The risk recovery is taking a pause for breath this morning as the bull run on equities begins to show signs of easing. It comes as Treasury yields have pulled a shade lower, the US dollar has found a degree of support across major currencies, and equity futures are tailing off. In recent days there have been some mixed reports over how US and China relations could be developing. After a claim by Reuters that China could pull back on its US imports was officially denied, there are still suggestions that this may be the case. The official denial a couple of days ago had previously fanned the flames of the risk rally. Could this now begin to douse those flames with cold water? The consolidation comes ahead of what could be another momentous European Central Bank monetary policy decision. No change on rates is expected, but the ECB is likely to add to its Pandemic Emergency Purchase Programme (PEPP). PEPP purchases have been running at around €5bn of assets per day. It means that the €750bn fund size will be exhausted by around August/September. The expectation is that the ECB has seen the PEPP as a successful operation and in order to get ahead of its exhaustion, will increase the program by around €500bn today, enabling the purchases can run into Q2 next year. This would be ongoing supportive for the euro as it reduces the risk premia for the single currency of the Eurozone. In the near term there has been a consensus build up for this move and could mean some “buy on rumour, sell on fact” profit taking. However we would still see near term euro weakness as a chance to buy.
Wall Street closed another strong and positive session with decisive gains, as the S&P 500 was +1.4% at 3122. However, US futures are a shade lower today with the E-mini S&Ps at -0.3% and some of the momentum of the rally is being lost near term. This is reflected in Asian markets mixed to only slightly positive (Nikkei +0.4%, Shanghai Composite flat). European markets are similar to the lead from the US, with FTSE futures -0.4% and DAX futures -0.3%. In forex, there is a dollar rebound underway, where USD is outperforming across the major pairs. The main underperformers are GBP (on elevated fears of a no deal outcome from EU trade negotiations) and AUD. In commodities, we see gold has built a degree of support after yesterday’s sell-off, whilst silver is yet to amidst the near term risk reversal. Oil is also around -1% to -2% lower in early moves.
The economic calendar is dominated by the ECB monetary policy today. However, UK trader may also keep an interested eye on the UK Construction PMI at 0930BST. Consensus expects a bounce back to 29.2 in May from an incredible 8.2 in April, although this is still deep in contraction territory. The ECB monetary policy decision will be at 1245BST where there is no expectation of any changes to rates (main refinancing rate of 0.0% and the deposit rate of -0.50%). However, the main announcement is expected to be an extension to the Pandemic Emergency Purchase Programme (PEPP) by around €500bn. The ECB Press Conference with Christine Lagarde at 1330BST will also be worth watching. The US Weekly Jobless Claims are at 1330BST and are expected to show the continued reduction in claims, to 1.800m (from 2.123m last week). The US Trade Balance is at 1330BST and is expected to show an increase in the deficit to -$49.0bn in April (from -$44.4bn in March).
Chart of the Day – Silver
This is an important moment for the silver rally. The latest breakout above resistance at $17.62 has spent the past two sessions correcting back and is currently trading around a key confluence of support. The question is whether this is a pullback into breakout support, or the start of a deeper move (the hybrid safe haven status has acted as a drag as risk appetite has soared). The move has unwound back to the support of a four week uptrend (c. $17.50 today), and the breakout support (at $17.62). If support can begin to build, it would be a good opportunity to buy for the likely continued recovery. Despite an initial tick lower, momentum indicators remain positively configured on a medium term basis. The RSI has unwound to 60, MACD lines are still strong and Stochastics above 80. However, this could change if silver continues to slide and we could begin to see some corrective signals. For now, we expect this slip lower will be short-lived and that the market will begin to build support once more before continuing higher. Even if the uptrend is breached, the bulls will certainly be looking to hold a corrective move above the 76.4% Fibonacci retracement of the big sell-off from $18.94/$11.62 (at $17.20). Holding the uptrend on a closing basis will be an encouraging sign now. Hourly RSI and MACD lines have unwound and are beginning to look more stable this morning. Initial resistance is $17.75/$18.00 needs to be overcome to re-engage the bull move. A move back above resistance is now the $18.36 resistance would see the recovery back in full swing for a full retracement to $18.94 (which is still preferred) in due course. The bulls would though lose control on a breach of $16.65 key higher low.
As another crucial ECB meeting approaches, the sharp recovery on EUR/USD is showing initial signs of stalling. We have seen the run higher along a sharp uptrend of the past eight sessions. A succession of higher lows and strong closes have defined a run of over 350 pips, but this morning, we see signs of this move slowing down. This could be part of a consolidation in front of a key event, but after such a strong run higher, caution must be taken with long positions. It is interesting to see that the peak yesterday came at $1.1255. An upside target derived from the breakout above $1.1015 implied around $1.1250, so effectively this target has been met. Daily momentum indicators are strong but stretched. RSI is beginning to roll over a shade above 70. We have discussed previously the struggles that the 14 day RSI on EUR/USD historically has around 70 and this could be an area where the near term move begins to lose momentum. Hourly indicators are beginning to lose their momentum too. We watch for a move below the 55 hour moving average (this morning around $1.1190) as a signal of a trend breach. Hourly RSI below 40 and hourly MACD below neutral would also be a signal of reversal to watch for. A retreat into the $1.1080/$1.1145 support cannot be ruled out near term. We would though still look to use supported weakness as an opportunity to buy.