Wall Street bounced back yesterday to see risk appetite swing back to a more positive skew. There has been little to really drive this move, with surging mega-cap tech stocks certainly playing a role. However, it is also notable that the extended risk positive bias of assets are playing into this move. Although Treasury yields are all but anchored now (as markets price for some sort of yield curve control), the dollar is suffering, as the Dollar Index falls to four week lows this morning. There has been some uncertainty over the outlook of the dollar in recent weeks, but traders seem to be increasingly positioning for a structural dollar weakening. It is interesting that amidst the worsening of newsflow over COVID-19 infections in the US, the dollar seems to be the main casualty here. It would suggest that the view is that as Q3 develops, the US economic recovery from lockdown will be scaled back, at least relative to other major economies. China seems to be a beneficiary here as the yuan has strengthened below 7.00 to the dollar for the first time in almost four months. China inflation was mildly encouraging overnight, with the Producers Prices Index inflation coming in slightly higher than expected and has helped the yuan strengthening. Also we see traction beginning to come from the euro too, The dollar weakness has also helped to propel gold through $1800 for the first time since 2011. This dollar negative bias is once more evident this morning, with USD underperforming across major currency pairs. Equities are edging positive (even though US futures are ticking slightly lower) as an edge of positive risk appetite builds.
Wall Street closed solidly higher again with the S&P 500 +0.8% at 3170. Although US futures are a touch lighter today (E-mini S&Ps -0.1%) there is a positive bias to Asian markets (Nikkei +0.4%, Shanghai Composite +0.8%) whilst European indices also look to be set fair (FTSE futures +0.5%, DAX futures +0.9%). In forex, there is an ongoing USD negative move, with EUR and GBP continuing to pull higher from yesterday’s near term breaches of resistance. JPY is a relative underperformer. In commodities, gold is building support following is key upside break yesterday, whilst silver is also maintaining good support. The oil price consolidation continues as the bulls are unable to find traction recently.
It is a another quiet day for the economic calendar today. The US Weekly Jobless Claims at 1330BST are always a key focus though. Consensus expectations suggest another 1.375m claims in the past week (marginally down from 1.427m previously). This is expected to leave around 19m continuing claims.
Chart of the Day – Silver
A decisive breakout on the precious metals! In the past 24 hours we have seen gold with a big upside move above $1800 and also a move above key resistance on silver. For silver, the market has been consolidating in a range (between $16.93/$18.36) since peaking the rally in May. However, the bulls have been massing in recent sessions, using the support of a now nine week uptrend to accelerate higher. Resistance at $18.36 has been tested over the past week, but yesterday a decisive bull candle burst through $18.36 for the highest daily close on Silver since September 2019. The move has come with increasingly positive configuration on momentum, which suggests near term weakness is a chance to buy. The RSI is accelerating into the high 60s (but also still with upside potential as twice in May the RSI hit the mid-70s), whilst Stochastics pull above 80 and the MACD lines bull cross. The reaction to a breakout is always interesting, with initial weakness today being bought into. We are happy to back this breakout (there is an upside target of around $19.50 to be derived from the June consolidation range) but also look to use any near term pullback to the breakout support around $18.36 as a chance to buy. A 100% retracement to the February high of $18.93 is about to be tested but should be little barrier to gains. The implied upside target suggests a move towards a test of the crucial September 2019 high of $19.64 in the coming weeks could be on. The nine week uptrend adds further support at $18.15 today, whilst the bulls are in control above the $17.74 higher low.
Price action on EUR/USD in the past few sessions suggests that the bulls are gaining in strength. An initial look at the resistance of $1.1350 was rebuffed earlier in the week and also once more yesterday. However, the bulls seem to be made of sterner stuff now and the market has pushed above this resistance this morning. A decisive closing break above $1.1350 today would suggest that this is a break to back. This time we see the momentum indicators really going with the move, as the RSI confirms the move (at a three week high), Stochastics pull decisively higher and most encouraging of all, the MACD lines are on the brink of a bull cross. All this points towards a test of the five week range high at $1.1420 in due course. Although we are more confident of this break, we are still mindful that the euro has struggled to sustain upside breaks through this range. We would still be looking to use weakness as a chance to buy though, with a mini-uptrend coming in as support around $1.1275 today. The hourly chart shows $1.1300 is a key pivot over the past week and is supportive, meaning that with the hourly RSI a little stretched this morning, we look for buy signals between $1.1300/$1.1350. A move under $1.1250 support confirms the bulls have faltered.
