Market Overview
There is a continued fluctuation of risk appetite across major markets as a recent phase of uncertainty continues. We have argued that this is a crucial crossroads for markets as the recovery momentum of the risk rally has tailed off in the past week or so. This choppy phase shows little sign of abating this morning as a marginal swing towards a more positive risk appetite has formed after yesterday’s slide. This comes with some mixed signals across major markets today. A rebound on US equity futures are suggesting yesterday’s Wall Street losses are being unwound, but US Treasury yields are slipping marginally lower and oil is just tailing off again. However, there is a slightly more positive backdrop to the forex majors this morning, with the Australian dollar performing well after a broadly more positive than expected readthrough from Chinese trade data (driven by surprise exports growth of +3% for April). The euro has begun to find a level of support once more after another day of selling pressure yesterday. The suggestion is that the ECB may shy away from directly responding to the German Constitutional Court over the legality of its asset purchase programme. Instead it may leave the response to the Bundesbank, leaving the issue a national one, which would reduce the risk of further court cases. The Bank of England has kept rates on hold at +0.1% (unanimous) and maintained its asset purchases stock at £645bn. The QE decision was not unanimous, with two members voting for an extra £100bn. With the MPC also saying that it is committed to increase support if necessary. This is all broadly anticipated and little to surprise the markets, it has been supportive for sterling this morning.
Wall Street gave up earlier gains to close lower last night with the S&P 500 -0.7% at 2848. However, with US futures rebounding today (E-mini S&Ps +0.9%) these losses are being retraced. Asian markets were mixed overnight, with the Nikkei +0.3% and Shanghai Composite -0.2%. European markets are tentative in their early moves too. In forex, there is a mild risk positive bias, with AUD and NZD performing well, as is GBP in the wake of the Bank of England. JPY is the main underperformer, whilst USD is also struggling slightly. In commodities, there is little direction on gold or silver, whilst oil has not managed to solidify support yet after yesterday bull failure, with WTI and Brent both c. -1% back.
The latest weekly jobless data will be key for the economic calendar today to provide the most recent snapshot of the US labor market. The US Weekly Jobless Claims at 1330BST are expected to show another 3.000 million claims (3.839 million last week).
There are also some central bankers on the radar today. ECB President Christine Lagarde speaks at 1500BST and the speech will be scoured for hints at further policy action,. Especially in light of the German Constitutional Court decision. There is also a speech by the FOMC’s Patrick Harker who is speaking at 2100BST.
Chart of the Day – AUD/JPY
We continue to view the Australian dollar rally with caution and crossed with the Japanese yen this comes into even starker focus. The six week uptrend on AUD/JPY was broken on Monday and the bull failure at 68.97 came right on the new resistance of the underside of the old uptrend. As with several other markets, we see a crucial crossroads here, around the breakout of the first March rebound high. The support around 67.25/67.60 will be key now as a breach would drive a key trend reversal and open for a deeper correction on AUD/JPY. The momentum indicators are already showing signs of reversal as the RSI has moved to a four week low and MACD lines bear cross for the first time since late February. Tuesday’s bull failure adds to the concern that 68.97 (effectively 69.00) is turning into a key lower high. A positive reaction today is encouragin near term, but the move needs to continue at least decisively through 69.00 to improve the outlook once more. Whilst trading under the old uptrend there is a concern that the market is in the process of top building.
The euro has been under pressure for the past three sessions, with the move lower accelerating in the wake of the German constitutional court decision. The move has taken EUR/USD decisively below the $1.0890 near to medium term pivot and towards the lows of the recent range $1.0725/$1.1015 again. The question is whether the market will now be breaking this support between $1.0725/$1.0770. It is interesting to see that much like the price coming back to its range lows, the RSI is also edging towards its one month low around 40. Although Stochastics and MACD lines are still falling, they are also still within scope of the near to medium term trading range. There are signs of consolidation in the past 24 hours and downside momentum has slowed on the hourly chart. It is too early to say for sure, but if the bulls can continue to lay these foundations of support, this move lower will be just another part of the growing medium term ranging consolidation. For that, the support at $1.0770 needs to hold into the close, whilst $1.0725 is a key intraday low too. Whilst there is clearly still downside risk to the continuation of this move lower on EUR, we favour continuing to play this range, and a moderation back towards the $1.0890 pivot in due course. The bulls will be looking for a move back above $1.0810/$1.0830 to generate recovery momentum once more.
