This recovery in risk has a remarkable ability to pull ever higher. The US has now faced a week of protests and rioting, and yet Wall Street continues to rally. Whilst the riots could still be an issue (if they continue for much longer), right now it seems to be secondary as an issue. Investors and traders of risk assets are focused far more on the massive monetary and fiscal support, re-openings from lockdown and potential economic recovery. Reports that China was potentially breaching its Phase One trade agreement obligations seem to have been wide of the mark (at least they have been officially denied) and so the risk rally has been released once more. This has been driven further overnight with the China Caixin services PMI which have climbed to 55.0 and shows an expansion level of almost decade highs. This all continues to fuel the recovery in equities, which bounds on this morning. Even Treasury yields (which have seen volatility dampened by the actions of the Fed) are ticking higher. The outlook on forex is decisively risk positive, with the Aussie and Kiwi again bursting higher today, whilst the dollar and the yen (both seen as key safe haven plays) are underperforming badly. This relentless run in risk appetite is also hampering the move higher on gold too, which is down in recent days despite the dollar weakness. The services PMIs will give an indication of how the major western economies are faring today. With the ECB also expected to add to its own support programme tomorrow, this risk rally looks set to continue.
Wall Street closed in positive territory once more, with the S&P 500 +0.8% at 3080. US futures are showing further gains today too, with the E-mini S&Ps +0.4% higher. Asian markets were broadly positive again (Nikkei +1.3% and Shanghai Composite +0.1%) whilst European indices are also set for good early gains (FTSE futures +1.1%, DAX futures +1.4%). In forex, the risk positive bias continues to show through as AUD and NZD pull ever decisively higher. USD and more pertinently now, JPY, are the underperformers. EUR continues to strengthen ahead of the ECB and GBP is also positive. In commodities, the bull run on oil is the big story, with Brent Crude and WTI around 2% to 3% higher once more. Gold is struggling on the strong risk environment, with silver also weaker today.
The economic calendar is packed today with services PMIs, US employment and the BoC rates decision. The morning will be dominated by the European PMIs, with the Eurozone final Services PMI at 0900BST which is expected to be confirmed at 28.7 (28.7 flash May, 12.0 final April). This would mean the Eurozone final Composite PMI coming in at 30.5 (30.5 flash, 13.6 final April). The UK final Services PMI is at 0930BST and is expected to see a mild upward revision to 28.0 (from 27.8 flash, and up from the 13.4 final April). This would leave the UK final Composite PMI at 28.9 (28.9 flash, 13.8 final April). At 1000BST, the Eurozone Unemployment for April is expected to increase to 8.2% (from 7.2% in March). Into the US session, the early data is dominated by the ADP Employment change at 1315BST which is expected to show a decline of -9.000m in May (after the -20.236m in April). This will likely set expectations for Friday’s Non-farm Payrolls. The US ISM Non-manufacturing is at 1500BST and is expected to improve slightly to 44.0 in May (from 41.8 in April). US Factory Orders at 1500BST are expected to show a month on month decline of -14.0% in April. The Bank of Canada monetary policy decision at 1500BST is not expected to make any changes to the rate of +0.25%. Finally the EIA Crude Oil Inventories at 1530BST are expected to show another solid stock build of +3.3m barrels (after the surprise build of +7.93m barrels last week).
Chart of the Day – German DAX
It has been a breakout that has barely looked back for the DAX. Throughout much of May, the DAX bulls were looking towards the next breakout, but it was a struggle in coming. However, since clearing the resistance at 11,247 the DAX has taken a huge leap forward in its recovery. The breakout implied around 1100 ticks of additional recovery towards 12,350 and the market is well on its way towards hitting this next target. The next resistance is around the early March high of 12,270. Momentum indicators are impressively strong, with the RSI into the high 60s (and the strongest since November), whilst MACD lines rise strongly. They all suggest buying into weakness and so the good uptrend of the past two and a half weeks (comes in as a basis of support around 11,660 today) is the key near term gauge. The question is whether there will be another opportunity? Gaps are commonplace on the DAX but are often unfilled. Yesterday’s gap at 11,730 is yet to be filled, but with futures looking strong again today, there could be a further acceleration higher of the move. That said, the extended nature of this move will likely induce an unwinding intraday move at some stage which would be the opportunity on support. There is a good band of support around 11,570/11,810, with yesterday’s traded low at 11,850.
With the run of decisive positive closes higher on EUR/USD the bull run continues. The move has now decisively broken though the resistance of the late March high at $1.1145 to continue the impressive rally of the past three weeks. The original breakout above $1.1015 implied a move towards $1.1250 and this is still on the cards the way the market is moving. Momentum indicators are certainly with the breakout, with the RSI into the 70s, Stochastics strong and MACD lines accelerating higher above neutral. We still believe that the near term outlook is stretched though, as historically the RSI tends to struggle around the 70 mark and this is a warning for the current run. However, the strength of momentum and configuration of daily candlesticks (which have solid and strong positive real bodies) reflects the strength of the buying pressure. So drawing in a sharp uptrend which rises around $1.1160 today, this should be watched for potential reversal signs. It would only need a negative candle/close for this mini trend to be breached and warn of a corrective slip. For now though as the market again pushes higher, we are still happy to sit long. We are just cautious for profit-taking (especially with the ECB announcement on Thursday). We are also watching for the potential negative divergences on hourly chart (MACD especially), whilst hourly RSI below 40 would also be a warning. Initial support band $1.1080/$1.1145.