Market Overview
There are two phases of response to the impact of COVID-19. Firstly, how the virus itself is progressing. The signs are that new cases and number of daily deaths are now falling. This is good news as it suggests that whilst there is some way to go, the authorities in China are beginning to get on top of it. However, the next phase is the economic impact. This could be far more long lasting, and perhaps the knee-jerk bullish response to the signs of improvement on the virus spread should be taken with more caution.
Markets have had a shot across the bows today, as tech giant, Apple, has warned that its top line revenue will be negatively impacted. This has knock on implications for its suppliers across the region and although may be seen as obvious, if Apple is being impacted by Coronavirus, maybe analysts need a reality check of the impact across a broader range of implications. There has been a move back into safety once more today, as Treasury yields resume lower after Presidents’ Day (10 year yield -3bps).
Gold and the yen are performing well. Oil and equities are lower, whilst the Chinese yuan has weakened to above 7.00 again versus the dollar. The minutes for the Reserve Bank of Australia suggested that policy easing was still on the table, hitting the Aussie already under pressure from a slip in commodity prices. This looks to be a day of risk-off.
Wall Street was shut for Presidents’ Day yesterday, but US futures are -0.4% lower early today. Asian markets have had a mixed session, with the Nikkei -1.4% but the Shanghai Composite +0.1%. European futures are pointing sharply lower in early moves, with FTSE futures -0.8% and DAX futures -0.8%.
In forex, there is a risk negative bias, with JPY performing well whilst AUD and NZD are the main underperformers. It is interesting to see EUR beginning to find a degree of support, can it continue? In commodities, there is a renewed positive move for gold which is +$7 (c. +0.5% higher), whilst oil has dropped back by around -1%.
There is a European skew to the key releases on the economic calendar today. We start with UK employment data at 09:30 GMT, where UK Unemployment is expected to have remained at 3.8% in December (3.8% in November). UK Average Weekly Earnings are expected to have fallen slightly to +3.0% (from +3.2% in November).
Onto data impacting the Eurozone, with German ZEW Economic Sentiment for February at 10:00 GMT which is expected to slip back to +21.5 (from +26.7), whilst the ZEW Current Conditions are expected to deteriorate to -10.3 (from -9.5 in January). Into the US session, the New York Fed Manufacturing index at 1330GMT is expected to improve marginally to +5.0 in February (from +4.8% in January).
The NAHB Housing Market Index at 1400MT is expected to remain at 75 in February (75 in January).
Chart of the Day – Brent Crude Oil
The recent rebound on oil has reached an important stage in its development which could now be a decisive crossroads for the recovery. Four decisive bull candles last week has rallied Brent Crude through resistance at $56.60. This was a key moment as it was the first breach of a lower high since the sharp sell-off began in early January. The breakout is now set to be a gauge of support for the recovery. The old resistance is new support and could also be taken as a neckline of a base pattern which would imply a $2.90 recovery target towards $59.50. The recovery has had an initial look at the $23.6% Fibonacci retracement (of $71.75/$53.11 sell-off) around $57.50. It has also now (to the tick) filled the old gap at $57.70. So how the bulls respond to not only the gap at $57.70 and the neckline support at $56.60 will be telling for the prospects of recovery. A quick failure back below would be a key disappointment. A decisive closing breach of $57.70 would be a strong signal for the bulls now, especially if weakness is bought into today. Support at $54.95 is a key higher low on the hourly chart.
EUR/USD
It is unwise to take too much out of technical signals received during a US public holiday, but the euro at least held its ground yesterday. The initial reaction in the Asian session today is that this consolidation has continued. It means that the sharp downtrend of the past two weeks on EUR/USD is being tested this morning. We are still anticipating that with the euro so deeply oversold, there will be some sort of technical rally brewing. However, with support levels almost three years old, there is little to hold up EUR/USD. There is a minor support at $1.0770 but little else really until $1.0490/$1.0570. But with the hourly chart showing an easing of the selling pressure over the past few sessions, the reaction as the US traders return to their desks today will be key. The resistance at $1.0865 is first real level the bulls need to overcome, whilst a move above $1.0890 would suggest something more substantial could be developing. Hourly RSI above 60 and hourly MACD lines sustainably above neutral would also suggest a technical rally forming. The bulls will note that there is plenty of room for a rally to take hold, but trading ahead of confirmation could prove to be costly.
