In an attempt to try and mitigate the economic impact of Coronavirus, global central banks seem to be acting in coordination. Rate cuts from major central banks such as the Federal Reserve, Reserve Bank of Australia and now Bank of Canada have been seen in recent days. Attention will be on whether the ECB and the Bank of England also follow suit. The question is whether a monetary policy response to a supply-side shock is the right move. It needs to come in conjunction with a fiscal response from governments, and it is beginning to now come. The supra-national body, the IMF has pledged $50bn of support to low-income countries, whilst in China there will be a package of 100bn yuan (c. $16bn) for its own coronavirus prevention. As for markets, there has been an element of stabilization on bond yields in the past 24 hours, with the US 10 year yield back above 1.00% again, helping the dollar to steady. Forex majors seen to be relatively settled this morning, at least relative to the huge volatility of recent sessions. Focus for oil traders today will be on how talks between OPEC members decide to increase production cuts. Furthermore, how OPEC+ (i.e. mainly Russia) agree to take part in any further cuts.
Volatility remains significant on Wall Street with another huge session, this time higher, helped by the strong showing of the continuity candidate Joe Biden in “Super Tuesday”. The S&P 500 jumped +4.2% to 3130. However, the volatility shows little sign of calming down, with US futures sharply back lower again today, by -0.9%. Asian markets have felt the benefit of a strong close on Wall Street, with the Nikkei +1.1% and Shanghai Composite +2.0%. European futures are pointing to gains in early moves today with FTSE futures 0.5% and DAX futures +0.7%, however, given the direction of futures in the US, gains may be restricted. In forex, there is a mixed outlook across majors. The signs of fatigue in the EUR rally continue, whilst JPY is performing well. CAD remains under pressure following the larger than expected rate cut from the Bank of Canada. In commodities, gold continues its consolidation from yesterday, whilst oil is ticking back higher as OPEC meets today.
The economic calendar is mainly reserved for US data today. The Weekly Jobless Claims at 1330GMT are expected to once more remain around recent levels, with 215,000 (from 219,000 last week). The US Factory Orders at 1500GMT are expected to show a -0.1% decline on the month of January (following a +1.8% increase in December).
There are a couple of central bank chiefs on the agenda to keep an eye out for. First of all the outgoing governor of the Bank of England, Mark Carney is speaking at 1700GMT, whilst the Bank of Canada’s Governor Stephen Poloz talks about “economic progress” at 1745GMT.
Chart of the Day – Brent Crude Oil
As the OPEC+ countries discuss the prospect of production cuts in the next couple of days, the outlook for Brent Crude comes into focus. The technicals show a big bullish engulfing candlestick (bullish key one day reversal) on Monday has given the market an improving skew. However, despite this, the initial rally has failed to follow through and there has been a stumbling of the rally around resistance. An intraday failure on Tuesday around the 23.6% Fibonacci retracement (of $71.75/$48.40) at $53.90 has yet to be overcome, whilst yesterday’s intraday rebound failed around the $53.10 old February low. This leaves a resistance band $53.10/$53.90 which will be a gauge for the recovery. Momentum indicators are gradually improving following a Stochastics bull cross to move above 20 and RSI crossing back above 30. However, yesterday’s negative candle suggests the market is concerned that OPEC+ will be unable to deliver the necessary cuts. Technical reaction to the fundamental/newsflow event will turn bullish above $53.90. The hourly chart shows a higher low at $49.90 above the key $48.40 low, with a tick higher this morning. Initial support at $51.00 the bulls will be keen to protect now, whilst $53.00 is a basis of resistance.
The strong run higher on EUR/USD came as the market quickly priced in a series of Fed rate cuts. However, now the FOMC has made the emergency -50bps cut (and more cuts are priced in already), could there be the prospect of some profit-taking? We discussed this potential yesterday and subsequently the market did start to show signs of stalling in the rally. A negative candle resulted. However, the bulls are still hanging on this morning. A second test of the old pivot at $1.1100 held into the close yesterday and the market is now building consolidation. We note that the RSI has turned back from a position above 70, something that is seen as an extreme move on EUR/USD, whilst Stochastics are also showing signs of fatigue. The hourly chart positive momentum has also lost its spark as slight negative divergences have begun to weigh. The key move to trigger a correction would be a close back below $1.1095, which would open another retracement again.
The selling pressure through Cable has just begun to stabilize in the past 48 hours or so. This comes as Friday’s multi-month low at $1.2725 has remained intact through the first half of the week. However, this could simply just be the early moves of another near term technical rally on Cable that runs counter to what is now a corrective outlook. Running lower highs and lower lows which have been breaking through a series of key supports in recent weeks have left the sterling bulls bruised. Although they have not had the knockout blow of trading what can still be argued to be a four to five month range, here is increasingly an outlook of selling into strength on Cable now. This would suggest that how this technical rally manifests in the coming days would be another opportunity to sell for a decisive move clear below the November low. A move above $1.2845 initially improves the outlook and opens for a +100/+120 pip rally. The Fibonacci retracements (of $1.2193/$1.3515) play a key role here. Initially the 50% Fib retracement at $1.2850 has been breached which opens the 38.2% Fib level at $1.3010 which also marks around the first key lower high. However, bear market rallies tend to undershoot their recovery targets. We would expect a technical rally to falter around $1.2950 between these Fib levels and be a chance to sell.