The near term outlook for sterling has improved considerably in the past week. On Cable, we have seen the sterling bulls turning a corrective three week downtrend, into a base pattern on a move above $1.2540. This base took on a decisive formation yesterday with another strong positive candlestick (the sixth positive close in the past seven sessions). Closing above $1.2540 implies a move now to test the resistance of the June high at $1.2810 and is a move backed by improving daily momentum. Stochastics are rising with upside potential into the 80s, whilst RSI is into the 60s this morning. A bull cross on MACD lines adds to conviction (although with Cable being in a three month trading range, this move lends less influence). Resistance at $1.2685 is important, but the key test is how the bulls react around the barrier of the seven month downtrend (which is at $1.2700 today). How the bulls react around this resistance will be a good gauge of their intent. We look to buy into weakness, with the hourly chart showing $1.2600 being the initial support whilst the neckline of the base at $1.2540 is growing in importance now. This is added to by a one week uptrend line support also at $1.2540 today. The bulls are in control of the medium term range now whilst the support at $1.2435 remains intact.
Dollar/Yen remains stuck in a rut as once more there is little to choose between the two currencies. Small bodied candles often in contradiction from one session to the next are very much the norm now for the pair. This is an indication of a lack of conviction amidst the ongoing consolidation. Initial resistance at 107.75 is preventing a test of 108.15. A very marginal negative bias is threatening in the past 24 hours, with initial support around 107.20 creaking. Breaching 107.20 would open 106.80, however, even if it were to be breached, the consistent tendency for false signals on Dollar/Yen would leave little real conviction that the move would continue. Daily momentum indicators are beginning to show a mild drift lower, but again with little conviction. The hourly chart shows an oscillation between 30/70 on hourly RSI as a tight range plays out. A close below 106.80 would be a more notable break and imply a move towards the 106.00 key medium term range lows. Iniitla resistance is now 107.50/107.75.
A decisive breakout on gold has been seen as the yellow metal has moved above $1800 for the first time since 2011. The move has been characterised by conviction in momentum, something that has tended to be lacking in previous attempted breakouts. The daily RSI has moved into the 70s, Stochastics are consistently now above 80 and MACD lines are accelerating higher. A breakout from the April to June trading range gave an implied target of around $1820 on a conservative basis, but the more bullish target can derive as much as $1858. There is effectively now a lack of resistance until the all-time high at $1920 from way back in September 2011, so there is little reason not to expect continued upside. Also given the strength of momentum, we are happy to back this run higher, whilst any near term supported weakness will be seen as a chance to buy. The latest breakout around $1789 is initial support, whilst what is close to a five week uptrend is underpinning the run higher around $1780 today.
Brent Crude Oil
The recent consolidation continues. Tight daily trading ranges with small candlestick bodies suggest the bull traction continues to ebb. The bull trend is intact but increasingly lacks conviction. Hourly indicators suggest this is more of a consolidation than a bull run now and this consolidation may now well breach the uptrend that has been a basis of support for the past eight weeks. A trend breach, in this manner of consolidation, is not an overtly bearish signal, it just suggests that the bulls are struggling to push the market forward. This is reflected in the daily momentum indicators which retain a positive medium term configuration, but which are just not as decisively strong as they were previously in May/June (something that is also present on hourly indicators too). The trend is your friend and the market is creeping to test the key $43.95 resistance, however, we need to be on alert for potential reversal signals too. The reaction low at $42.45 is now a support to watch. The bulls would be looking for a decisive “closing” of the gap at $45.20 to suggest breaking the shackles. We are increasingly cautious of this bull run.
Dow Jones Industrial Average
The Dow ticked higher yesterday to help to bolster initial support in a move which helps to guard against another drift lower within the growing near to medium term range. Tuesday’s solid negative candle, pulling back once more from the key resistance band 26,300/26,610 had threatening to swing the market lower, but Wednesday’s rebound will keep the bulls hopeful that they can make a decent fist of testing 26,300/26,610 again. Daily signals are still reflective of a consolidation play, as RSI oscillates between 44/56 for the past four weeks and MACD lines flatten. However, there is still a marginal positive bias to moves which point towards a preferred test of the resistance. For this to be sustained, the hourly chart shows that the 100 ticks of support between 25,715/25,815 now need to hold. However, with the positive bias to momentum also showing on the hourly indicators, it suggests that there is still an appetite to buy into weakness. Whether the bulls can break through 26,300/26,610 and move to close the gap at 26,940 is another question.