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.
A key moment for the rally is approaching. An impressive run of positive candles has seen Cable now within striking distance of the $1.2645 key April highs. Momentum is strong with the move with the RSI into the mid-60s and Stochastics strong above 80. However, looking under the bonnet there are a few concerns that this bull run may be running out of steam. We have discussed recently the consistent waves of buying and selling seen through Cable in recent months, with the latest bull move of two and a half weeks now equal to that of the previous sell-off. As the market has ticked slightly lower today, we see momentum indicators just starting to lose their strength of the bull move. Looking at the hourly chart, the move is losing impetus too, with hourly RSI, MACD and Stochastics beginning to tail off with negative divergences appearing. A negative divergence is not an explicit sell signal but serves as a warning that the trend is maturing. The support band $1.2525/$1.2550 now needs to be watched as a decisive breach, in conjunction with these negative divergences on the hourly chart could induce another retracement within the $1.2075/$1.2645 range. The mid-range old levels $1.2360 and $1.2465 then come back into play. Initial resistance is at yesterday’s high of $1.2615 now.
The weakness of the dollar came throughout the major pairs yesterday, but the yen has been even weaker. This relative yen weakness has driven Dollar/Yen to breakout above 108.10 resistance in the past couple of sessions. This is a key move which effectively ends what has been almost two months of consolidation. New upside targets can now be derived. The breakout of 108.10 completed a base pattern (or a range breakout) which effectively targets a move towards 110.00 now. We have also seen good confirmation in the new move higher with a second positive candlestick yesterday and early moves higher today. The key near term test is now the April high of 109.35 and this is set to come under pressure. There has been a notable improvement in momentum indicators on the breakout. The 14 day RSI rising into the mid-60s, MACD rising above neutral and Stochastics pulling above 80 all confirm the breakout. It points to buying into intraday/near term weakness now. The breakout band 107.90/108.10 is now good support, whilst the hourly chart shows 108.40/108.80 is building too as a near term buy zone.
The immediate bullish outlook for gold has been significantly compromised by price declines of the past two sessions. We have recently been discussing how difficult the upside moves are becoming for gold. Two decisive negative candles of the past couple of sessions reflects this. Since the March low, the market has been trying to pull higher, but is consistently being impacted by near term corrective moves. These moves have been breaking ever shallower uptrends. The latest breach of a very shallow 8 week uptrend shows that near to medium term moves on gold are increasingly choppy. All the while, momentum indicators have been sliding lower over a medium term basis. The lower highs on RSI are now added to by a move below 50. MACD lines are sliding ever back towards neutral. Stochastics are turning lower under neutral. This makes for a difficult market to make much on the long side on a near to medium term basis. Breaking the support of the low at $1693 now means that $1744 is a key lower high under $1764. Whilst the medium to longer term fundamentals on gold remain strong, it is increasingly clear that the near term trading moves are difficult to navigate. The market has stabilised to an extent this morning (and it is interesting that this comes with a slight corrective move on risk appetite). Where previously the lows where coming between the 21 day moving average (today at $1721 and interestingly around the old $1722 pivot) and the former 8 week uptrend (around $1704 today), if this now turns into a basis of resistance for another lower high, we may need to start factoring in a deeper corrective move towards $1660/$1668. In the meantime, there is a choppy sideways range to trade.
Brent Crude Oil
The bull move higher has just shown some signs of near term stalling in the past 24 hour or so. A close higher last night came with a doji candlestick on the daily chart (denoting uncertainty with the current trend higher). The early slip back this morning will add to concern for a near term bout of profit taking. The hourly chart shows $38.65 as near term support this morning and a breach effectively completes a mini top pattern that would imply an unwind towards $36.75. Mild negative divergences on hourly momentum signals also imply a loss of impetus. Consolidations in recent weeks on Brent Crude have tended to set in as the bulls just pause for breath. The six week uptrend comes in around $36.40 today and the key breakout support is also $36.40/$37.00. With daily RSI just stuttering around 70 an unwind would also help to renew upside potential for the continued recovery. Above yesterday’s high of around $40.50 means the market is on course to continue towards filling the gap at $45.20.
Dow Jones Industrial Average
The equities recovery continued to soar yesterday as another gap higher and strong positive candlestick showed the intent to reclaim losses from the COVID-19 driven sell-off. The move in the past couple of weeks has formed a strong uptrend now which comes in at 25,680 and flanks the rally. An upside target of 26,750 can be derived from the previous breakout above 24,765 and the market is well on its way towards achieving it. The next real resistance is not until 27,100. Momentum indicators are very strong with RSI into the high 60s now, whilst MACD and Stochastics also rise in a strength of configuration not seen for months. We look to buy into weakness and with the US futures edging back lower this morning, there may be another opportunity to present itself. The breakout above 25,760 is a basis of initial support now, and then 25,030.