There is a very slightly more constructive tone to risk today as traders look at their screens to see some decent gains on Wall Street overnight and the sense of recovery in the beleaguered oil market. However, this more settled outlook on major markets could once more become rocked today as some important events come into view. EU leaders hold another virtual meeting today to discuss how the COVID-19 virus recovery fund is applied. Old discussions over debt mutualization will likely make for some heated discussion and the old North/South divide could be laid bare once more. We do not expect much to be resolved at this meeting (and maybe not for another month or two). However, headlines over divisions between countries could impact on core/periphery yield spreads and subsequently weigh broader sentiment, hitting the euro. Furthermore, traders will be looking to see how major economies in the west have coped with their lockdowns as the April flash PMIs are released. The expectation is for further deterioration on the March PMIs (which had only part of the month impacted by lockdowns). For the Eurozone, according to the composite PMI, run rate of GDP contraction for March was around -10% (annualized). This is expected to be even worse for April. With the UK and US flash PMIs also on the docket in addition to the US weekly jobless numbers, it could become a session where volatility elevates again. The initial calm and positive tone may not stay there for long.
Wall Street closed with good gains last night, with the S&P 500 +2.3% at 2799. Futures are also looking steady once more, with the E-mini S&Ps up +0.5% early today. This has helped to generate a steady session in Asia, with the Nikkei +1.5% and Shanghai Composite all but flat. In Europe, there is a supportive tone, with FTSE futures +0.1% whilst DAX futures are +0.7% higher. In forex, there is a very slight positive sentiment, with AUD and NZD mild outperformers, whilst JPY, CHF and EUR are marginally weaker. Commodities show some good signs also, with silver gaining +0.5% and gold holding on to yesterday’s gains, whilst oil is strongly higher with WTI +11% and Brent Crude +9%.
It is an important day of data on the economic calendar, with the flash PMIs for major economies set to paint a picture of how April is shaping up. Eurozone data is early this morning and is unlikely to be pretty. Eurozone flash Manufacturing PMI at 0900BST is expected to deteriorate to 39.2 (down from a final 44.5 in March) whilst Eurozone flash Services PMI is expected to show an alarming 23.8 (from 26.4 final in March). This is expected to leave the Eurozone final Composite PMI at 25.7 (from 29.7 final March). The UK’s PMIs are also expected to deteriorate further in April, with the UK flash Manufacturing PMI at 0930BST expected to decline to 42.0 (from a final 47.8 in March), whilst the UK flash Services PMI is expected to fall to 29.0 (from 34.5 final March). This would mean that the UK’s flash Composite PMI is expected to fall to 31.4 (from a final reading of 36.0 in March). Before the US PMIs, we get the latest look at the state of the US labor market, with the US Weekly Jobless Claims at 1330BST. The many millions of claims over recent weeks, is expected to be added to by 4.20m this week (although down from the 5.25m last week). The US flash Manufacturing PMI is at 1445BST and is expected to drop to 38.0 (from a final reading of 48.5 in March), whilst the US flash Services PMI is expected to deteriorate to 31.5 (from 39.8 in March). US New Home Sales at 1500BST are expected to decline by 15% to 645,000 in March (from 765,000 in February).
Chart of the Day – DAX
The outlook for risk is still teetering on the brink despite yesterday’s rebound on equities. The risk remains for a break lower and the DAX reflects this well. We have been concerned by a number of “risk on” plays breaking their recovery uptrends recently and the potential for a breakdown is growing. For the DAX, we have been discussing for a few weeks the importance of the breakout support at 10,137. Tuesday’s strong bear candle (which broke the recovery uptrend) eventually found support at recent lows around 10,245. The support of 10,137 remains intact, for now. However, we see momentum indicators beginning to struggle, with the rolling over on the Stochastics for another bear cross reflecting increasing pressure. For now, the DAX is trading in a sideways range between 10,245/10,820 but how the market now responds in the coming days to the broken trend will be important. A failure of yesterday’s latest rebound would really begin to weigh on sentiment, with the hourly chart showing the bulls needing to hang on with the hourly RSI above 35 and hourly MACD lines to not decisively break below neutral. A rebound that fails under 10,525 (Tuesday’s high) could trigger renewed selling. This is a market that is at a critical stage that could govern the outlook for the next key move.
Coming into an important day for the Eurozone, we see a very slight negative bias just threatening to take hold on EUR/USD. The tight band of trading between $1.0810/$1.0890 which had contained the price action for much of the past week has just begun to see support creak. Given the importance of the flash PMIs and the latest European officials’ meeting to discuss the Eurozone’s recovery fund, we could see this consolidation on EUR/USD finally breached. The technicals are just beginning to take on a slightly more corrective outlook once more with three negative closes in a row and yesterday’s decisive negative candle. We also see momentum indicators beginning to tail off. Although the market has ticked marginally back positive today, the technicals are suggesting a cautious market and the consistent pressure on $1.0810 is opening a potential test of the key reaction low at $1.0770. The hourly chart shows intraday resistance having been left around $1.0840 and a failure of this morning’s rally under there could again weigh on euro sentiment. We continue to prefer intraday rallies being used as a chance to sell and this will be the case until a move clear above resistance at $1.0925.
