The sell-off of risk assets is ramping up. With Wall Street over -4% lower last night, the Dow saw its largest points decline since 2008. The futures for today’s session, show that the selling pressure has not abated quite yet either. Fear continues to spread through markets. The VIX Index of S&P 500 options volatility has spiked to its highest level since January 2018. The flood gates have also opened on US Treasury yields, which is seeing the US 10 year yield plunging to all-time lows. The safety of US debt is the place to be right now. One interesting casualty right now has been the US dollar. It has been a strong haven of safety in recent weeks, but as cases of Coronavirus pop up in the US now, the fear is that the negative economic impact is knocking at Uncle Sam’s door. Last week, it was the yen that took the hit from fears over a Japanese economy, this week it is the dollar’s turn to be sold. There has been a massive shift in expectation of a Fed rate cut which has dragged on the dollar. However, we see this as a near term knee jerk move that is unlikely to last. Although the US 10 year yield has fallen -40 basis points in the past two weeks, with such elevated volatility, moves on rate differentials are quickly being priced in. The question is how far markets go before the elastic snaps back? We are seeing extreme technical positions forming on Wall Street now (elevated volume indicates panic selling). Could we be close to a near term technical rally? For now, the selling pressure continues.
Wall Street closed a huge session of losses with the S&P 500 -4.4% lower at 2978. With US Futures another -0.6% lower today, there is a spread of selling across global markets again this morning. Asian markets were broadly slammed with Nikkei -3.6% and Shanghai Composite -3.7%. In Europe, the sell-off also extends with FTSE futures -3.0% and DAX futures -3.3% (even if these levels are off earlier lows). In forex, there is a continuation of JPY outperformance and sizable risk-off positioning with AUD and NZD significant underperformance. It is interesting to see USD beginning to stabilise against EUR and pulling Cable lower. In commodities, there is a big decline forming through gold (-1.0%) as volatility continues, and oil is another -2.5% lower.
It is a day of inflation on the economic calendar. German Prelim HICP for February is throughout the morning, with the countrywide data at 1300GMT which is expected to remain at +1.6% (+1.6% in January). Then the Fed’s preferred inflation gauge, the core Personal Consumption Expenditure for January is at 1330GMT which is expected to grow by +0.2% on the month which would increase the year on year reading to +1.7% (from +1.6% in December).
There are no Fed speakers today, but a couple of Bank of England MPC members that will be worth looking out for today, as Andy Haldane (at 1115GMT) and Jon Cunliffe at 1615GMT.
Chart of the Day – German DAX
With the DAX falling off a cliff (along with all other equity markets) in the past six sessions, it is an important time to see where the analysis sits. Dropping over -10% lower from the all-time high of 13,795 sees the DAX in official correction territory. Key support levels have been broken on the way but it is a move that is still just a retreat within a well-defined long term uptrend channel which comes in as a basis of support at 12,140 today. The RSI is well into oversold territory into the low 20s, but there is little reason to expect a sustainable rebound right now. Volatility on the DAX is understandably elevated right now, with the Average True Range of 228 ticks at six month highs, whilst the market closed well below the 2.0 SD Bollinger Bands yesterday. However, the market is getting smashed again early today and the channel is breaking now. The focus will be on the September low of 11,880 which marks a significant long term pivot level and is key support now. A breach would bring the August 2019 low of 11,265 into play, and this is a crucial support. The bulls need just to stem the tide of selling, even small losses would be a bonus right now.
The euro was already engaging a technical recovery, but the gains seen in yesterday’s session would have surprised even the more positive of traders. Adding +118 pips on the session was the biggest one day rise on EUR/USD since January 2019. The technical rally accelerated through key resistance at $1.0980 and also broke an eight week downtrend. With RSI into the high-50s, MACD and Stochastics accelerating higher, the bulls are in control, for now. However, we would caution backing against the dollar for too long here. The sell-off on the dollar is similar to the sell-off on the yen last week, a move which quickly unwound. We have been seeing a technical rally on EUR/USD as counter-trend and a move which is likely to be short term in duration. The move has gone further than we anticipated, but technically, the outlook is still corrective on a medium term basis. Old resistance is at $1.1065/$1.1100 with falling moving averages overhead. A move above $1.1100 which is a lower high, would change the outlook, but this is still likely to be a short term rebound that hits the buffers once more. Initial support at $1.0965.
The dollar was smashed across the majors yesterday, but the fact that Cable fell on the day just goes to show that sterling is under growing pressure now. Testing the support at $1.2845 is coming and with the momentum indicators sitting with a negative bias, the selling pressure is mounting. Another lower low below $1.2845 would be a third key time this has been seen since December and the medium term sellers are gradually putting the squeeze on. The next support level is at $1.2820, however, the key level that needs to be watched comes in at $1.2765 which is the November low. Furthermore, closing decisively below the 50% Fibonacci retracement (of $1.2193/$1.3515) at $1.2850 would open the 61.8% Fib around $1.2700. The downside levels are becoming more realistic now. With the lower highs in place, rallies are being sold into. Resistance at $1.3015 is increasingly important, with yesterday’s high of $1.2945 initially the barrier today.