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 in today at $1.2235). Although momentum indicators are pulling higher, we continue to view this move with caution. Effectively, with MACD lines are only tentatively rising still below neutral, whilst RSI is a shade above 50 this looks to be the moves of a ranging market. The RSI has not been able to hold above 60 for months. The April rallies floundered with RSI around 59 and unless the RSI moves into the 60s it is difficult to see this as much more than a mid-range rally. The implication is that Cable is now a 570 pip range ($1.2075/$1.2645) and the latest rebound is a move back into what is essentially the middle of the range (between $1.2360/$1.2465). Caution is needed in that the dollar has been very weak elsewhere in the majors and any regaining of dollar strength will once more weigh on Cable back towards the range lows $1.2075/$1.2160. Initial support at $1.2290/$1.2360.
Just when it looked as though Dollar/Yen was finally seeing some direction, Friday’s intraday bounce from 107.05 has neutralised the market once more. So, with Friday’s move is it back to square one? Perhaps not, as the legacy of Friday’s initial downside move will still be fresh in the minds of traders this morning. Looking at momentum indicators that are beginning to be weighed down, there is a negative bias that is just beginning to form. It is way too early to take a view on Dollar/Yen (as proved by Friday’s false downside break), but the attraction towards 107.30 is growing this morning. A close below 107.30 would be a mild but notable shift (at least in a market that moves very little at the moment). Below 107.05 (Friday’s low) would add to this growing negative bias and open the May supports of 106.70 and perhaps even 106.00. It appears as though resistance between 107.90/108.10 (the seven week range highs) remains strong. And the is little to suggest that an upside breakout is building. The contrarians may look to the weakness of the dollar across the major pairs and conclude that the fact that Dollar/Yen is going nowhere still could play positively for the dollar if dollar strength begins to resume. For now though, it is very much a waiting game.
Gold spent much of last week with a mix of signals around an inflection point where the medium term positive outlook met the near term corrective outlook. It seems as though, once more the bulls are winning. We have long been buyers into weakness on gold. The near term corrective moves continue to be bought into as the market has been higher in aggregate over recent months. The only time that the strategy of using weakness to buy has been severely shaken was during the huge volatility of March. That aside, it has been a strategy that has worked time and again. Once more, we see the market correcting into a support (this time a seven week uptrend) before rallying once more. The positive candles of Thursday and Friday, along with strong early gains today suggest that the bulls are pulling ahead once more. The move has broken a near two week downtrend and moved above resistance at $1735/$1740 (lower highs within the mini downtrend). Near term momentum signals are turning positive, with a bull cross buy signal on Stochastics. Trading above a clutch of rising move averages adds conviction to what is increasingly a near term buy into weakness strategy again. Next resistance is $1754 before the $1764 key May high. Initial support $1722/$1726. Support of $1693 is growing in significance on a medium term basis now.
Brent Crude Oil
Brent Crude oil has seen its June contract rollover and although the front month contract price now shows a near three month high. The main takeaway is that the oil price remains firm and the recovery is still intact. The uptrend support comes in at $34.70 today and we continue to look towards further moves higher in due course. Momentum remains strong with the recovery, whilst weakness is seen as a chance to buy. We favour Brent Crude to position for a test of the $39.70 resistance and whilst the market uses the support above $33.55 as the foundation for gains, we remain confident of the recovery.
Dow Jones Industrial Average
The breakout above 24,765 was the key move for the next step forward in the recovery. It completed an upside break of a consolidation rectangle of just under 2000 ticks and implies a move towards 26,750 in the coming weeks. Thursday’s tick lower would have been a disappointment for overenthusiastic bulls, but weakness towards the breakout is a positive development. A pullback to the neckline support at 24,765 helps the bulls to lay the foundations of their breakout. Friday’s rebound from a low at 25,030 is helping to form that support. Momentum indicators are strongly configured, with the RSI in the 60s and at over 3 month highs. Stochastics and MACD lines are similarly positioned. It is all set up to buy weakness into support. The band between 24,295/24,765 is a strong area of support now if the market continues to drift back. A renewed positive candle today would mean the bulls are back on track. Above Thursday’s high around 25,760 re-opens the recovery and the next resistance is not until 27.100.