Risk appetite has turned sour in recent sessions and the news from China over the weekend now threatens to really crank up the momentum of flow back into safe haven asset plays. The risk recovery took a turn last week as second wave infection rates in some US states started to increase again. Over the weekend, China has reported the re-emergence of COVID-19 infections and the threat of renewed lockdown. For now, this is only localised to Beijing and measures are rapidly being deployed to control the situation, but if this develops into something much bigger again, the world will take a collective gasp. Second wave infections have always been a distinct likelihood, but can they be quickly contained without the need for renewed lockdown measures? Today we see equities falling sharply in early moves, whilst Treasury yields are falling, all meaning the safe haven currencies (Japanese yen, Swiss franc and US dollar) are performing well. Big question marks now hang over the capacity for demand recovery and this is hitting the oil price again today. It is interesting to see gold is (perhaps counterintuitively) falling, but this is something to certainly keep an eye on today. Adding to risk aversion today, we see that China data for May has all come out softer than expected, with misses on fixed asset investment, retail sales and industrial production, even if they did all improve on April’s numbers. Given news of a potential second wave, it could make the Chinese authorities more nervous about easing restrictions and a slower recovery could ensue. That would play negatively into market confidence too and this could be a real test for sentiment in the coming sessions.
Wall Street bounced on Friday with the S&P 500 closing +1.3% at 3041, however, this move does not appear to have lasted long and selling pressure is building fast today. US futures are strongly lower with the E-mini S&Ps -2.8%. Asian markets have all fallen hard with the Nikkei -3.5% and Shanghai Composite -0.7%. European indices are also following suit, with FTSE futures -2.1% and DAX futures -2.5%. In forex, there is a definite safe haven bias with JPY, USD and CHF performing well, whilst AUD and NZD are getting hit hard. In commodities, the big selling pressure on oil is a concern with Brent Crude -3.5% and WTI off -5%. Silver is strongly lower with -1.7% and also we see gold slipping back -0.5%.
There is not too much on the economic calendar to be worried about today, but Empire State Manufacturing will be an interesting gauge of how New York is beginning to emerge from lockdown. The New York Fed Manufacturing for June at 1330BST is expected to improve to -30.0 (from -48.5 in May).
Chart of the Day – USD/CHF
Are markets beginning to position for a (near term) dollar rebound? Dollar/Swiss has been pulling lower for several weeks where rallies have been consistently sold into as the market has accelerated lower. However, a three candlestick reversal set up has formed (completed on Friday) and the building blocks for a rally look to be developing. A “morning doji star” is a three candlestick set up (strong negative candle, a doji, followed by a strong bull candle) and is a signal of a positive reversal for the dollar. Technically it comes at a key moment too. The Fibonacci retracements of the 1.0022/0.9190 December to March sell-off have often provided a key basis for support and turning points near term. The 23.6% Fib at 0.9387 was the basis for the low on Thursday before Friday’s rebound took the market up through 38.2% Fib (at 0.9508). It now suggests that there will be a rebound towards 50% Fib at 0.9606. The 50% Fib is also the basis of an old floor of resistance through April and May. The rebound comes with the RSI bouncing off 30 and there is also now the signs of a Stochastics buy set up. There is a slight tick back lower this morning, and how the dollar bulls react will be important now. The hourly chart shows a more positive momentum set up and a basis of near term support at 0.9455/0.9480 which will be a “buy zone” for the recovery. There is initial resistance at 0.9553. A near term recovery into the 0.9595/0.9650 resistance band is a growing likelihood now.
We believe that a correction has been building on EUR/USD over a number of sessions. It has been a process that has been seen through developing technicals, rather than an outright decline. Furthermore, the process may yet still be ongoing. However, the bullish forces on the euro (and bearish dollar) seem to be turning around, at least near term anyway. A second consecutive decisive negative candlestick formed on Friday, in a move which saw an intraday breach of support at $1.1240. The market has not closed with a breach of this level yet, but the intent seems to be growing for a move lower. Once more, EUR/USD has opened lower today and a closing breach of $1.1240 would complete a top pattern which would imply a correction range of -140/-180 pips. This would bring the market back below $1.1100 area. The recent failed upside breakout also comes with mild negative divergences on daily RSI and Stochastics, whilst MACD lines are also topping out. The hourly chart shows near term momentum turning increasingly corrective, where moves on hourly RSI into 50/60 have now become selling opportunities and $1.1240/$1.1275 is a near term sell-zone. Back above $1.1320 would improve once more.
