The Federal Reserve has come to the rescue of the risk recovery once more. Just as the momentum of a corrective move was building, the Federal Reserve has announced that it will sweep in and buy up US corporate debt. A move to support liquidity and the availability of credit to large US companies. Market focus has switched from concerns over a building second wave of COVID-19 infections in Beijing, to the “Powell put” once more. The old adage “don’t fight the Fed” has again come to the fore. Risk appetite has picked up and Wall Street turned completely on its head again. What had looked to be a session of sharp losses turned positive into the close and US futures are continuing higher today. US Treasury yields have jumped (the US 10 year Treasury yield is around +7 basis points higher as risk appetite indicators have rallied. Moves out of the Japanese yen and US dollar in the forex space, whilst rallies on equities and oil are re-engaging. The question will be how long this latest little spurt higher for risk can last. If the second wave threat in Beijing develops into something bigger, this renewed risk-on phase will dissipate very quickly. The Bank of Japan as expected, did little on its monetary policy decision overnight, with rates at -0.1% and a 10 year yield target around zero. Sterling has been given a little boost this morning, with much better than expected UK employment data. Unemployment has stuck at 3.9% where markets had expected a jump to 4.7%, although this good news is slightly tempered by weaker than expected wage growth.
Wall Street closed the session higher with the S&P 500 +0.8% higher at 3006, whilst futures are also pointing for a continuation of this move, with the E-mini S&Ps +1.0% this morning. This helped to boost Asian markets, with the Nikkei +4.9% and Shanghai Composite +1.2%. In Europe, there is a strong handover, with FTSE futures +2.2% and DAX futures +2.6%. In forex, there is a continues risk positive bias, with GBP outperforming and EUR gaining ground. JPY is the main underperformer. In commodities, gold is steady, whilst silver is slightly weaker. The bounce back on oil has just turned into consolidation this morning.
On the economic calendar, how the Eurozone’s largest economy is emerging from lockdown will be gauged today as the German ZEW Economic Sentiment is released at 1000BST. Sentiment is expected to pick up to 60.0 in June (from 51.0 in May), whilst the current conditions component is expected to improve to -84.0 (from -93.5). Into the US session , US Retail Sales for May are expected to bounce back month on month by +5.4% on an ex-fuel basis (after plunging by -17.2% in April). US Industrial Production is at 1415BST and is expected to improve by +2.9% on the month (after a huge decline of -11.2% in April). In the months to come it will also be interesting to see how the Capacity Utilisation level recovers, with an improvement to 66.9% expected in May (from the record low of 64.9% in April).
Later in the US session, be on the lookout for the Congressional testimony of Fed chair Jerome Powell who is speaking with the Senate Banking Committee at 1500BST.
Chart of the Day – Silver
We have remained positive on silver as the breakouts of May have pulled the market higher. However, into June, the performance has struggled both on an absolute but also relative basis (when measured against major forex). With risk appetite turning sour in recent sessions, silver has been under growing pressure with just two positive candlesticks in the past two weeks. This has started to drag on the price, with an intraday breach of support at $17.20 yesterday. Whilst the move could not be sustained into the close, there is a growing sense that the bulls are being pushed back. Following the latest support from the Fed, the question is, does this stoke the fires of the recovery once more? Momentum indicators are still deteriorating, with the RSI at five week lows, MACD lines pulling lower off a bear cross and Stochastics lower on another bear cross. We draw in a tentative three month uptrend off yesterday’s low which is supportive around $17.00 today. The bulls will also argue of a willingness to defend the 76.4% Fibonacci retracement (of $18.93/$11.62) around $17.20, but can the bulls hold on? A close below $17.20 would complete a small top and imply a retreat towards $16.20. The hourly chart shows that yesterday’s bounce has pulled silver into a band of near term resistance $17.35/$17.55. Initial support comes in at $16.93, whilst $16.65 is key support now preventing a retreat to $15.83. A failure to break back above $17.55 would increase the growing negative pressure on silver. Above $17.75 improves again.
For just over a week, we have been talking up the prospects of a near term corrective move on EUR/USD, and whilst this has been developing, it would appear that you just cannot fight the Fed. A big late session turnaround yesterday in the wake of the latest supportive measure from the Federal Reserve has improved risk appetite on major forex and completed a strong bull candle on EUR/USD. Whilst our expected near term pullback towards $1.1100 may still be in the pipeline, we now cannot see as a likely scenario. The corrective bias that was forming on the hourly chart has been dispersed and the rebound back above the near term $1.1320 pivot means that an improving configuration has taken hold. It could still be that this is now just a ranging formation between $1.1210/$1.1420, but if the bulls can now begin to develop support between $1.1275/$1.1320, the pressure towards the $1.1420 high can build. Threatening corrective daily momentum is easing and we will need to see how this phase develops now, however, for the time being we are neutral again on EUR/USD.