There has been a lean back towards risk aversion in recent sessions and this has continued into the new trading week. This comes as President Trump, in his infinite wisdom, has seen it as a good time to start talking about reprisals for China’s role in the global pandemic. The prospect of renewed trade tensions between the world’s two biggest economic superpowers is not really the ideal scenario for risk as economies look to re-open from their lockdown measures. After a period of recent stability, the Chinese yuan has weakened noticeably since Trump’s suggestion of renewed tariffs. A weakening yuan tends to go hand in hand with a reduction in risk appetite. The reaction has been for the significant rebounds on equity markets to be hit by profit-taking. The question is whether this profit-taking turns into something more considerable. The next few days could be important for how this pans out. This morning, we see negative risk, where the dollar is continuing to claw back recent losses, but the safe haven yen is the primary outperformer. We also see equities continuing to slip back (although US futures are well off their earlier session lows), whilst gold has also rebounded. Treasury yields have been very settled in recent sessions, but if the US 10 year yield starts to sit consistently under 0.58%/0.60% then the risk aversion may gain traction.
Wall Street closed decisively lower for a second session on Friday with the S&P 500 -2.8% at 2830. Futures had been much lower early today, but are currently only slightly lower, with the E-mini S&Ps -0.6%. Asian markets (the ones that were open) played a bit of catch up on recent downside moves, with Japan and China closed for public holidays. In Europe, they are also playing catch up after Friday’s public holiday, so DAX futures are -3.2% whilst FTSE futures are -0.2% lower today. In forex, there is a distinct risk negative and dollar positive outlook, with JPY and USD being key outperformers, whilst NZD and AUD are under pressure. In commodities, there is a mixed outlook on silver whilst gold has ticked slightly higher by +$5. There is a swing back lower threatening on oil with volatility on WTI continuing with -6% early downside, whilst Brent Crude is a little more stable at -1%.
After Friday’s Labour Day public holiday, the Eurozone final Manufacturing PMI dominate the economic calendar this morning. The data at 0900BST is expected to show confirmation of 33.6 (33.6 flash April, 44.5 final March). The Sentix Eurozone Investor Sentiment will also be worth keeping an eye on at 0930BST with an expected improvement to -26.7 in May (from -42.9 in April). Later in the session, the US Factory Orders are at 1500BST and are expected to contract by a huge -9.5% in March (from 0.0% in February).
Chart of the Day – FTSE 100
Equities have reached a crucial moment. For weeks, all the talk has been of how far can the recovery go before reality hits and selling pressure resumes again. Well, we are about to see whether this reality is dawning. FTSE 100 is a market threatening renewed downside. The bearish engulfing candlestick (bear key one day reversal) of Thursday was confirmed by Friday’s second successive decisive negative session. The move has taken the market back into the belly of the April support. With futures pointing towards early losses again today a breach of initial support at 5728 is expected. However, support at 5576 is the first key higher low of the recovery. A breach of this support would be a trend changing event. Momentum indicators are beginning to weigh lower, as Stochastics cross lower and RSI drops back under 50. For now, this is still just a pullback into support, but a third consecutive negative session has not been seen since the recovery began and would be really concerning now (especially if 5576 were also breached). There needs to be a reaction from the bulls early this week. Support needs to form soon and move back above the recent breakout resistance at 5815/5895. If this can be achieved it would improve the sentiment once more. A failure to do so would really see the downside pressure begin to build. The resistance at 6152 is now key.
The euro exploded into life in the wake of the ECB meeting last Thursday. A run of strong bull candles has subsequently formed to neutralise the dollar strength. Looking at a set of moving averages which show little or no overall conviction, it would suggest that the medium term outlook on EUR/USD is now neutral. Taking a step back we see that aside from the March spike in volatility which soared EUR/USD higher, there is a band of resistance $1.1150/$1.1250, whilst support comes in around $1.0635/$1.0770. Oscillations in between can be traded but there is a lack of real direction now. The latest move higher has lost its way to leave resistance at $1.1015 and the dollar bulls are dragging the price lower today. The hourly chart still shows the importance of the near term pivot at $1.0890, which is now supportive. A minor pivot at $1.0970 is a basis of resistance building overhead now. Given the significance of this $1.0809 pivot a retreat towards here is likely in the near term.