Although the recovery momentum on Cable has been broken, the bulls still had an opportunity on Friday to at least hold ground. However, a second consecutive negative candlestick has confirmed the re-emergence of a more corrective outlook within what is now a $1.2075/$1.2810 trading band. We have been discussing how the late May rally (which bounced off the old key support of $1.2160 following the $1.2075 low) could become an almost mirror image of the recent breakout above $1.2645. It seems that our assessment has been very close. Friday’s intraday rally failed around $1.2645, the old key resistance, before turning into a continued retreat lower. The move is coming with a series of deteriorating momentum signals. The daily RSI failing at 70 and moving below 50 is a key negative move, whilst Stochastics are also now confirming a near term sell-signal. If MACD lines bear cross then all three of our preferred signals would be turning negative. Another intraday breach of $1.2500 has been seen early today and the next real support within the band if $1.2360. The hourly chart shows $1.2475/$1.2550 is a growing band of resistance now.
The positive candle from Friday has steadied the ship for the dollar bulls after four consecutive negative candles. The move has helped to suggest the outlook remains rangebound and support is growing at 106.55. It comes at an intriguing time in the markets, where there is an apparent shift back into safety. Does the yen benefit from being the classic safe haven, or the dollar which is seemingly starting to regain momentum. The likeliest course is a period of range trading on Dollar/Yen. The support of 106.00 remains intact and 106.55 is growing. This comes as the daily RSI has stabilised above 40, whilst Stochastics and MACD lines are also relatively settled. There is still a mild negative bias within the trading range, despite Friday’s positive candlestick. However, the hourly chart shows that selling momentum has ebbed away and hourly indicators are trying to build more of a constructive configuration for the bulls. A move above 107.60 would be needed to see this as a near term rally that really gets going. This morning’s low around 107.00 would ideally now also begin to develop into meaningful support too.
For the past couple of weeks we have been increasingly neutral on gold. A bounce of three positive daily candlesticks in a row last week could have threatened this, but once more, the resistance band around the range highs has proved to be too much for the bulls. Failing again at $1744, the market is now falling over once more and moving into retreat. A negative candle on Thursday and a bull failure move on Friday, have come before gold faltering this morning. Momentum indicators continue to reflect rallies turning into bull failures. Daily RSI is again showing a near term bounce failing at a lower level, this time in the mid-50s. Stochastics are crossing lower this morning, whilst MACD lines continue on their broad trajectory back towards neutral. Playing gold within a medium term trading range of $1660/$1764 continues to be the strategy. The hourly chart shows that the pivot band $1720/$1725 within the range is coming under pressure this morning and a decisive breach would imply another break back towards $1700 area. Given the Average True Range is currently around $26 and early momentum has turned negative, this downside move is a growing possibility today. Initial resistance is $1733 this morning.
Brent Crude Oil
Whilst trading above key medium term support $33.55/$36.40 the outlook for the recovery will be on track, but the bulls need to work hard to prevent this correction from developing into something bigger. However, the near term slide back on oil will be worrying and will quickly need to be stemmed for the bulls to be confident again. The broken uptrend would certainly have been a concern, as would the oil price falling on the week, for the first negative weekly close in seven. Is recovery momentum turning into reverse? The warning signs are certainly there. Stochastics are accelerating lower, whilst the MACD lines have posted a decisive bear cross. If the RSI decisively breaks under 50 it would be a six week low and would be a key deterioration. However, the price support band $33.55/$36.40 is crucial to all of this. If the bulls can hold on to build support in a move which is in effect still a medium term pullback to the neckline of a base pattern, then this correction can be an opportunity. It is a crucial few days ahead for the outlook.
Dow Jones Industrial Average
The “Island Reversal” is still the dominant chart feature on the Dow. Friday’s initial technical rally looks to have been short lived as the futures are pointing back lower once more in a move that initially seems set to retest Thursday’s low of 25,080. The sharp downside moves that have emerged over recent sessions will now be assessed for their overall impact. The breakout of the move through the old April high of 24,765 left an extremely important support band between 24,060/24,765. If this band is now broken it would crucially damage the recovery outlook. It would also bring the Dow below all the moving averages for the first time since early April. The resistance of the island reversal gap which starts at 26,295 is increasing in importance with every session that it is not filled. Momentum indicators have been impacted by the selling pressure, with Stochastics and MACD lines falling, but it is the daily RSI that needs to be watched. A move below 40 would be the lowest since the early days of the recovery and would really suggest the market moving back into correction mode once more.