Risk appetite has had several shots in the arm at the beginning of this week. Markets had already been reacting to the accommodative comments from Fed chair Powell in his interview, aired over the weekend. This was then added to with the encouraging trial results for a COVID-19 vaccination in the US. Furthermore, moves by France and Germany to back a system of grants for the €500bn EU Recovery Fund are also a positive step forward. A big jump in US Treasury yields (with a risk positive bear steepener on the yield curve) with the US 10 year yield +10basis points higher. Equities also stormed higher across the world. On forex, a rally for the commodity currencies, the euro and the embattled sterling. We also see commodities following these lines, with oil sharply higher, whilst gold, seen as more of a safe haven play, pulling back sharply from a breakout. Market moves are still feeling the legacy of these move today. Although there has been a minor pull lower on US yields, equity futures are holding up well. Risk positive moves continue and today’s testimony from Jerome Powell could give the bulls another boost later today. It will also be very interesting to see how the market now plays gold. Prior to yesterday’s bull failure, the set-up for multi-year highs was solid. Early moves today are a touch uncertainty, but this breakout may now have to be put on ice whilst the market digests these risk positive factors.
Wall Street closed strongly higher with the S&P 500 +3.2% at 2953. US futures are showing these gains still holding today, with the E-mini S&Ps +0.4% today. This has helped a positive Asian session, with the Nikkei +1.5% and Shanghai Composite +0.7%. European markets are also well set up today, with FTSE futures +0.5% and DAX futures +1.0%. The risk positive moves on forex also continue, with JPY the main underperformer, whilst NZD, AUD and GBP are all outperforming. In commodities, oil is once more moving higher (by around 1%), whilst the precious metals are again lower, gold by -$5 (c. -0.2%) and silver by -0.9%.
The outlook for the German economy is always keenly watched on the economic calendar, with the German ZEW Economic Sentiment at 1000BST. Consensus expects that sentiment will pick up slightly in May to 32.0 (from 28.2 in April). Into the US session, at 1330BST US Building Permits are expected to fall sharply to 1.00m in April (from 1.35m in March), whilst Housing Starts are also expected to dive to 927,000 (from 1.21m).
There will be another important appearance from Fed chair Jerome Powell today at 1500BST where he testifies with Steve Mnuchin via video link to the Senate Banking committee over the Coronavirus aid act.
Chart of the Day – USD/CAD
Another rally has just rolled over again. For seven weeks, the market has been stuck in a range between a band of support 1.3850/1.3920 and highs up towards 1.4265/1.4350. However, within this there has developed a mild trend lower and once more, over the past week, the market has rebounded but subsequently failed around the downtrend. Yesterday’s decisive negative candle looks to be the latest trigger for the next test of 1.3850/1.3920. The Fibonacci retracements of 1.2947/1.4667 have often been key trigger points in the outlook in recent weeks. Once more we see the market moving below the 38.2% Fib level at 1.4010 (which failures have often triggered moves lower), in a move that opens the support once more. Momentum indicators have turned lower, with a bear cross on Stochastics see yesterday (the last two have been solid signals), whilst MACD and RSI have also turned lower. We now look for intraday rallies to fade for the market to pressure 1.3850/1.3920. Rallies are a chance to sell now. Resistance at 1.4140 is key near term.
After more than a week of going almost nowhere, finally some signs of life. Fundamental drives have impacted where Fed chair Powell’s supportive comments spurred USD weakness, and Eurozone Recovery Fund traction have supported the euro. Will the dollar weakness and euro strength that emerged yesterday be enough for EUR/USD to now go on a bull run? For almost two weeks the market has been stuck in a mini range 1.0765/1.0890 but the bulls have stirred from their slumber to break above the $1.0890 pivot. This move needs to now hold today. It has been an important pivot throughout the past six weeks and is a key gauge for sentiment of the market. Holding above will leave EUR/USD in the upper half of the $1.0725/$1.1015 trading range and suggest pressure growing on $1.1000/$1.1015. Momentum indicators are now ticking higher, but are still within the confines of ranging outlooks. The RSI will be the one to watch, moving to a two week high, the bulls are building a position. If it moves into the high 50s it would be a signal of real strength building in a move higher (confirms above 60). A failure back under $1.0890 would be disappointing today and simply reinstate the previously sticky outlook around $1.0800.
