gold bulls at least had a something positive to cling to yesterday. A positive close, and mild positive candlestick suggested that perhaps some support was forming. It was interesting to see that in the past two sessions there have been surges of selling which have not breached the $1445 key November low, but also intraday rebounds to close above the 23.6% Fibonacci retracement (of $1445/$1702) at $1506. On the hourly chart, this shows as a higher low and higher high formation, breaking a downtrend and looking at more positive momentum. The question is whether this can now be built upon. For this, an early drop back this morning needs to build support again. As a bare minimum the bulls need another higher low above $1465, but ideally this would be building on support around $1506. With hourly RSI and MACD lines also having formed decent recovery configuration, it would be disappointing for them to also lose their improvements. For this, the hourly RSI need to hold above 35 (i.e. hold a run of higher lows). Resistance formed around $1545/$1553 yesterday and will now be a target for the bulls to overcome to build real recovery momentum. It is still very early stages, but at least the flood of selling has been restricted, for now.
The reaction of the oil market to the string of major fiscal support measures in order to support business in the major economies will hardly enthuse the bulls. Oil has broken below its recent spike low of $27.35 that came on that day of massive volatility as the OPEC+ agreement spectacularly disintegrated. It now means that oil is within a sneeze of $26.05 which was the February 2016 low, a level which is the lowest on oil since 2003. Technically, the outlook is extremely precarious, with momentum bearish, in decisive negative configuration on both daily and hourly charts, but without a hint of recovery. The hourly chart shows resistance at $28.10/$30.00 and even intraday rallies are being pounced upon as a chance to sell. Quite where oil could drop to should $26.05 support fail, is wide open. For now, this is a market in the full control of the bears.
Dow Jones Industrial Average
Another technical rebound on the Dow has meant that the volatile ride of losses and gains over the past seven sessions continues. The task for the bulls is to scrape together a second consecutive positive session (and ideally a second consecutive positive candlestick too). Since the sell-off began, there have not been two sessions of gains strung together. We are increasingly focusing on gap analysis too, and although the latest gap down from 21,285 was again filled yesterday, the bulls could not quite “close” it. The futures already don’t look great today though and suggest that traders will be far more concerned with losing the psychological 20,000 level once more. Yesterday’s low at 19,882 was the lowest level for the Dow in over three years since February 2017. Technically, indicators remain bearishly configured, and in this environment, rallies continue to be sold into. Until there is a run of two and three positive closes in a row, a strategy of selling into strength has to remain.