Risk aversion has taken more of a grip on major markets in recent sessions as a drip feed of negative newsflow surrounding second wave infection rates of COVID-19 has increased. Infection rates rising again in Japan, Australia and Germany are a concern, but alarming increases in the infection rate curves across several US states have made traders sit up and take note. The risk recovery from the pandemic cannot be a one way bet. The emergence of the US from economic shutdown will need to be re-calculated as several states re-instate elements of lockdown procedure. The weight of this on the risk recovery is growing. The decline of longer date Treasury yields (and curve flattening) is a signal for risk aversion and risk asset plays are increasingly struggling. Wall Street is faltering back towards testing key technical breakout support, whilst oil is also slipping as the prospects of demand recovery are scaled back. The interesting mover here is how the market views the US dollar. Does the dollar begin to lose its safe haven status if the US is seen to be the major focus of a second wave? This morning we see the dollar pressured across major forex, whilst equities are struggling (a degree of catch up on Wall Street losses from Friday though).
Wall Street closed sharply lower into the weekend, with the S&P 500 -2.4% at 3009, whilst US futures are consolidating early today (E-mini S&Ps +0.1%). Asian markets suffered on catch up, with the Nikkei -2.3% and Shanghai Composite -0.8%. In Europe there is a slightly corrective look to early moves, with FTSE futures -0.5% and DAX futures -0.4%. In forex the underperformance of USD is broad, with EUR and GBP the main beneficiaries so far. In commodities, the dollar weakness is helping gold and silver hold firm, but with the mild risk negative bias, we see oil around -2% lower.
The economic calendar has a light feel to it today, with German inflation and US housing data the only releases of note. German inflation is always interesting as it can give a steer for the Eurozone data which is tomorrow. Regional inflation releases come throughout the European morning, with the nationwide German HICP for June at 1300BST, which is expected to grow by +0.4% over the month of June, bringing the year on year reading up to +0.6% (+0.5% in May). US Pending Home Sales are expected to rebound sharply in May after the enormous decline in April. A bounce of +19.7% is expected in May (after a fall of -21.8% in the month of April).
Chart of the Day – EUR/JPY
A big retracement of the May euro rally has been undertaken in the past few weeks. This move has pulled Euro/Yen from 124.40 right back to the support of what is now a seven week uptrend (today around 120.00). The question is whether this is enough of an unwind to give the euro bulls another opportunity again. We believe that if this euro recovery story is to continue, the bulls will now begin to regain control. The unwind has been to 50% Fibonacci retracement (of the 114.41/124.42 bull run) where the bulls have found support at 119.30 and stabilised. The early signs of renewed buying last week breached a corrective downtrend, and although the bulls have been unable to so far gain traction, the configuration of the candlesticks (small bodies to the candles) hints at limited selling pressure now. Momentum indicators have unwound to decent areas where the RSI and Stochastics are stabilising. The market needs to hold on to the 50% Fib at 119.42 as a basis of support now, and picking up from Friday’s low at 119.80 means the bulls have a platform now for early pressure today on the 38.2% Fib at 120.60. A decisive close above would open 23.6% Fib at 122.06. The old highs of 121.00/121.40 are a barrier overhead that needs to be breached and this will be the key for renewed recovery. However, given the recent limited selling pressure, the bulls have a platform to work from. A close below 119.30 opens 118.23.
With the euro rebound faltering at $1.1350 on EUR/USD, the market is developing into a new consolidation pattern. The breakout support of $1.1145 held a recent unwind and a choppy week last week could be setting the scene for a difficult phase of trading where the market lacks decisive direction. Friday’s doji candle and open higher today has neutralised any selling pressure that had previously threatened, and support is now forming between $1.1165/$1.1190. The daily RSI holding above 50 is encouraging for this support to build as a platform now, whilst Stochastics are also looking to bottom. This would suggest that weakness towards $1.1200 is a chance to buy for near term positions towards $1.1350 again (resistance for the past couple of weeks).
Despite an early rebound this morning, Cable remains under corrective pressure. A slight realignment of what is now a two and a half week downtrend sees Cable still pulling lower within its medium term range (of $1.2075/$1.2810). The market has bounced initially off $1.2312m, but with momentum indicators still deteriorating, there is a sense that near term bounces will struggle to sustain traction. The near term trend sits around $1.2460 today, so there is a little room still for a rebound, but any failure under last week’s high of $1.2540 would add to a continued corrective outlook. The hourly chart shows initial resistance around $1.2450 as a building pivot area. Below $1.2312 opens $1.2160 once more and the medium term range lows.
Although there has been a pick up in intraday volatility on Dollar/Yen over the past week, there is still a lack of conviction in the moves. False moves either way have seen support around 106.00 bolstered but also resistance at 107.60 still intact. It is still difficult to take too much away from the configuration of the candlesticks right now as there is such confliction and variety on a day to day basis. With the important support of 106.00 holding, it is interesting to see daily momentum indicators are bottoming out. This reflects a lack of selling momentum now and at least a consolidation around the lower region of the medium term range 106.00/109.85. This remains a market in need of a catalyst.
Once more we see gold edging higher through resistance but without decisively making the breakout. It is a similar move to the one we saw back in May, where the market moved through resistance to multi-year highs, only to struggle to sustain the traction. This time, we have seen a breakout through $1764 which lends the positive bias, but it is tough going for the bulls, with some conflicting candlesticks in the past few sessions. However, there is now a well defined uptrend that has developed in the past three weeks which is rising around $1751 today. The support is developing around $1744/$1747 from old June highs, which would point to$1744/$1764 now being an area to look for long opportunities. One of the more significant improvements that has developed in the past week has been the return of a more positive momentum configuration, where Stochastics are consistently holding above 75, RSI holding above 60 and MACD lines rising for the first time since late April. With the market almost flat today, we look to us near term weakness now as a chance to buy for moves towards $1795 (the 2012 high) and beyond. A close below $1744 would defer this strategy.
Brent Crude Oil
The recovery is still on track, but is beginning to look far less secure. The uptrend of the past eight weeks (today at $40.20) has been creaking recently (we have had to shallow it out a couple of times now) and is coming under mounting pressure again today. Daily momentum indicators are gradually now deteriorating. Some (RSI and Stochastics) are hinting at negative divergences, whilst the MACD lines have bear crossed and are now falling back. Through 2020, the 50 level on RSI has been a very good gauge for the state of the medium term outlook. A deterioration below it would suggest that bulls are no longer in control. The important medium term support remains the breakout at $36.40/$37.00 (the latter being the June low) and if this were to be breached in the coming days it would really turn the market corrective. Initially, support is at $39.63 and if this were to be broken it would confirm the 8 week uptrend breach, whilst also opening a test of $36.40/$37.00. Resistance at $41.80 is developing into a potential lower high.
Dow Jones Industrial Average
We have been increasingly concerned by the failure of the bulls to “close” the island reversal gap, and now the market is ready to break lower. A choppy end to last week saw the selling pressure mount and the key support band between 24,765 and 24,845 is now set to come under significant scrutiny. With futures currently pointing towards a flat to slightly lower open today, the support could still cone under threat. A closing breach of 24,765 would be the first really important breakdown since the recovery kicked off back in March. On a technical basis, the move would be creating a new medium term negative trend, of lower highs and lower lows. The deterioration in momentum indicators is also a growing concern, with daily RSI falling to its lowest level since early April, whilst Stochastics are now finding downside traction from a cross lower around 50. It would suggest selling into strength. The next key support is at 23,730/24,060 and then down with the May low at 22,790. The question would then become whether Fed (and Congress) would “allow” the market to fall back in that way, without stepping in with support again.