The decisive break below $1.2160 support was a key move on Cable. It was a signal of intent and even though the market rebounded from $1.2075 yesterday, there is still the risk of this rebound falling back over once more. The resistance of a two week downtrend sits at $1.2255 will be an early indication of how strong this rebound is. The market is also up into band of overhead supply $1.2160/$1.2265 of all the old April/May lows and again this will be a good indication of how strong this rally really is. Strictly speaking, $1.2245 is the neckline resistance of a double top still. Given the momentum indicators rolled decisively over or turned negative with the recent breakdown, they will also be watched. We feel wise to sit out a rally, in anticipation of a bull failure for the next move lower again. It would need a considerable move higher, above $1.2400 at least to suggest the bulls really trust a recovery.
Risk appetite sharply improving does not bode well for the near term outlook of the yen. Even in the face of broad USD weakness, we are seeing the yen underperform. USD/JPY ticking higher yesterday and the move continues today. It is a move that currently lacks real conviction, but a mild positive candle whilst continuing to hold on to the old pivot support area at 106.90 suggests a slight positive bias to the 106.00/108.00 range. This comes as momentum indicators also edge higher on MACD and Stochastics. If the RSI moves into the mid to high 50s then it would suggest that the bulls are building momentum to test the range highs. Initial resistance at 107.75 sits ahead of 108.00. We are happy to sit long for a test of 107.75/108.00 but are equally aware that this is a slow burner of a rally right now. The bulls may be struggling to make the breakout. A close under the old 106.90 pivot would shift the narrative.
The breakout to new multi-year highs has not gone quite to plan for gold, but the prospect is not over yet. Given the strength of the early morning position on gold yesterday, we had been looking for a closing breakout above $1746 and then to see an orderly pullback towards $1738/$1746. In the event, a sharp intraday retracement to $1726 and what looks to be a shooting star candlestick is a warning. We still hold a positive view of gold, but the bulls need to re-establish themselves today. Another negative candlestick today, with a close under $1722 would make us wary of the backing upside. Momentum is still strong, but again the bulls need to react today. A positive candle that steadies the ship is needed. Essentially, the two week uptrend support remains intact at $1706 today but given how the bulls were positioning, losing $1722 support would be disappointing now. The hourly chart still suggests this is a pullback into support, but it is an important phase for seeing how strong the bulls are now. We are still confident of further multi-year highs in due course, and are happy to buy into weakness. It is just that a bull failure on this breakout pushes this outlook further into the future.
Brent Crude Oil
Brent Crude is now eyeing the crucial resistance at $36.40. This is level where the market rebounded to in April, twice, only to then fall sharply lower. WTI has already broken above its equivalent resistance and with another strong bull candle yesterday, Brent Crude is now in a position to do the same. Momentum indicators are certainly calling for a breakout, which if considered on a closing basis, yesterday’s $34.80 is already a two month high. The RSI is now into the mid-60s, which is a four month high and the highest level since the significant selling pressure really kicked off in January. MACD lines are now rising above neutral and Stochastics are strongly configured too. With the market trending higher over the past four weeks, we see near term/intraday weakness is a chance to buy. The latest breakout at $32.25 gives good support, whilst the uptrend can be derived around $31.20 today. The market has just come off the top slightly this morning, but the hourly chart shows that there is initial support $42.50/$33.90 which to consider looking for renewed buy signals.
Dow Jones Industrial Average
The recovery, which had seemed to be keeling over last week, has had a massive shot in the arm from the supportive words of Jerome Powell and a potential COVID-19 vaccination. The Dow was launched higher yesterday to form a hugely strong candle to now be within sniffing distance of the key April high of 24,765. Given the rolling nature of the momentum indicators, this has been a really testing time for the bulls, but we now see a series of positive reactions on momentum, which if can be sustained, come as strong signals. The RSI has swung higher and a move above 60 would certainly suggest strength in the move. MACD lines are also looking to cross back higher, above neutral, whilst Stochastics are also crossing higher. Given the strength of these moves, a breakout above 24,765 is now expected but also is important. A close above would then open a move to finally fill the key gap from early March at 25,225 (also the 61% Fibonacci retracement of the 29,567/18,213 sell-off). Support is at yesterday’s traded low at 24,060 with a gap now open at 23,730.