Markets react to a US tech rebound, with ECB policy meeting in focus [Video]

Market Overview

The wild ride on Wall Street continued yesterday as the beaten down tech sector found support for a rebound. The question will now be how sustainable is this support and whether the recent sell-off is over. The impact on broader sentiment has been significant too. A dollar rally has coincided with the recent tech sell-off, however, now with tech (and Wall Street) rebounding, we see the dollar coming off again. This is being seen through major forex, whilst gold has also ticked higher. The focus for today will again be on the path of US futures, but also looking towards the ECB policy decision. A rebound on the euro came yesterday on reports that ECB members were confident of the Eurozone economic outlook, however, will this be the stance of ECB President Lagarde today. How does the ECB react to the record low on core inflation? Also what of the strength of the euro, which induced ECB chief economist Philip Lane to concern over its impact on the Eurozone economy? There is a sense of consolidation early today. How dovish the ECB comes across will likely be another driver to the next EUR and by association USD move.

Wall Street finally started to build support again yesterday, with a rebound (tech driven) which filtered across markets. The S&P 500 closed +2.0% higher at 3399 whilst futures are ticking higher again today (E-mini S&Ps +0.2%). This has allowed Asian markets higher (Nikkei +0.9%, Shanghai Composite +0.5%) and European futures are looking mixed around the open, with FTSE futures -0.3% and DAX futures +0.3%. In forex, there is a continued unwind of recent USD gains, aside from a touch of AUD weakness. EUR is ticking higher although this comes ahead of the ECB meeting later today. In commodities, the rebound on gold and silver from yesterday is just easing back slightly this morning, however, the rebound on oil is consolidating.

The ECB meeting dominates today’s economic calendar. European Central Bank monetary policy is announced at 1245BST with no change to the main refinancing rate of 0.0% or the deposit rate of -0.50%. However, the react action will come with the assessment of forward guidance. Will an “average” inflation element be introduced? Will the PEPP purchases level be increased, and by how much? The press conference of ECB President Lagarde is at 1330BST and should also be watched for the assessment of inflation and the strength of the euro. Aside from the ECB, at 1330BST Weekly Jobless Claims are expected to improve further to 846,000 (down from 881,000 last week). The EIA Weekly Crude Oil inventories are a day late due to Labor Day and are at 1600BST with an expectation of a drawdown of -1.1m barrels (-9.3m barrels last week).

Chart of the Day – USD/CAD 

The big dollar rally and oil price sell-off has driven a big rebound on USD/CAD, but has this changed the outlook? Negative trends are being broken now, as not only a seven week downtrend but also the big near six week downtrend has now been breached by the move. However, the rebound has unwound USD/CAD into a band of resistance around 1.3240/1.3270 (the August pivot area) only for the move to fall over yesterday. That serves to increase the importance of this resistance area on a medium term basis. How the market reacts in the coming days will be key. There is so much resistance overhead from the old sell-off that this is now a significant overhead supply of sellers. If a higher low between 1.3130/1.3260 can now develop then the bulls will see this as a recovery building foundations. A move back below 1.3095 would suggest that the recovery is already faltering and a retest of 1.3040 and the 1.2990 key low is likely to be seen.

 

Brent Crude Oil

A technical rally has pulled oil into a rebound, but is it sustainable? The old support of $41.30 is now the start of key overhead supply between $41.30/$43.60. How a Brent Crude rebound reacts in this area of resistance will be key now. Yesterday’s rebound failed initially at $41.20 but a tick back higher again today suggests that there is still a chance to regain the recovery initiative. However, if the market begins to consistently fail around here then there will be key questions over the impact to the medium term outlook. Momentum indicators look to be more negatively configured now and this tends towards seeing rallies as a chance to sell now. Failure around resistance will add to this. The support at $39.30 will need to hold, but there is a potential for a retreat towards the next key support at $37.00 due to the significant bearish shift in the past week.

Dow Jones Industrial Average

After a series of negative sessions, US markets found support for a rebound yesterday. Whether this is a sustainable move is likely to be down to the sustainability of support for the tech sector after the huge recent rout. For the Dow, the big medium term trends and supports have come under huge pressure, but are arguably still a factor. Despite being breached on a closing basis during Tuesday’s session, the five month uptrend and breakout support at 27,580 will still be factors due to the instant rebound. If the market can now build from 27,465 as support then the bulls can rebuild their shaken confidence. There is a basis of near term resistance at 28,000 which is now a gauge, being an old pivot. The market failed to close above there yesterday, so this needs to now be overcome on a closing basis. There is a degree of volatility that is also still to settle down too. The positive candle from yesterday suggests an appetite to buy remains, but this needs to continue and hold above 27,465 otherwise a near term unwind will become something much more significant. Above 28,000 opens 28,730.

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