A positive tone to risk has taken hold once more, which is helping to drive several major markets out of a phase of consolidation. After starting discussions on Friday, four days later, EU leaders have finally come to an agreement on the composition of the EU Recovery Fund. A €750bn pandemic recovery package comprising of €390bn of grants and €360 in loans. This is a key moment for the EU as the money will be raised by the European Commission through the capital markets and is a first step towards debt mutualisation. Markets are reacting positively, with core/peripheral yield spreads falling to multi-month lows. The spread between 10 year Italian BTPs and German Bunds is now under 160 basis points, and is at its most narrow since February. The euro, which has been strong in the run up to this decision, is a moving with caution today (we cannot rule out some near term profit-taking). However, this is certainly euro supportive as we go through the rest of 2020. Risk appetite was already boosted by another tech rally on Wall Street last night, but is again positive this morning. In the forex space, this is weighing on the yen and US dollar. Equities are strong, but the most eye-opening move is coming through silver. The precious metal is in a sweet spot right now, with the risk positive tone helping an industrial metal, amidst ongoing fiscal and monetary support. Gold is also performing well as it breaks to its own multi-year highs.
Wall Street closed a positive session with a breakout to multi-month highs, with the S&P 500 +0.8% at 3251. US futures are backing this move with E-mini S&Ps +0.5% today. This has helped a positive bias through Asian markets, with the Nikkei +0.7% and Shanghai Composite +0.2%. In Europe this tone continues, with FTSE futures +0.7% and DAX futures +1.1%. In forex, there is a risk positive, USD negative bias; with GBP and AUD performing well. In commodities, gold is pulling higher again (+0.4%, or +$7), whilst silver is another +2.7% higher. Oil continues to consolidate (at least by standards of recent months).
It is a quiet day for the economic calendar, with only minor data on Canadian Retail Sales at 1330BST, which are expected to bounce back by +20% in May (after falling by -26.4% in April).
There are no central bank speakers due, with the FOMC into its blackout period ahead of the Fed meeting announcement on Wednesday 29th July.
Chart of the Day – Silver
Silver has been on a remarkable bull run since March, but the breakout has just moved to a whole new level now. Although very marginally redrawn in June, there is a four month uptrend that has been carrying silver ever higher, through key resistance after key resistance to what was seen yesterday as a break to the highest level since September 2016. In the past two weeks, key resistance at $18.36 (old June high), $18.94 (key February high) and now $19.64 (the September 2019 high) have been breached. A consolidation over the past week has been followed by yet another strong bull candle and a breakout to multi year highs. The next resistance on this remarkable move higher is at $20.78 and then the 2016 high of $21.10. Momentum is hugely strong and reflects the strength of the trend. Daily RSI is only just into the mid to high 70s (it spent much of May in the mid-70s), whilst MACD lines are accelerating higher and Stochastics remain strong. The question is whether this is one to chase at these levels. The September 2019 bull run took RSI into the mid-80s (before peaking and correction set in though). The trend suggests that any near term weakness will still be a chance to buy. The latest breakout means there is near term support $19.46/$19.64, with key support forming around $18.90/$18.94 as another higher low support. The uptrend comes in at $18.70 today.
The euro has been running higher for over a week now, as traders have been pricing for an encouraging outcome from the EU Recovery Fund talks. This morning we see that the talks have (finally) concluded with agreement and the euro is stuttering. Perhaps a moment for a near term pullback? It will be interesting to see how markets react this morning, but the move will not be driven by technicals which remain strong. Yesterday’s latest bull candle was a second successive closing level above $1.1420 and still playing strongly within the three week uptrend channel. Momentum indicators are strongly configured but are also not stretched, with further upside potential. The 14 day RSI is into the mid-60s, whilst MACD and Stochastics lines are rising in strong configuration. In the absence of any serious selling (or profit-taking) pressure, we would still look at any near term weakness as a chance to buy. The intraday low at $1.1420 is holding initially this morning, whilst the hourly chart shows $1.1370/$1.1400 is a growing band of support. The bulls will still have designs on pushing above the March high of $1.1490 and into the $1.15s. That would then be the next decisive move. Below $1.1350 would disappoint the bulls now.
