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.