There are going to be many bumps in the roads towards a sustainable recovery in risk appetite. Most recently, markets have been responding to positive news of improving trends on the Coronavirus, however, this improvement in sentiment has already been deflated. A disappointing session on Wall Street managed to grasp a defeat from the jaws of victory as indices gave up initial gains of over 3% to close slightly lower. Oil markets are nervous and volatile ahead of a crucial meeting of OPEC+ tomorrow over how the major producers will respond in light of the massive decrease in demand following the Coronavirus. Sentiment has also taken a hit as news this morning has hit that the Eurogroup of Eurozone finance ministers have failed to come to an agreement over stimulus measures after 16 hours of talks. The southern European states (especially Italy) are keen to have debt mutualisation (dubbed “coronabonds”) as part of the package. This is something which has long been vehemently opposed by the traditionally more fiscally prudent northern European states. It all means that risk-on of yesterday has flipped to risk-off today. Treasury yields are falling back, whilst the US dollar is outperforming all of the forex major currencies. Furthermore, equity induces which have broken to multi week highs early this week are suddenly looking under pressure. The road to recovery was never going to be smooth and even with volatility across asset classes significantly reduced from its massively elevated levels of recent weeks, there is still room for some wild swings in major markets. Today, that swing is towards negative risk sentiment.
Wall Street lost considerable gains into the close with S&P 500 -0.2% at 2659. US futures have also even lost an intraday bounce this morning and are currently -0.4% lower. This has not overly impacted on the Asian session with the Nikkei +2.1% and Shanghai Composite -0.5%. However, European markets are feeling the pinch with FTSE Futures -1.8% and DAX futures -1.2%. In forex, a relatively quiet Asian session seems to be finding some direction as the Europeans take over, with USD strength to the fore. The higher beta AUD, NZD and CAD currencies are slight underperformers, whilst JPY is holding up relatively well. In commodities, after a second day of selling on oil, the price has recovered slightly today, with gold and silver trading around the flat line.
It once more a very light on the economic calendar today. The EIA Crude Oil Inventories at 1530BST are expected to show another huge stock build of +10.1m barrels (after last week’s build of 13.8m barrels was the largest build since October 2016). The focus will also be on the minutes of the FOMC’s unscheduled meeting from 15th March (usually the minutes are at 1900BST) where the committee cut rates by 100bps and engaged $700bn of asset purchases. The Fed has moved on rapidly since then with other emergency measures, so it will be interesting to see what sort of weighing the market gives to these already dated minutes.
Chart of the Day – DAX
It has been an incredible breakout on equity markets in the past couple of sessions, but is it a move to chase higher? Given the negative configuration of yesterday’s candle on the daily chart of the DAX, caution may be wise. The market closed decisively higher, but the closing level below the open resulted in a candle that could be playing out as part of a near term pullback. The old breakout resistance at 10,137 is now supportive whilst a gap is still open at 10,097 and ideally needs to be filled. This area is now a near term buy zone. It looks this morning, that with futures lower, the pullback could be on and these breakout supports will be tested. There is an uptrend of the recovery (now almost three weeks old) around 9720 today and is also supportive. Given the strength of momentum indicators, which are all rising and increasingly strong, we remain positive of the recovery on the DAX. It is just that the breakout is susceptible to a near term pullback. We would be looking to buy into supported weakness. This is reflected on the hourly chart where hourly Stochastics and MACD lines have just bear crossed back lower. Once this pullback has played out and found support once more, we are confident of further recovery gains. The near two week consolidation range breakout implies +800 ticks of upside towards 10,937 as a breakout target. The bulls will be looking to pull clear of the 38.2% Fibonacci retracement (of 13,795/8255) around 10,370 to open the 50% Fib at 11,025. The hourly chart shows further support around 9840. The DAX will maintain a medium term technical recovery whilst 9337 is the key higher low intact.
A strong one day recovery candlestick has threatened to change the outlook on EUR/USD, however the bulls will need more to suggest the dollar strength is not just going to reassert once more. An early reaction back lower in the Asian session questions just how far this rebound can go. There has been a moderation in the bear bias on momentum, as the Stochastics and RSI turn up. However, The broader outlook on EUR/USD remains corrective and there is plenty of overhead supply to restrict any recovery. The hourly chart shows that above $1.0900 to $1.0925 and up towards $1.0965 is a band of resistance from late March that has capped the recovery already. Hourly momentum has rolled over this morning as the slide back has resumed. The hourly RSI needs to hold above 40 and hourly MACD lines above neutral to suggest the bulls have any control left in this rebound. There is support around $1.0830/$1.0865 that if lost would put the market on course for a retest of the recent $1.0765 low again. The key breakout now for continuation of a recovery would be above $1.0980 which would clear key pivots and the 38.2% Fib on the daily chart. We favour using strength still as a chance to sell and prefer a retest of the lows.