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.