A risk negative tone has taken hold through major markets as we approach the end of another momentous week. The US pharmaceutical company, Gilead, which had a prospect COVID-19 treatment drug reported that clinical trials had flopped, causing Wall Street to fall back into the close. Furthermore, disappointment has come through the EU leaders being unable to agree on a major recovery package for joint fiscal support. Getting 27 countries to agree and ratify a way forward seems to be a difficult task, especially with continued opposition in some quarters to the prospect of debt mutualization. Lots of talk about what they might do, but no decisive action, which is what is so desperately needed at this point. Equity futures are falling back, US Treasury yields are lower and the dollar is performing well in the forex space. With the war of words and sabre rattling between the US and Iran over naval activity in the Persian Gulf, we continue to see oil rebound, but for how long? A week of wild swings in the oil price is set to end on a positive note, but oil fundamentals (massive oversupply amid cratering demand and a lack of storage) are not expected to shift for some time yet. A sustainable oil rally looks a long way off yet.
Wall Street lost pretty much all earlier gains as it closed mixed, with the S&P 500 -0.1% at 2797. Futures are also lower, with the E-mini S&P futures -0.5% early today. This has weighed on Asian markets overnight, with the Nikkei -0.9% and Shanghai Composite -1.1%. In Europe, the outlook is increasingly negative, with DAX futures -2.1% and FTSE futures -1.2% early today. In forex, there is a USD positive bias across the major currency pairs, with a shade of AUD and NZD underperformance along usual risk off lines. In commodities, there has been a slight pullback on gold (in line with USD strength) and silver. Oil continues to rebound with WTI +3% and Brent Crude +1.5%.
There is some interesting sentiment data on the economic calendar today. The German Ifo Business Climate is at 0900BST and is expected to show the outlook for German business deteriorated further in April to 80.0 (from 86.1 in March). This reading would be in line with the lowest reading that the Ifo hit in March 2009. Then into the afternoon, initially the US core Durable Goods Orders (ex-transport) at 1330BST are expected to take a sharp decline of -5.8% in March. The other sentiment data comes with the final reading of Michigan Sentiment for April at 1500BST which is expected to show a downward revision from the prelim to 68.0 (from the flash of 71.0, final March 89.1), which would be the lowest reading since 2011.
Chart of the Day – EUR/JPY
The outlook for the euro has really deteriorated away in the last couple of sessions. It is interesting to see that the yen cross is now into a crucial zone of support. Throughout March, the market has been finding good support in the band between the early September low of 115.85 and the October low of 117.00. Several intraday drops into this support area found willing buyers to close the market back above 117.00. However, in the past week, the market has begun to close consistently below 117.00 and especially now with two decisive negative candlesticks. This comes as a bear trend throughout April has formed. Yesterday’s intraday breach of 115.85 saw an intraday rally into the close just above 115.00. However, this is a big warning for the euro bulls and 115.85 is again being tested this morning. These breaches of support are taking EUR/JPY to its in three years. Momentum indicators are all negatively configured and the RSI falling into the mid-30s has downside potential for further pressure on 115.85 and below. A closing breach would open 114.80 as the next support but bigger downside targets of 112.00 could also open up. The outlook is one to sell into intraday rallies now, with the one month downtrend (116.85 today) and 117.00 (the old support) now resistance.. The bears are in control now on a near term basis whilst resistance at 117.20 (Wednesday’s high) remains intact.
The pressure is mounting on the euro. Recent support at $1.0810 has been decisively breached and despite not managing to sustain a breach of the support at $1.0770 in yesterday’s session, the market is moving lower once more today. A closing break of $1.0770 leaves the euro with very little real support until $1.0635, the key March low. Yesterday’s low of $1.0755 has now been breached this morning and given the run of negative candles, which are accelerating in magnitude, intraday rallies are a chance to sell. This is reflected in the negative bias now developing on momentum indicators. Stochastics and MACD lines are beginning to pull decisively lower, whilst if the RSI breaks under 40 it would add conviction to the increasingly bearish momentum. The hourly chart shows intraday rallies failing with the hourly RSI around 50/60 now, whilst there is overhead supply between $1.0790/$1.0840.
It is interesting to see that whilst EUR/USD has begun to fall decisively, Cable is holding up well. The downside element to EUR/USD seems to be of a negative euro standpoint, rather than a specifically dollar positive move. This is allowing consolidation to form on Cable. The last two sessions have seem positive closes on Cable, even if yesterday’s close higher was only marginal. A similar move today is now breaking what has been the development of an eight session downtrend. The support has developed between $1.2245/$1.2300 in recent sessions and the bulls have formed the basis of something to build from now. Momentum indicators have flattened with this recent consolidation, with the corrective aspect of the Stochastics just on hold for now (confirming the mini downtrend breach). RSI continues to hold above 45 and MACD lines are flattening around neutral. For now these are all in holding patterns and suggest a wait and see approach. The hourly chart shows resistance has formed with the old mid-April lows around $1.2405, as the market looks for sustainable direction. With the risk negative bias across financial markets again this morning, we would favour downside, but until $1.2245/$1.2300 band of support is breached, Cable will lack direction.