Recent price action on Cable suggests that the market is increasingly rangebound. A run of dollar weakness built a series of positive candles for Cable which have now failed at the resistance of $1.2645. Confirming this resistance, it was notable that the daily RSI turned back from 59 and almost exactly where the mid-April resistance set in. With Friday’s turn lower continuing early today, the market is once more moderating back towards what is increasingly the mid-point pivot area around $1.2385/$1.2405. MACD lines are once more rolling over around the neutral line, whilst and Stochastics are also beginning to falter too in a rather neutral area. The gauge will now be how the market reacts to the pivot support area. A breach of $1.2385 would open $1.2245 and the key support of the five week range $1.2160.
With risk sentiment faltering again on Friday, we continue to see the corrective bias on Dollar/Yen holding firm. A shallow downtrend is now four weeks old and still providing the basis of resistance (today at 107.30). However, the outlook is not as decisively negative as it was a few sessions ago. It is notable that in the past four sessions, the bears have failed to hold a position under the 50% Fibonacci retracement (of 112.20/101.20) at 106.70. We still see momentum indicators broadly correctively configured on a negative drift below their neutral points, however, there is suggestion on Stochastics and RSI that selling pressure is reducing. For now, we still see rallies as a chance to sell, but the sessions early this week will be important. Renewed downside impetus to take the market clear below the 50% Fib would be an important move for the bears and begin to break the shackles of near term uncertainty. Coming into today’s session, with initial downside backs this as our favoured position. This negative bias would begin to change on a move above 107.50 (Thursday’s resistance), especially if done on a closing basis as it would also break the downtrend resistance. The key resistance overhead for the bulls remains the 108.00/108.20 pivot band.
It had looked late last week that the market was stabilising, but the huge swinging candles that finished the week have suggested this is not the case. A huge bear candle broke a four week uptrend and closed the market decisively below the $1702 pivot again. Friday’s recovery move simply muddies the waters of the near term outlook further and the rebound is back around the $1702 pivot. This time though, the pivot is a basis of resistance. Our concern for the past week or so has been that gold has formed a range between $1660/$1746. The price action of the past couple of sessions suggests that this is the case. There is a corrective slip on momentum which is still playing out and the moves lower on MACD and Stochastics play into this. We had been looking to turn near term bullish again on gold, but this prospect has again been put on ice through this range formation. We continue to believe that buying gold into weakness is a viable strategy, but for now we are cautious. Beyond the $1702 pivot, the near term lower high at $1721 is a barrier to gains as the hourly chart begins to also take on more of a ranging configuration. Initial support is building at $1691, below which would open the range lows again $1660/$1668.
Brent Crude Oil
Can the bulls begin to dream of a sustainable recovery on oil? Given the volatility and continued huge price moves on a daily basis, it is difficult to be confident either way on oil, but having closed higher on four successive sessions, there is a far more improved look to Brent Crude now. The rebound has been to such an extent that a downtrend which has been in place since mid-February has now been broken. This move has come with momentum indicators improving as Stochastics, RSI and MACD all swing higher. However, a key area on the daily RSI has developed, with the recoveries throughout 2020 (of January, February and April) all failing around 50. There is an old pivot area around $27.15/$29.00 which also needs to be broken. The bulls will be conscious that the latest rebound faltered in this band on Friday to form a slightly negative one day candlestick on the session. Today’s early slip back has firmed up that high around $27.90. For now, this looks to be just an unwinding slip, but initial support at $25.00/$25.50 ideally now needs to hold to prevent a growing corrective outlook from developing. A close above $29.00 would be the next key step in this recovery. The bulls will now look to lay the foundations of a sustainable recovery with support between $23.20/$24.50.
Dow Jones Industrial Average
Two negative sessions to finish last week are now threatening to completely change the outlook of the recovery. Friday’s downside break of 24,010/24,265 breakout support also breached the support of a four week uptrend. This is the second uptrend that has been broken since the big rebound started to kick in. Perhaps this is a signal of normalising markets and lower volatility, but this shallowing downtrends being breached are still not especially encouraging now. The big support is around 22,940 which is the latest higher low of the recovery. The bulls must fight to hold on to this otherwise it would be a considerable trend changer. Momentum indicators are beginning to lose impetus with this rally now, with MACD lines flattening off, along with Stochastics crossing lower and RSI slipping back towards 50. How the bulls respond in the early part of this week could be crucial. The hourly chart shows resistance building between 24,010/24,400 effectively as the old breakout levels once more become resistance. Support at 23,415 will be an early gauge for sentiment today.