Market Overview
The ebb and flow of market sentiment has once more seen flow back into risk at the start of the week. An interview by Fed chair Powell on the programme, 60 Minutes, in the US last night has been taken as a glass half full. Powell talked about the prospect of unemployment peaking at around 20% to 25% and perhaps a GDP shrinkage of over -20%. However, he was also confident of the rebound too, potentially as soon as Q3 this year, although decisive economic recovery may not be seen until a vaccination has been found. Powell continued to re-iterate no desire for negative interest rates but the Fed can do more if needed and it is not out of ammunition. Whilst there was nothing overly new in this interview, it seems to have reassured markets today. One area really reacting positively this morning are the precious metals, with gold breaking out to its highest level since 2012. However, there is also broad positive sentiment across asset classes too. This comes amid further news of economies such as the US, Denmark and Italy stepping up their easing of lockdown measures. Additionally, although Japan fell into recession in Q1, Japanese GDP came in broadly better than expected. The question now, is whether the bulls can build on this positive start to the week.
This has all allowed a fairly positive outlook to take hold this morning. US Treasury yields are ticking higher (with a bear steepening, risk positive shape to the yield curve), whilst equities are showing some decent gains. With the E-mini S&P futures +1.2% higher, Asian markets have been solid (Nikkei +0.5% and Shanghai Composite +0.2%), whilst European markets are over +1.5% higher. In forex, there is broad positive risk appetite, with JPY being the main underperformer, whilst the commodity currencies are all outperforming. For commodities, we see the rallies taking off in gold (breaking out to multi-year highs) and silver, whilst oil is now building up a head of steam too with Brent and WTI around 4% to 5% higher.
It is a light economic calendar today, with the US NAHB Housing Market Index at 1500BST the only data of any real significance due. The index is expected to have improved to +35 in May (from +30 in April).
Chart of the Day – NZD/USD
In spite of this morning’s rally, the outlook for risk in forex still looks to be precarious. Over recent weeks, we have been talking about how the rebound from the March lows across several risk related markets is under growing pressure. The Kiwi dollar is a market considered to be at the higher beta (riskier) end of the scale on the major pairs and there are growing signs of a correction forming. The uptrend channel has been shallow since late March, but has now been broken to the downside by some negative candles towards the end of last week. Closing consistently below $0.5995 means that the market is rolling over to form lower highs and lower lows. NZD/USD is edging closer to what would be a test of key support at $0.5910. This is the mid-April low and a breach would signal a decisive shift in sentiment. A close below $0.5910 would complete a month long top pattern and open for a -220 pip corrective move towards $0.5690. Momentum indicators are already ahead of the move, with RSI falling below 45 and at a four week low, along with Stochastics accelerating lower and now a bear cross on MACD. The 21 day moving average has been a decent gauge over recent months (coming in at $0.6035 today). Increasingly intraday rallies are being seen as a chance to sell. With a mini-downtrend around $0.6000 and overhead supply from old May lows, there is a near term sell-zone between $0.5990/$0.6015.
The euro continues to fluctuate in a near term band of around 125 pips against the dollar. There is little real direction as the market remains steady between support at $1.0765 and resistance of the mid-range pivot at $1.0890. Momentum indicators remain becalmed in a state of consolidation, with the price sitting steady in the lower half of the six week trading range between $1.0725/$1.1015. Across the course of last week the market fluctuated within this tighter band but lacks direction. There is the slightest negative bias as Stochastics (the most sensitive momentum indicator) edge lower, but the last two candles have cancelled each other out and the market is all but flat tis morning. So, breaching the support or resistance is needed for direction. Support of note is at $1.0765 with resistance at the pivot of $1.0890. For now, much else is just noise.
