Although there is a very mild positive bias this morning as the European trading session takes hold, major markets are searching for conviction as we approach the end of the week. A mild risk negative bias from yesterday is being countered today but these are all still very minor moves compared to what traders have been used to in recent weeks. Add in the fact that it is also “quadruple witching” today (where futures and options for index and individual stocks all expire on the same day) which could add some volatility later today, so there is a degree of caution in front of this event too. Essentially though, the caution comes from markets having become far less certain of the continuation of risk rally in recent sessions. US weekly jobless claims continue to rack up and are worryingly higher than expected. There seems to be a confliction between the risk positive fiscal and monetary support, versus the fears over economies re-opening and second wave infections dragging on expectations of economic recovery. Subsequently the dollar weakness is being gradually unwound in the past week, and a less positive sentiment develop through markets. Equity markets are less bullish now and retracements in the risk recovery are threatening. The announcement early this morning of UK Retail Sales for May bouncing back and being much stronger than expected may add some support for sterling today. After yesterday’s sell-off came through scepticism of the Bank of England’s relatively upbeat take on the UK economy. This could be something that tempers the immediate selling pressure on sterling. It is helping to pull some mild outperformance versus major forex today.
Wall Street closed mixed last night, but the S&P 500 managed to eek out some gains by +0.1% at 3115. US futures are though starting on a positive note today with the E-mini S&Ps +0.7%. This has helped to usher a mild positive close on Asian markets (Nikkei +0.5% and Shanghai Composite +1.0%). In forex, this mild positive risk move is seeing a USD underperformance, whilst EUR, AUD and GBP are performing well initially. In commodities, the dollar weakness is allowing gold to tick +$8 higher, whilst silver is around the flat line. Oil continues on its re-engaged path higher with another early gain of +1.5%.
It is a fairly light economic calendar to end the week. However, the Eurozone Current Account for April at 0900BST will be of interest after falling sharply in March to +€27.4bn. The US Current Account for Q1 is at 1330BST and is expected to improve slightly to a deficit of -$103.0bn (from -$109.8bn in Q4 2019).
There is another Fed speaker to watch for today, with Randall Quarles (centrist voter) speaking at 1700BST.
Chart of the Day – DAX
There is an intriguing battle of the gaps on the DAX now. There is a bearish gap lower from 12,470 and a bullish gap higher at 11,968. This comes as the market has shown signs of uncertainty in the past couple of days. The bulls may not be as strong as they would like to be now, with the bear gap from 12,470 having now been “filled” by yesterday’s bull failure. The move also completed a bearish key one day reversal which now increases the potential for this to be a key lower high too. How the market reacts in today’s session will be very important now. Not only does the gap at 2,470 need to be “closed” for the bulls to be assured, there is added resistance of the key reversal too. The hourly chart shows that if support at 12,152 is breached today then the corrective momentum will begin to build. The prospect then would become one of moving back towards the bull gap support at 11,968. Momentum indicators have developed less conviction with the medium term recovery recently, with the declining MACD lines reflecting this. However, it will be how the market deals with either (or both) of these gaps which will be a key determinant over the development of the next phase for the outlook.
A continuation of a run of negative candles on EUR/USD is weighing on the near term outlook. A third negative session in a row and the market is edging towards a corrective move. This comes with momentum indicators turning lower, as MACD fall off a bear cross and Stochastics begin to accelerate lower. However, the nature of this move is still fairly orderly and seems to merely be countertrend to the recovery. Given how overstretched momentum had become, this move is still considered healthy within the medium term positive outlook. The move looks to be an unwinding retracement which is pulling the market back towards breakout support. The old key March high of $1.1145 is prime area for this move, whilst there is also an uptrend of the past five weeks which sits around $1.1150 today. There is an argument for a deeper correction, with a near term topping pattern completed below $1.1210 (which implies around $1.1000), however, given our reading of this being a bull market pullback, we expect the buying pressure would resume earlier and undershoot the downside target. Resistance at $1.1350 is increasingly important now, with lower highs also forming to leave the initial $1.1260 resistance today. We believe there is more in this near term correction but are on alert for the emergence of renewed buying too.
The Bank of England was optimistic yesterday, but perhaps too much so. The market has taken