There still seems to be a fine balance struck between whether markets lean positive or negative on any given session. Sentiment fluctuates between bullish and bearish. Hopes for vaccine and treatment drugs are still able to boost sentiment, but the traction seems to be limited now. The weight of concern comes with the economic impact on the US economy from rising COVID-19 infection rates. Consistently over 60,000 new cases per day, is driving the need to reverse re-opening measures. The state of California closing bars, restaurants and other businesses is a concern for retail sales recovery and consumer confidence. The data for July and as Q3 develops is likely to reflect this and scale back expectations of economic recovery. Add in a dose of concern over the tit-for tat relations between the US and China over Hong Kong, interests in the South China Sea and Huawei. The risk recovery has been built for perfection and with reinfections growing in the US, it seems that a China recovery needs to be a heavy lifter for the global economy again. China trade data out overnight has been encouraging, but Singapore reported a larger than expected decline in Q2 GDP and a move into recession for the first time since 2009. UK GDP for May has also disappointed, a data miss driven by underperformance by the dominant services sector. Any good news on the economic data front that markets were served in the past month, seems to be running dry. At the least, this makes it much harder for the risk rally in the weeks ahead.
Wall Street fell sharply into the close, weighed down by a drop in tech stocks, with the S&P 500 -0.9% at 3155. Even though US futures have rebounded slightly today (E-mini S&Ps +0.5%) there has been pressure through Asian markets, with Nikkei -0.9% and Shanghai Composite -0.9%. In forex, there is a mixed look to major pairs, with little real theme, however, with US Treasury yields lower this should suggest a weight on risk appetite. In commodities, gold and silver have slipped slightly in early moves, whilst oil is around -1% lower.
It seems a while since there was any economic announcements of note but given the releases earlier this morning and also due later, the economic calendar has a pretty steady stream of data today. The German ZEW Economic Sentiment at 1000BST is expected to slip back slightly in July, back to 60.0 (from 63.4 in June). This deterioration comes despite a continued pick up in the ZEW current conditions component which is expected to recover further in July to -65.0 (from -83.1 in June). The big focus for today will come with US consumer inflation for June, with the US CPI at 1330BST. Headline CPI is expected to improve by +0.5% in the month of June which would improve the year on year reading to +0.6% (from +0.1% in May). Core CPI is forecast to improve by +0.1% but the year on year inflation would be dropping to +1.1% (from +1.2% in June).
Keep an eye out for the FOMC’s Lael Brainard (voter, leans dovish) who is speaking at 1900BST today.
Chart of the Day – German DAX
The DAX is still positing higher lows and we would love to be able to fully back the rally. However, almost every session is a hard grind for the bulls. In the past three weeks, the number of negatively configured candles (with a close below the open) have outweighed the positive candles. This suggests that the DAX rally is reacting off other markets (mostly Wall Street) whilst it is a real struggle for any sustained traction. This is effectively reflected in the MACD lines which have been drifting lower for the past month and lack conviction in the bullish outlook. Despite this though, the old gap from 12,470 has now become a pivot and good basis of support, whilst the market has used the support of a six week uptrend (today at 12,520) to squeeze the market for a test of the key 12,915 resistance. With futures pointing to the market sharply lower in early moves today, these supports look set to be tested again. The response of the bulls could be key. So we look at the uptrend (12,520) and the pivot (at 12,470) as key near term indicators. How the DAX reacts to these levels in the next couple of days will give a strong indication as to whether 12,915 resistance can be tested. The daily RSI is still low 50s to low 60s and Stochastics positively configured to suggest buying into weakness is still the strategy. A close below last week’s low at 12,415 would signal real strain to the bullish outlook.
The euro bulls continue to test the multi-week resistance between $1.1350/$1.1375 which has acted as a limit to their attempts to get real control on this market. There is an appetite to buy into weakness that means EUR/USD is pressuring higher, however, there needs to be a release of the shackles to truly back a bull run. Momentum indicators look primed and ready, with the Stochastics and RSI swinging higher in a positive bias, whilst MACD lines have converged above neutral, potentially ahead of a bull cross. Yesterday’s close of $1.1340 was the highest close for a month and adds further evidence that the bulls are ready. We look to buy into supported weakness. Support at $1.1255 needs to hold, but the bulls will want to build above $1.1300 now (shown on the hourly chart as a near term pivot). A close above $1.1375 would confirm the bulls in control to test $1.1420 and then the crucial $1.1490 March high comes into play.
Sterling bulls have lost their way somewhat in the past few sessions. Two small bodied candles (reflecting a lack of conviction) have been followed up by a decisive negative candle as Cable was sold off into the close last night. The neckline breakout of the support at $1.2540 is now under threat. There is now a direct conflict of the weight of the 7 month downtrend (which is falling today at $1.2685) and the near term (base pattern). The bulls need to return quickly today to prevent this base pattern from losing its bullish influence. A decisive close under $1.2540 would suggest that the recovery momentum has been lost and a retreat and once more neutralised medium term outlook become preferred. This would be increased were there to be a move below $1.2435 reaction low. Already we see momentum threatening lower. The Stochastics are the main concern, bear crossing after a bull run, in a similar configuration to the failure of the early June rall