There seems to be a number of factors on rotation which depending upon the latest newsflow will result in the set up for market sentiment on any given day. The three factors to consider are progress of a COVID-19 vaccination, the stages of economies re-opening after lockdown, and what has emerged in recent weeks, the geopolitics of relations between the US and China. The arbitrary weighting of these push and pull factors on markets will tend to generate market direction. The latest newsflow on a vaccination put wind in the sails of risk appetite yesterday and this continues today. But for how long? The usual playbook is that markets get 24/48 hours of momentum before settling down again. Rumbling in the background is still US legislation impacting negatively on China over its restrictions on Hong Kong. However, Japan easing lockdown restrictions sooner than expected has added a spring to Asian markets overnight, helping oil regather momentum, and driven US Treasury yields higher. Even with this tendency for two steps forward and one step back, we are now seeing allowing equity markets to break through the resistance of their recent ranges. US futures are strong today, playing catch up after the Memorial Day public holiday yesterday.
Wall Street clawed back losses into the close on Friday with the S&P 500 +0.2% at 2995 and with US futures reacting strongly after Memorial Day (E-mini S&Ps +2.0%) markets are set firm early today. Asian indices traded positively, with the Nikkei +2.6% and Shanghai Composite +0.9%. European markets are also positive with FTSE futures +2.6% (playing catch up after the UK public holiday yesterday) and DAX futures +1.3%. In forex, the majors have a risk positive skew, with AUD and NZD performing strongly along with a bounce back on GBP. The main underperformer is JPY. In commodities, where is a rebound on silver by +1%, whilst gold continues to consolidate. Oil seems to be looking at regaining momentum once more, with Brent Crude +2% and WTI +3.5%.
It is a quiet European morning for the economic calendar with a clutch of US data later on in the session. The S&P Case Shiller House Price Index is at 1400BST and is expected to show a slight decline to 3.4% in March (from +3.5% in February). New Home Sales are at 1500BST and are expected to decline by around 26% to 495,000 in April (from 627,000 in March) and would be the lowest level since late 2015. Finally the US Conference Board’s Consumer Confidence is at 1500BST and is expected to tick slightly higher in May to 88.0 (from 86.9 in April).
Also watch out for the FOMC’s Neel Kashkari (dove, voter) who speaks at 1800BST.
Chart of the Day – GBP/AUD
Of all the forex majors, the prospects of sterling look the most concerning. On the flipside, we continue to be happy with the way the Aussie is performing as prospects of a long economic recovery take hold. Subsequently, we see a strong downtrend on GBP/AUD forming. The support at 1.8545 (the old November low) held an initial test last week, but we expect that this will come under further pressure in the coming days and rallies should be a chance to sell. After a rebound from 1.8520 last Wednesday, candlesticks have been underwhelming in recovery. This is reflected in the lack of conviction in recovery on momentum indicators and with the seven week fast approaching, this looks like an opportunity to sell. There is resistance built up between 1.8715/1.8760 from last week, whilst the downtrend falls around 1.8770 today. A closing breach of 1.8545 would leave a retreat to 1.8070/1.8095 as the next test. The bears would be in control at least until 1.8890/1.9125 were broken.
Amidst recent corrective slip again, the pair has been neutralised once more. Selling pressure into the weekend, which formed two decisive negative candles and swung the market to retreat back to the $1.0890 mid-range pivot area. Whilst this will come as a disappointment for the bull position who would had been eying the resistance around $1.1000/$1.1015, could it also be another opportunity? With the market looking to settle and the bulls re-gather themselves today, we see the pair holding above mid-range support. The bulls are restricting the swing back lower towards the bottom of the range which has been a feature of previous weeks. Momentum indicators are beginning to look more positively skewed too. There is now a position where RSI resides above 50, whilst MACD lines are still rising around seven week highs and close to moving above neutral. If Stochastics hold above 50 this would also be an encouraging sign. We view the pivot at $1.0890 as still an important gauge. The bulls will have been disappointed with how last week went, but the hourly chart shows a basing process is forming once more and indicators are improving and the pivot is growing as support again. Above initial resistance at $1.0960 would open $1.1000/$1.1015 again and is a move that we favour. Below $1.0870 would neutralise once more.
