The Wall Street sell-off has become a significant issue for risk appetite. The rout in the tech stocks may amount to little more than a sector rotation when the dust settles, however, the rattling impact in the meantime is hitting sentiment across major markets. The sell-off is just one factor though, with a slew of other risk negative headlines hitting across markets today. Infection rates of COVID-19 are accelerating higher, whilst one of the leading vaccination trials (by AstraZeneca and Oxford University) has been put on hold due to an adverse reaction in one human participant. The prospect of the UK and EU being able to agree on a trade deal before the 15th October soft deadline is looking increasingly unlikely, with UK Gilt yields and sterling falling hard. Furthermore, the potential for agreement on a US COVID aid fiscal support package also seem remote as both Republicans and Democrats continue to be way apart in their demands. This is all adding up to risk aversion across major markets. Equities continue to fall, whilst US bond yields are falling (with a “bull flattening” yield curve, which tends to reflect risk aversion). In forex, the dollar rally continues and the Japanese yen is a key outperformer now. Oil is falling hard on the perceived hit to demand from second waves. It is time to bunker down.
Wall Street closed sharply lower in a tech-led decline, where the S&P 500 was -2.8% at 3332, whilst the Dow was also -2.3% lower. US futures looked to be stabilised a touch this morning, but are now lower again, with the E-mini S&Ps -0.2%. Asian markets felt the squeeze this morning, with the Nikkei -1.0% and Shanghai Composite -1.1%, whilst FTSE futures and DAX futures are also around half a percent lower into the European open. In forex, GBP continues to be slammed on fears that the UK is moving towards leaving the EU with no trade deal possible, whilst the risk negative bias is pulling JPY outperformance. In commodities, the drift lower is once more looking to take hold, with gold -$4 (-0.3%) and silver also lower (-0.8%). Oil is another asset that is being driven ever lower by the growing risk negative outlook.
The Bank of Canada is the main focus on the economic calendar today, with a bit of US employment data snuck in too. The Bank of Canada monetary policy is at 1500BST and there is no expectation of any change to the +0.25% interest rate, and whether the BoC retains an encouraging outlook will be watched. The US JOLTS jobs openings are at 1500BST too, with an expectation of to 6.00m in July (up +1.8% from 5.89m in June).
Chart of the Day – Silver
As the dollar strengthened significantly yesterday, the conditions are set up for silver to be taking a turn for the worse. However, with there being a flight to safety across asset classes, this may also help to prevent a significant decline on silver too. This seemed to be the move yesterday, as initial selling was then met with a rebound into the close. A breach of key near to medium term support at $26.05 (which provided a floor in late August) was subsequently bought into and only a small decline on the day. It seems to be a market full of uncertainty right now. An initial tick lower this morning has again consolidated. The initial breach of $26.05 will though be of concern for the bulls if the market continues to drift. A closing breach of $26.05 would see a breakdown completing a topping out of the price and would imply downside of c. -$2.80. Adding to concern will be that having been the basis of support for so many weeks during the summer, the 21 day moving average (today at $27.04) has now turned to become a basis of resistance. The pressure growing on $26.05 has also come with the RSI moving towards 50 and its lowest since early May. This is very much of another medium term crossroads now. There is resistance at $27.15 now and leaves $26.30/$27.15 as a near term sell zone. A close above $27.15 is needed to improve the outlook now.
With the euro still reeling from the comments of ECB chief economist Philip Lane, and the dollar rebound in full swing, we continue to see EUR/USD dragged back. This near term unwind now threatens to be something more considerable. The market is testing a confluence of support from a rising near four month uptrend (today at 1.1770) and the first key support at 1.1750. For some time we have discussed of the importance of the support band 1.1695/1.1750 holding firm, but this is now under increasing threat as momentum indicators continue to deteriorate. With yesterday’s decisive negative candlestick, the 14 day RSI has closed below 50 for the first time since mid-May (i.e. since the uptrend began). This does not bode well, considering also the Stochastics and MACD lines continue to correct too. The big question is whether this support band 1.1695/1.1750 can hold firm, as if there is a close under 1.1695 then a correction towards 1.1500 would be implied. The hourly chart shows initial resistance around 1.1780/1.1800 this morning, whilst 1.1850/1.1880 is strengthening too.
An acceleration lower on Cable has really taken hold in recent sessions, with the market losing -180 pip in yesterday’s session. This has come amidst almost perfect selling conditions, with GBP battered from increased Brexit risk and USD engaging a broad risk-off rally. The move has retreated below 1.3000 and is breaking the key support band 1.2980/1.3000 with further downside today. Momentum is increasingly corrective, with RSI into the low 40s, whilst MACD and Stochastics accelerate lower. The inference is that intraday/near term rallies are now a chance to sell. A closing bre