Market sentiment has begun the new week of a new month with the glass half full once more. The anticipation of Donald Trump announcing punitive measures on China and Hong Kong was worse than the reality. Trump could have gone much further than just revoking Hong Kong’s special status and although he continues to talk about potential further sanctions, he has not announced additional tariffs on China as a retaliation. This allowed a relief rally into the close on Friday and markets are still playing out this more risk positive, dollar negative bias today. The official and unofficial PMIs out of China for May have also helped to play into this more positive bias. Official manufacturing PMI remains above 50 (in expansion), whilst this morning’s China Caixin Manufacturing PMI beat expectations at 50.7 (49.6 exp). This has pulled the US 10 year yield 2 to 3 basis points higher, and is weakening the dollar. The commodity currencies which are most geared to a China recovery (Aussie and Kiwi) are performing strongly, whilst the strong performance of silver (a hybrid industrial and precious metal priced in dollars) is the standout. Asian equities were strong overnight and European markets are looking positive in early moves too as US futures tick higher. Focus today will be on the further PMI data, but with reduced fear that Trump could derail the risk recovery, markets are set up positively for the new week.
Wall Street reclaimed initial losses to close slightly higher on Friday, with the S&P 500 +0.5% at 3044. US futures are continuing this move higher with E-mini S&Ps +0.2% early today. Asian markets were positive (Nikkei +0.8% and Shanghai Composite +2.0%. European indices are also set fair, with FTSE futures +1.4%. The DAX is shut for Whit Monday public holiday. In forex, a risk positive, and dollar negative bias. USD is underperforming across the board, with only slight gains on safe havens such as JPY and CHF. The higher risk commodity currencies (AUD and NZD) are strong. In commodities, the dollar weakness is helping to continue the gold rally (+$15 or +0.9%) whilst silver is over +2.5% higher. There is a consolidation on oil as trader look towards what could be a meeting of OPEC brought forward to Thursday 4th June.
The economic calendar is packed with May’s manufacturing PMIs today, however, all of them remain deep in contraction territory. Despite German and France being on public holiday for Whit Monday, the Eurozone PMIs are still being released this morning. Eurozone final Manufacturing is at 0900BST and is expected to be unrevised from the 39.5 flash reading (which is a rebound from the 33.4 from April). The UK final Manufacturing PMI is at 0930BST and is expected to remain unrevised at 40.6 (40.6 flash May, 32.6 final April). The US ISM Manufacturing is at 1500BST and is expected to improve slightly to 43.5 (from 41.5 in April).
Chart of the Day – EUR/JPY
The outlook for Euro/Yen has completely changed over recent weeks. The decisive move really kicked in as Germany and France began to make moves towards Eurozone debt mutualisation, and this is reflected in the technical on the breakout above the initial resistance at 117.75. Since that move in mid-May, the move has built the solid formation of an uptrend. A second higher low at 117.00 then accelerated higher throughout last week and the recovery is increasingly strong now. Momentum indicators are increasingly strongly configured and suggest that buying into weakness will continue. The RSI is around five month highs, whilst MACD lines are now more decisively positive than they have been for months. The technical set-up is strong to buy into weakness now. There is a band of support between 117.75/118.50 where old resistance is now new support and is a buy zine for any near term pullbacks. The initial support is at 119.00 which is the latest breakout support. An uptrend is rising to support today around 118.30. Given the strength of momentum, the outlook is strong for continued upside and to retrace back towards the 121.00/121.40 February/March highs.
The breakout above $1.1015 was a decisive moment last week on EUR/USD. In completing the upside break from the consolidation rectangle, the implied target was of around $1.1250. Into the European session this morning, the next step in this move is a decisive break above the resistance of the late March high at $1.1145. This resistance was tested almost to the pip on Friday before an intraday pullback. However, the bulls are a sturdy bunch these days and they are coming again this morning. Momentum is strong with this move, with RSI into the high 60s, whilst MACD lines accelerate higher and Stochastics are strong. However, some care needs to be taken with this move. In March, during a time of extreme volatility, the RSI went above 80. In more normal trading times, the RSI on EUR/USD will tend to struggle around 70. This may mean we begin to see the momentum of this bull run begin to ease. It may therefore mean that even if the euro can breakout above $.1145 resistance, upside potential may be limited before a pullback is seen. Whilst we are still bullish of EUR/USD, we are beginning to be a little more cautious of this bull run which has added c. +370 pips in just over two weeks. Support is strong around $1.1015 and the uptrend at $1.0950.
With a weakening dollar, even Cable is rallying. The question is whether it is a rally that can be trusted? This has been an issue we have pondered throughout the past week as a Cable recovery has tentatively developed. Friday’s breakout above resistance at $1.2360 was the next step forward in the move which has formed a shallow uptrend of the past couple of weeks (comes