GBP/USD
It has been a well-trodden road for Cable. A rebound for a handful of sessions, before a retracement sets in. Neither the bulls nor the bears can seem to retain control for longer than a week or so. And so, the recent rebound has turned lower at $1.3070 and started to form negative candles again. A retreat back below $1.2990 has re-opened the near term pivot band of support $1.2940/$1.2960 as the hourly chart indicators begin to take on more of a corrective outlook again. It is important to stress that this just continues to play out within a medium term consolidation outlook on Cable, where the RSI is oscillating between 40/60. However, having failed at $1.3070 resistance there is a mildly negative bias to MACD and Stochastics. So the bulls will be wary of how $1.2940 is treated as support, because a failure opens $1.2870 once more.
USD/JPY
With US markets shut yesterday, Dollar/Yen continued the recent consolidation. The bulls may have lost an edge of control in recent sessions, but it is notable that the support continues to be found on every occasion 109.70 has been tested. There is good near term support 109.50/109.70 now and whilst the pivot support at 109.25 remains intact, we favour long positions for a test of 110.30. Subsequently, we see near term weakness as a chance to buy. It is worth keeping a close eye on how momentum indicators develop though, as there has been a mild drag started to develop on Stochastics. For now though, this band of consolidation between 109.50/110.15 continues and we wait for a catalyst.
Gold
We are turning more positive on gold once more. The consolidation that arose in the wake of the sharp correction back from $1591 is now growing with a positive bias once more. Although the move is not decisive, there is a more positive outlook developing on momentum indicators now. The RSI is edging back above 60 and has broken a recent trend lower, whilst MACD lines are close to crossing higher as Stochastics rise towards 80. Weakness is increasingly being bought into and the bulls are eyeing $1591 again today. We spoke recently about the growing support levels. There is a higher low at $1562, the two month uptrend is at $1570, the market is trading clear of the 23.6% Fibonacci retracement (of $1445/$1611) at $1572, and now the breakout at $1577 was a basis for another higher low yesterday. We continue to look at weakness as a chance to buy, and we favour a move above $1591 to test $1611.
WTI Oil
WTI is on the brink of a key shift in outlook. For more than five weeks, it has been a real struggle for the bulls. Intraday rallies have been consistently sold into and sentiment has been negative surrounding the Coronavirus. However, in the past week there has been a more positive positioning. Intraday strength has been holding to form a run of positive closes and improving candles. Weakness is now being bought into. The market is testing the key pivot resistance around $52.15 which is also a neckline of a near term recovery base pattern. A decisive closing breach would imply around $3 of recovery and put the market in for a test of the $54.75/$55.00 key medium term resistance area. So how the market responds to this early slip back today will be important. The hourly chart looks to have a far more positive configuration now, with hourly RSI consistently above 30 (signals at least range formation) and MACD lines also more positively configured. A key higher low at $50.60 needs to hold for the recovery to remain in play, whilst initial support is at $51.30/$51.60.
Dow Jones Industrial Average
With the technical outlook remaining positive, a near term slip back on the Dow should be the source of another chance to buy. Although the old breakouts of 29,374/29,415 are a basis of support, the pivot at 28,950/29,000 is the first real band of support that would be of significance if it were to be breached. The last two daily candlesticks which have been very small-bodied and with little real corrective momentum, have been trading around the old 29,374/29,415 breakouts but with futures pointing lower today, there may still be some more in a near term unwind. However, with the positive configuration on momentum, weakness is still a chance to buy. MACD lines are rising, whilst Stochastics remain strong above 80. There is also upside potential on RSI around 60. We favour a retest of the 29,568 all-time high and further moves on towards 30,000 in due course, but we are looking for confirmed support to come in before the market pushed on again. The hourly chart shows a decent unwind is already being seen, with initial support in the band 29,210/29,283 protecting 29,000.
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