Whilst we continue to hold a fairly dim view of the prospects for sterling, it is interesting to see Cable rising this morning amidst the improvement in broad risk sentiment. This move is now breaching our already slightly redrawn downtrend of the past three weeks. This is the second time this trend has been breached and suggests that the selling pressure is (at least for now) limited. It is also interesting to see that $1.2160, the old April low which had been breached early last week, is becoming supportive again. The medium term outlook on momentum is still corrective and suggests that near term rallies will still struggle for traction. However, turning back higher with this trend breach, suggests that the immediate downside pressure is being alleviated. How the bulls now respond to the resistance of last week’s high at a$1.2295 will be a good indication of where the bulls are at. This was a previous failure around overhead supply, but a closing recovery above $1.2295 would be a shift in sentiment. It would mean the rally printing higher lows and higher highs, and would be the building blocks of a potential recovery. Support at $1.2075 is clearly then growing in significance, with $1.2160 again being a support of note this morning.
Dollar/Yen has settled into a very quiet period of trading, but as the US returns from Memorial Day public holiday, there are initial signs of a positive bias beginning to take hold again. Last week was a smattering of small bodied candlesticks with mixed direction, but all contained within the range of Tuesday’s failed test of 108.00/108.10. However, the resistance around 108.00/108.10 continues to be attractive and the market is once more gravitating towards it this morning. There is a mild positive bias to momentum, with RSI in the mid-50s and around seven week highs, whilst a similar positive edge to Stochastics too. However, there will be little conviction unless there is a price breakout with conviction above 108.00/108.10. This would then open the April high of 109.35. A slight redrawing of the two week uptrend implies support around 107.50 today, with 107.30 a near term higher low.
We turned far more cautious of the near term bull run in the wake of the strong negative candle last Thursday. Since then we have seen a battle for control which is yet to be resolved and our caution is well founded. There is still the positive bias of a three week uptrend channel on gold, whilst the market is still yet to breach the $1722 pivot on a closing basis. However, this pivot support is being tested on a daily basis now and the bulls are having to fight hard just to stand still. This phase of trading has generated some increasingly mixed near term signals on momentum and it seems that this is turning into an important crossroads for the outlook of the coming weeks. Our bullish medium to longer term stance holds true (and will do whilst support at $1640/$1660 is intact), but the near term outlook is questionable. Holding the uptrend channel is important for momentum of the attempted breakout. However, more of a gauge would be the price holding above the $1722 pivot on an ongoing closing basis. Below last week’s low of $1716 would begin to generate a more corrective set-up of lower highs and lower lows. It would also confirm a trend channel breach.
Brent Crude Oil
Brent Crude continues to put pressure on key resistance around $36.40. Last week we discussed the importance of how the bulls would respond to an initial failure to break clear of $36.40. Surviving intraday downside of over -7% on Friday, the bulls responded well into the close and posted a solid positive session yesterday. A good response to what was their first real test for weeks. Leaving support at $33.55 the market is now testing $36.40 once more. Momentum indicators suggest that this blip on Friday has done little to damage the outlook for the recovery, with RSI strong into the mid-60s, Stochastics holding above 80 and MACD lines still rising above neutral, The next step would be a decisive closing breakout above $36.40, which would be a significant medium term development. There is initial resistance at $39.70, but there is a huge gap from $45.20 that would then be wide open to be filled. The five week recovery uptrend is supportive around $33.50 today.
Dow Jones Industrial Average
With the Dow failing to breakout last week as the resistance of 24,765 built up, we noted that it would be important how the bulls responded to this disappointment. Friday’s session suggested that they were not going to just given up the gains. This seems to be a different attitude this time and although it was a small session, closing around the highs was a good signal which brings the bulls swinging into the session today, which looks set to be a strong one. The focus is again on how the bulls treat the resistance of the April high at 24,765. Futures point to the market gapping through the resistance but can it then hold as breakout support? Momentum indicators have been positively biased, but struggling to breakout of late. With Stochastics looking more positively configured, the RSI moving into the 60s would be a really strong signal and confirm the bulls on the next leg higher. Initial resistance is an old March gap at 25,225, whilst the next real resistance is not until around 27,100. A confirmed breakout above 24,765 leaves 24,060/24,295 as key near term support.