In recent days, we have seen the bulls struggling under the weight of July resistance and the barrier of a seven month downtrend. Yesterday’s bullish candlestick was the most positive one day session for almost three weeks and is a move that shows a rejuvenated set of Cable bulls. With yesterday being the highest closing level since 10th June, has now pushed through resistance of $1.2670 today and just as importantly is now breaking through the seven month downtrend. This move is also reflected through momentum indicators, with RSI decisively into the 60s, Stochastics rising strongly and MACD lines also pulling higher. Upside potential is there for a move to test $1.2810 now. The hourly chart shows initial support in the band $1.2640/$1.2670 today, whilst any near term move supported above $1.2600 area would be an opportunity for the bulls who suddenly look to have shifted from uncertainty to conviction. Support at $1.2480 is now a key higher low.
Whilst we have been discussing the tendency for support to continue to come in the band 106/107 in recent months, the buying pressure to pull the market off this floor is still lacking. There have been hints of improvement in momentum in the early part of this week, with Stochastics picking up, but they need to find traction to suggest this is a noteworthy bull cross. Seeing the RSI sustainably above 50 would be something that the bulls could get on board with, and so to see RSI ticking this way early this morning, along with Stochastics rising off a bull cross is encouraging. There is still an appetite to support Dollar/Yen under 107.00, so the potential for a move above 107.40 resistance which would open a near term rebound, is still growing. A close above 107.40 implies a rebound to test the 108.15 July rebound high. Although yesterday’s intraday move to 107.50 could not be held into the close, the market is beginning to test these levels as the bulls form a series of higher lows on the hourly chart. Support is growing once more around 106.90/107.10.
The bulls are gradually looking to break higher once more from the latest period of consolidation. Since moving higher through $1789, gold has been consolidating for the past week and a half under $1818. However, with a couple of strong sessions in a row, the bulls are pushing through $1818 resistance into further new multi-year high ground. Although our original five week uptrend was breached last week, we tentatively re-draw the trendline to account for Friday’s low at $1794, giving us a new (but slightly shallower) uptrend. Momentum remains strongly configured, but also with further upside potential too. RSI into high 60s is not overly stretched, whilst Stochastics ticking higher again above 80 confirms ongoing bull strength. Trading at levels not seen since late 2011, there is little real resistance until the all-time high (from September 2011 at $1920). There are several upside targets that can be derived currently. The April to June consolidation (from the low at $1660 to the high of $1764) can derive a conservative target of $1820, but anything towards a more bullish $1868 in the coming months. A close above $1818 would also derive a nearer term $28 upside target of $1846. Trading clear of $1818 also leaves $1789/$1790 as an increasingly important support too.
Brent Crude Oil
It was another quiet session for oil yesterday, with the market just seeming to be stuck betwixt and between right now. Although it was a very forgettable day, at least it showed that the bulls were still happy to move to prevent any selling pressure from gathering pace. The consolidation between $41.30/$43.95 is over two weeks old now and this lack of intent is hampering what was previously strongly configured momentum. However, for now this is more of a lack of intent to take a view, which is allowing momentum to unwind, rather than any building sell pressure. We do not (at this stage) see this as the precursor to a correction. The market is just beginning to creep higher this morning again and focus will again be on whether Brent can break through $43.95 resistance. The big March gap at $45.20 remains the key barrier for the bulls to overcome, and if this is achieved it would really open the upside for $48.40 initially and then $53.10/$53.90. Higher lows continue to be left, with $41.30 the first real support, but above there $51.80 but also yesterday’s low at $42.35 as weakness is still seen as a chance to buy.
Dow Jones Industrial Average
Despite the improved outlook of the past few weeks, the Dow still cannot quite truly get the momentum for a renewed bull run. Another session of consolidation added just +9 ticks with a very small bodied candlestick that does little for conviction. We are still minded to buy into weakness but there remains a lack of conviction, with the old key gap resistance at 26,940 still just “filled” but not “closed”. There is a positive bias to momentum indicators, with 14 day RSI still at multi-week highs and Stochastics strongly configured. This all continues to suggest that corrections are a chance to buy, and we still prefer moves higher to close the 26,940 gap and test 27,580 in due course. Support is still strong between 26,300/26,610 as a buy zone. The S&P 500 has already broken out above its equivalent resistance to trade at multi-month highs.