The Cable bulls have reacted reasonably positively in the wake of Tuesday’s strong negative candlestick. We have seen the basis of support forming with the 50% Fibonacci retracement (of the $1.3200/$1.1405 sell-off) around $1.2300 and now a tick back higher is testing what is an 8 day downtrend (which comes in today at $1.2380). Given the overhead supply around $1.2405 (the old lows of last week) this is an important little phase for the near to medium term outlook on Cable. A bull failure under what is now a resistance zone $1.2380/$1.2405 , which is also under all the moving averages would confirm an increasingly corrective position. Momentum indicators are on the brink too. With Stochastics already in decline, MACD lines have converged around neutral (for a potential bear cross) whilst if RSI fell under 45 it would be a four week low and a lead indicator for pressure on (and a potential breach of) support at $1.3260. Tuesday’s low at $1.2245 is growing in importance as support.
With the dollar bulls threatening to take control of major forex pairs again, we have seen the corrective bias on USD/JPY edged out and a consolidation take hold. This comes as a shallow two week downtrend has been broken. In what has been an incredibly tight period of trading on USD/JPY the market is now into a sixth day of trading within a 90 pip range. A very small bodied candle almost closing flat on the day reflects the lack of conviction in the market right now. This tight directionless phase has nullified any meaningful directional signals on momentum indicators, with RSI and MACD lines flattening off a shad under their neutral points. There is still an argument for a very slight corrective bias, with the lower highs of the past month closing in on the floor of support at 106.90. However, for now, resistance continues to be found around 108.00/108.20 but initial support between 107.15/107.30 is holding. Hourly indicators are equally neutrally configured and this is a market in need of a catalyst now.
The bullish outlook on gold seems to have been renewed. The corrective aspect of a mini top pattern of last week hit its implied target and the market has used this weakness as another chance to buy. Finding support at $1660, gold has climbed strongly once more. We were looking at the reaction of the market around a pivot at $1702 as to whether the bulls were ready. A decisive bull candle formation yesterday closing back above $1702 puts the bulls back in the driving seat. Just as importantly too, an early slip back this morning has found support above this pivot to push higher again. The price action has stabilised momentum indicators in positive configuration, with MACD lines still rising and RSI holding strong configuration. We still look towards $1702 being an important near term gauge and price action shown on the hourly chart suggests a band of support $1692/$1702 now. Hourly momentum is once more positively configured with intraday weakness now a chance to buy. Holding support of $1692/$1702 we now favour a retest of the $1746 high in due course. Below $1692 would neutralise the outlook once more, whilst turning bearish below $1660 support which is now potentially another key higher low.
Brent Crude Oil
With the carnage to the continuation charts of WTI in recent sessions, we see more meaningful analysis of oil in Brent Crude, for now. The technicals of Brent have been extremely negative too, with a ferocious sell-off, but not one of the magnitude of WTI. The acceleration in the move lower in the past week and a half since hitting resistance of $36.40 has been huge. A -56% decline down to the low of $16.00, but now the market is stabilising. Tuesday’s long tailed (almost) doji candle steadied the ship and now the market is looking to trade higher this morning. It will be interesting to see how the market now responds in this band of overhead supply from the old March lows between $21.65/$24.50. The $24.50 level also coincides today with a sharp downtrend resistance of the recent two week decline. Breaking this downtrend is the first thing the bulls need to do to look for any kind of sustainable recovery. A sequence of higher lows too, so on the hourly chart the support at $19.90 is also important. Looking further out, the bigger nine week downtrend will be key for recovery, as will a move on the daily RSI above 50. The very optimistic out there will also point to a bullish RSI divergence as signs of slowing selling pressure too.
Dow Jones Industrial Average
The trend break on the Dow means that there is now growing potential for a reversal. However, it is not a done deal yet. The legacy of Tuesday’s significant negative session remains a key factor for this near term outlook, with a bearish gap down is still to be filled (the gap is at 23,627). Yesterday’s positive session clawed back +2% but the candlestick lacked intra-session conviction, completing a “doji” but also which failed to fill the gap at 23,627. The bulls need to “close” the gap, ideally with a positive candle today. There is the concern that Stochastics are now swinging lower and are close to a confirmed bear cross. RSI and MACD lines are less concerning at this stage and are relatively neutral, but how the market now reacts to the latest rebound will be key. Having broken the recovery uptrend, the fear is that a new negative trend is forming. Failing to “close” the gap, and leaving another lower high could be the building blocks of a new downtrend. Tuesday’s low around 22,940 is now key support. The 50% Fibonacci retracement (of 29,567/18,213) at 23,890 is a barrier to gains also now.