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 a