Markets have been under the strain of uncertainty of how long the economic disruption will last from the Coronavirus. However, this morning we are seeing a positive reaction as some light has been seen at the end of the tunnel. Whilst it is still very early days, there are signs of a peaking of the rate of increase in the numbers of deaths in countries such as Italy, Spain and the UK. Markets rallied hard a couple of weeks ago on the huge monetary and fiscal response, however in the past week this rally has been ebbing away. Markets need to see a sustainable improvement in the virus numbers now if this positive reaction today is going to be more than just a blip. Treasury yields are higher, equity futures pointing to strong gains, whilst higher beta major commodity currencies (Aussie, Kiwi and Loonie) are performing well. The safe haven yen is the main underperformer whilst the dollar rally has stalled this morning. To add to the positive sentiment today is the apparent progress in the discussions between Saudi Arabia and Russia over oil production cuts. The oil price has rallied hard in the past couple of sessions. The news that a virtual meeting of OPEC+ penned for Monday had been pushed back to Thursday initially hit the oil price this morning, but the rumour mill is working from a positive perspective today and suggestion is that Saudi and Russia are “very close” to a deal. This is helping oil to regain earlier losses. However, we should expect further bumps in the road and newsflow/rumour to drive volatility in oil over the coming days ahead of Thursday’s meeting.
Wall Street closed lower on Friday with the S&P 500 -1.5% at 2488, but US futures are reacting strongly today, around +4.0% higher. This has helped Asian markets positive overnight with the Nikkei +4.2% although interestingly, the Shanghai Composite has lagged -0.6%. In Europe, a strong open is in prospect with FTSE futures +2.7% and DAX futures +4.0%. In forex, there is a risk positive bias, with JPY underperformance, AUD and NZD outperformance and USD mixed. In commodities, oil is around -1%/-2% into the European session but well off its lows which were over -10% at one stage. Gold and silver are around half a percent higher.
The second week of the month tends to be a little quieter for the economic calendar. There is not much on the docket today aside from a couple of entries in the European session. The UK Construction PMI at 0930BST is expected to decline to 44.0 in March (from 52.6 in February). The Eurozone Sentix Index for April at 1000BST is expected to decline to -30.0 which would be the lowest since August 2012 (from -17.1 in March).
Chart of the Day – AUD/USD
Risk sentiment has taken a turn for the worse in recent sessions and the question for traders on Monday morning is whether a mild improvement can be the turning of a corner. The strengthening of the dollar and retreat of the Aussie has reflected the worsening of sentiment. This has seen a new trend formation of lower highs and lower lows developing and a run of negative candlesticks. A mild tick back higher has done nothing to sustainable improve the picture and looks on the hourly char that unless the rebound gathers strength it will just be another chance to sell. Daily momentum indicators show the RSI falling over under the 50 mark and now below 40, whilst Stochastics are now on the brink of another bear cross (the last two bear crossed of February and March were excellent sell signals). The hourly chart shows a mini trend channel formation, with the hourly RSI failing consistently around 50 and going to 30 in classic bear market configuration. It suggests intraday rallies are a chance to sell. The hourly chart shows an old pivot at $0.6075 is resistance now, whilst the 23.6% Fibonacci retracement (of the $0.5505/$0.6213 rebound) is a basis of the next pivot resistance, along with the falling 55 hour moving average. A further retreat below $0.5985 opens the key near term higher low at $0.5870 but a deeper retracement is threatening now.
There has been a pause in the run of decisively negative candles this morning, as the euro has come into the new trading week with a degree of support. The question is, how sustainable is the prospect of recovery? There needs to be a move that breaks the run of lower highs, and for that, it needs a breach of $1.0865. Momentum maintains a negative bias on the daily chart, but there is a suggestion on the hourly chart that the bulls are testing the water. Hourly momentum is more positive this morning, but needs the RSI above 60 and MACD lines rising above neutral to suggest there is any real intent in this move today. There is an old pivot at $1.0830 which is being tested, but Friday’s reaction high at $1.0865 is important, whilst a move back above $1.0900 to confirm the bulls are fighting back. For now, in the absence of any sustainable recovery signals, this early bounce today is still most likely to be taken as a bear rally and another chance to sell. Support initially around $1.0800 this morning, with $1.0770 from Friday’s low being breached would simply re-open $1.0635 again. We favour selling into strength still at this stage.
A bearish breakdown on Friday has ended thoughts of a consolidation on Cable and opens for a corrective move. A decisive closing break below $1.2300 not only took the market clear under the 50% Fibonacci retracement (of $1.3200/$1.1405) but also broke what had been a trading range formation (shown best on the hourly chart). Furthermore, the breach of the spike low at $1.2250 confirms that the bulls have lost control of Cable right now. Momentum is beginning to deteriorate, with RSI faltering under 50 and now means that the Stochastics are at risk of topping out too.