With a breach of the mid-range pivot support band $1.2385/$1.2405 broken, Cable fell decisively yesterday and has taken on a mild negative bias within the range once more. Subsequently, the key April support at $1.2245 is under threat if this near term move continues. However, the technical corrective move lower is under threat of correction today on a positive reaction to this morning’s (early) Bank of England monetary policy decision. How the market reacts around what is now the resistance of the mid-range pivot band $1.2385/$1.2405 will be important. We continue to expect Cable to trade within the medium term range and it increasingly gravitates around the mid-range pivot now. Momentum indicators have rolled over but are simply playing out ranging configuration around their mid-points now. Hourly indicators are swinging higher in the wake of the Bank of England, leaving initial support at $1.2310 to effectively bolster the $1.2300 old support.
There has been a slight kick-back on the slide in sentiment this morning, as the yen has weakened slightly. However, for now this is a move that is counter-trend to the growing trend lower on Dollar/Yen. Having breached the old April lows of 106.90 last week, the market has now also broken clear below the 50% Fibonacci retracement (112.20/101.20) at 106.70 which had become a consolidation point. Trading clear below this 50% Fib level has opened 38.2% Fib at 105.40 as the next target area. With the market trending lower of the past four weeks there are barriers to gains now which suggests that intraday rallies will be seen as a chance to sell. This is reflected in the confirmation of the breakdown on momentum indicators, where RSI is below 40 and along with MACD lines they are both at multi-week lows. The four week downtrend comes in at 107.00 today, whilst the old support at 106.90 has been the basis of resistance this week. The hourly chart shows initial resistance between 106.35/106.60. Initial support has formed around 106.00 but further downside is likely in due course, with old support levels 104.55/105.00 coming into view.
Gold
Gold continues its near term slip back from its highs. A two week corrective downtrend that links the lower highs of the last couple of weeks has weighed on gold to yesterday form a decisive negative candlestick. This now brings gold back towards the lows of the range of the past few weeks around $1660/$1668. We continue to see this kind of near term move as being another chance to buy. Gold remains strongly configured on a medium to longer term basis and an orderly decline (similar to the one it is currently experiencing) is expected the be the source of the next buying opportunity. For now the mini trend is lower though and there is still room for further unwind. However, the 23.6% Fibonacci retracement (of the $1450/$1746 rally) sits at $1676 and the mid to late April lows of $1660/$1668 are close too. This is an area where we expect a near term correction will begin to form support. The old breakout level of $1640 is a good gauge of important support now, and the bulls would not want to see the market falling below here. The hourly chart reflects this near term correction well and faltering under $1690 (which has become a near term pivot) suggests there is further downside potential near term. The downtrend sits around $1704 today and there is initial resistance at $1711 which a break above would be a trigger for renewed upside momentum once more.
Brent Crude Oil
Yesterday’s session is a warning for the bulls, that their recovery is not assured and that volatility can still bite. A big bull failure candle has pulled the market right back to the sharp uptrend and with a consolidation this morning,, this recovery uptrend is being breached. Losing -8% from the session highs into the close yesterday shows how this is not a one way train, despite the strong improvement in outlook recently. It will be important to see now how the market responds to the band between $27.15/29.00 which has turned from being resistance into now being support. This is an important gauge for the market now for the recovery to be sustained. The momentum indicators are still all with the move higher, with the RSI holding decisively above 50 at multi-month highs, whilst MACD and Stochastics continue to move higher. Initial resistance lies with yesterday’s high now of $32.27 which is a barrier preventing a retest of $36.40 now. The initial support is at $28.65.
The price action of the past few sessions on the Dow has done little to dispel the concern that a correction could be building. Having broken a one month uptrend on Friday, the market has been unable to find the buyers to reclaim the lose ground. Yesterday’s decisive negative session which pulled the Dow c. -220 ticks (-0.9%) lower simply adds to the growing potential of a renewed correction. Momentum indicators are reflecting this concern. Stochastics and RSI have dropped back to their neutral points, but the MACD lines will be the chief concern, converging and now close to a bear cross lower. The support of Monday’s low at 23,360 is the first important level to watch. A breach would mean the formation of lower highs (at 24,170 under the key 24,765 rally high) and lower lows too. Focus would then be on the crucial first key higher low of the recovery at 22,940. Coming into today, the futures are ticking back higher again and a more neutralised look to the Dow is forming. However, with daily momentum indicators having lost their recovery momentum, the prospect of taking profits on the rally is growing and is something that the bulls will need to fight against.
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