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.