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.
The recovery on Cable continues. Since the market bounced off $1.2160 last week, there have now been six positive closes in the past seven sessions. Moving decisively clear of the mid-range resistance $1.2360/$1.2465 the market is on the way towards a test of the range highs again at $1.2645. This is an incredible turnaround considering less than two weeks ago Cable was looking at the prospect of $1.20 big figure. Such has been the momentum of this rally we are now looking at strong RSI and Stochastics. The 14 day RSI is into the mid-60s now and is at its strongest since December. It is all set up for a test of the key April highs of $1.2645 now. We are still mindful of the consistent swing tendencies of Cable, where the previous two and a half week sell-off has been followed by a rally now two and a half weeks old. Subsequently, whilst $1.2645 is a target to be eyed, we watch for warning signs of exhaustion on the hourly chart. The rising 21 hour moving average has supported the run throughout the past few sessions. The hourly RSI has been above 40 for the past week. Breaking these conditions would be a warning. The hourly MACD and Stochastics lines are just beginning to threaten negative divergences too. Given the history of Cable ranging within $1.2075/$1.2645 it might be wise to take caution on long positions around these levels.
It has come out of almost nowhere, but finally a decisive move higher has broken the tedium that is Dollar/Yen. Suddenly, with the risk rally taking another leg forward, the market has taken a view, and it does not look great for the safe haven yen. After weeks of doing nothing, a huge bull candle formed yesterday and Dollar/Yen has broken higher. A move that has smashed through resistance at 108.10 completes effectively what is a 210 pip base pattern breakout and implies a move towards 110.00 over the coming weeks. The breakout at 108.10 now becomes an area of support to buy into an intraday pullback. Ideally this would be a move to wait for confirmation, (especially given the false downside break of last Friday). So perhaps a confirmation session, building support above 108.10 would help to add confidence for the breakout. An early consolidation today is not giving back the breakout yet and is encouraging. Given The improvement in momentum now, support forming above 108.10 would be a positive signal that the market is accepting the breakout. The next resistance is the early April high of 109.35.
The bulls will have come away from yesterday’s session feeling that another encouraging position has been squandered. A rally of recent sessions is now being unwound. A decisive negative candle yesterday after the market had been building positively suggests that this is a market which lacks the traction to really push decisively higher now. We continue to see the uptrend of the past eight weeks as a gauge (coming in at $1702 today) and weakness is subsequently a chance to buy. However, the bullish momentum that was so evident in the moves higher in late March and through April, now has far less conviction. The RSI is above 50 but cannot sustain above 60 now, whilst MACD lines continue to drift lower. We are happy to buy into the latest weakness and once more, note that the lows of recent weeks have all been seen between the rising 21 day moving average (around $1722 today) and the eight week uptrend (at $1702 today). The hourly chart reflects the rolling over of the latest attempt to move higher and a more corrective configuration forming once more this morning. Below $1722 (an old pivot) the support is initially at $1710. Closing with a $1600 handle, the market would lose its medium term bullish outlook, with $1693 support increasingly important.
Brent Crude Oil
Oil continues to run higher. Having moves decisively clear of the technical resistance at $36.40, Brent has this morning moved above $39.70 resistance. The more optimistic bulls will be suggesting that this move clear of $36.40 actually completes a big two and a half month base pattern that effectively implies an upside recovery target of around $56 over the coming months. Given that the February high was $60 and there is a March rebound high of $53.90, is this really so unrealistic? For now, Brent is now into gap fill territory, with the big gap down from $45.20 being the next key target. Momentum in recovery is still very strong, with RSI into the 70s, whilst MACD and Stochastics are also strong. The contrarians will look at previous bull failures coming around the 70 mark on RSI (September and December 2019) and this may induce a near term corrective move at least. The recovery uptrend comes in at $36.00 today whilst the breakout at $36.40 is a key area of support now.
Dow Jones Industrial Average
The Dow just continues to grind higher. Having had a slip back at the end of last week, the bulls seem to have used this pullback towards the key breakout at 24,765 as a chance to buy. The reaction from a low of 25,030 has resulted in three positive candles in a row now. The market has formed an uptrend that is now approaching three weeks in duration (coming in as support at 25,380 today) and is a gauge for the progression of the current bull leg higher. The consolidation rectangle breakout implies a target of around 26,750 and with the next resistance being 27,100 (an old March mini rebound high) the recovery is firmly on track. Momentum indicators confirm the move higher, with RSI into the mid-60s now and at their strongest since January (when the Dow was still pushing all-time highs). MACD and Stochastics also remain bullishly configured. They also suggest using any near term weakness as a chance to buy. The key breakout at 24,765 is the main support area, but any correction to find support above 25,030 would be an opportunity too.