Today is Friday the 13th, not a great day for the superstitious. But can the horror show be any worse than Thursday the 12th after some of the worst selling in history and a car crash of a press conference from ECB President Christine Lagarde? Hot on the heels of a broadly terrible address from Donald Trump the night before, Lagarde’s inexperience did little to calm market fears. Her predecessor, Mario Draghi, seemed to be so adept at setting the nerves, but Lagarde compounded a damp squib of a monetary policy announcement by spooking traders. Her comments that the ECB’s role is not to close sovereign debt spreads caused yields on Italian BTPs to spike higher and the euro to dump. The fears of Coronavirus creating economic crisis turned into a liquidity scare yesterday as overnight funding swaps prices soared, with the dollar jumping. The US Federal Reserve has looked to calm markets and it will offer trillions of dollars in liquidity operations through its repos. This is an attempt to stem what it sees as “temporary disruptions” which caused a huge jump in overnight swaps pricing. At least, coming into the European session this morning, there is an element of relative calm and recovery. Risk assets are rebounding. Is this like putting a sticking plaster on a burst dam? Let’s hope that this can begin to provide stability that the markets so badly need right now.
Across the board, yesterday’s moves on equity indices were some of the worst falls since 1987, with the S&P 500 -9.5% to 2480. However, US futures are on the rebound today with a gain of 4.0%. Asian indices played catch up with the Nikkei -6.1%, whilst the relative outperformance of the Shanghai Composite continues (-1.2% last night). European markets look set for a rebound with DAX futures +1% currently. In forex, there is a pick up in risk appetite, with JPY being the big underperformer, whilst AUD and NZD along with CAD are on the comeback. In commodities, gold is trading over +1% higher with oil almost +4% higher.
Although volatility remains immense, the economic calendar shows the Prelim Michigan Sentiment at 1400GMT is data that could be telling. The impact of Coronavirus is expected to begin to hit the US consumer, with the headline Michigan Sentiment expected to drop back to 95.0 in February (from 101.0 in March). The deterioration is expected to be driven by the Current Conditions component falling to 112.0 (from 114.8) whilst Michigan Expectations are expected to reduce to 88.2 (from 92.1).
Once more, there are no central bankers due slated to speak today, and FOMC members remain in their blackout period until next Wednesday’s FOMC announcement.
Chart of the Day – USD/CHF
When the Swiss franc sells off as the bottom is fallout out of risk markets, there is a real signal that something is going badly wrong. As such the dollar is strengthening across major forex and unless the Fed’s funding operations calm markets down, the momentum of the dollar move could be like a steam train. Technically, a recovery of the big sell-off on USD/CHF is gathering pace. Yesterday’s positive close came with a lot of volatility throughout the session. In calmer markets, trading decisively through 23.6% Fibonacci retracement (of 1.0022/0.9190 decline) at 0.9387 implies a continued recovery to test 38.2% Fib around 0.9510. Momentum buy signals are coming through fast with crossover buy signals on Stochastics, and the RSI back above 40. Posting another positive candlestick today would suggest the dollar bulls remain on track and recovery back towards the 50% Fib at 0.9605 which is also an old floor of the January low and a basis of overhead supply could be seen. The hourly chart shows good near term support now 0.9325/0.9410.
A double whammy of an incredulous ECB press conference, dollar strength on funding concerns and a Fed move to mitigate, generated a wild session on EUR/USD. A high to low range of 280 pips does not even tell the whole story either. Taking a step back though to survey the technical damage to the chart, there is a breach of the support band $1.1200/$1.1240 which we see as being a move that opens the next target area of $1.1100, an old pivot. Selling into strength has already been a developing theme and for now we see little reason to change this view. Technicals are reflective of this, with the RSI below 60 having been above 80 means the corrective momentum is developing still. A Stochastics sell signal add to this. Resistance is now between $1.1200/$1.1240 with the 38.2% Fibonacci retracement (of $1.0775/$1.1492) at $1.1220. Whilst the market trades under $1.1300/$1.1330 resistance the move remains corrective now.
The momentum behind weakness on Cable in the past couple of days can be attributed to the renewed dollar strength. If current market conditions continue, the downside momentum of selling pressure could continue to pull further losses. The medium term range support has been broken and Cable looks pretty negative right now. Although we see this as breakdown of our medium term position, it is still likely to be a longer term buying opportunity for sterling. However that is for another day. For now, watch the Fibonacci levels, as Cable has been extremely conformist despite the significant volatility. The Fibonacci retracements of $1.2193/$1.3515 have been incredible in calling support and resistances in recent weeks. Once more, yesterday’s huge sell off turned to find a low at $1.2490, just a shade below the 76.4% Fib at $1.2505. This Fib has been today’s low also. So, 61.8% Fib around $1.2700 is a barrier overhead now. Considering the old low at $1.2725, there is a resistance band building. A decisive close below the 76.4% Fib implies a full retracement to $1.2193.