We have been increasingly concerned for the outlook of sterling in recent sessions, and it seems that this concern has been justified. A trend lower has formed over the past two weeks and with a succession of negative candlesticks, Cable has now decisively broken the support of the key April low at $1.2160. This leaves Cable at a seven week low, but more importantly, there is little real support to prevent what could be a significant decline now. During the hugely elevated volatility of the March sell-off and rebound, Cable sliced through previous crucial 2019 support of $1.1957/$1.2020 (which formed during the height of concern over Brexit uncertainty). This is now all that stands between here and the $1.1405 March low. Momentum indicators are increasingly negatively configured now, with RSI confirming the breakdown to multi-week lows but only in the mid-30s (i.e. with further downside potential), whilst Stochastics and MACD lines are also increasingly negative. Near term rallies will be seen as a chance to sell this week, where the breakdown at $1.2160 is now the start of overhead supply of all the stale bulls from April into May. The two week downtrend comes in at $1.2285 today. There is room for a bounce back, but the bulls are really struggling now.
As the increased price volatility of early last week has settled down, we see that Dollar/Yen is once more struggling for direction. There is the slight negative bias that comes with the market posting lower highs and lower lows over the past month or so. Although the bulls overcame a minor resistance at 107.50 last week, the more considerable 108.00 barrier remains intact. The market has since settled down to trade slightly above the old pivot of 106.90. Effectively, there is a 200 pip band between 106/108, with a pivot around 106.90 in the middle. The hourly chart shows the lows of each of the past three sessions have all come between 106.75/106.90 before closing above the pivot. Momentum indicators is essentially neutral and there is still a lack of conviction in the market. Above 107.40 opens the 108.00 resistance again. However, with a lack of conviction signals we are neutral.
Gold
Breakout on gold! We have been noting the increasingly positive signals of recent sessions on gold. The positive candlesticks have been racking up in succession and now the market has burst to new multi-year highs. Such is the strength of the early move today, the market is now through to its highest level since 2012 and the next real resistance is not until $1795 (the 2012 high). The market has been trading in a range $1660/$1746 over the past month, meaning that if the move successfully confirms the breakout (a decisive close above would do it) there is an implied breakout target area of around $1810/$1830. Momentum is increasingly strong with the move, but also has upside potential too, with RSI into the mid-60s (January and February breakouts took RSI towards 80 and over). A bull cross on MACD and strong Stochastics add to this too. On an initial pullback basis, $1746 is supportive, but there is a good band of support now $1722/$1746 as a medium term buy zone. A failure under the old $1702 breakout would abort the bullish targets now.
Brent Crude Oil
The bulls have responded impressively in the past few sessions. Ending last week with two decisive positive candlesticks, the market has seen a closing breakout to a new five week high. Breaking above $32.25 on Friday, the bulls are still going today and will now be turning their focus on $36.40 which is the key resistance of the April highs. There is an uptrend formation building, whilst a breakout from the mini range $28.85/$32.25 implies a target of $35.60 in the coming days. Momentum is increasingly strong with this move, with the RSI confirming the breakout and moving into the 60s for the first time since early January. MACD lines are also rising around 4 month highs, whilst Stochastics are also strong. The breakout at $32.25 is now supportive for any intraday unwind as we look to use weakness as a chance to buy. It seems as though the huge volatility of last month with the WTI contract rollover has not been replicated, but it could still cause a little bump in the road tomorrow.
The outlook for the recovery is looking on shaky ground now. The market is ranging at best, but this could easily be a topping formation now. Despite a couple of positive sessions at the end, the Dow lost around -650 ticks for the whole week and there is now a position where near term rallies are failing at lower levels. This is threatening to turn into a more corrective medium term trend and a close below 22,940 would complete a top pattern. The move is not confirmed yet though, as the intraday rebound from 22,790 has prevented a closing break of the old April higher low at 22,940. If this support were to be broken on a closing basis, then it would be a decisive negative development. Momentum of the recovery is sliding away too now, but once more, not decisively so with RSI and MACD lines having lost their positive momentum but not turned negative quite yet. So, the bulls are still in with a shout, and early US futures suggest a decent move higher today which could mean three positive candles in a row. This needs to push through the lower high at 24,380 to really be a statement of intent from the bulls.
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