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 exactl