Selling pressure ramps up amid significant safe haven flow [Video]
|Market Overview
The market response to the impact of the Coronavirus is maturing. It seems as though the authorities on the Chinese mainland have started to gain a degree of control, as new cases and daily increase in deaths are stabilising. However, markets are looking past this apparent good news now. The outbreak fears are increasingly international, with Korea, Iran and even Italy requiring a significant response as they struggle to contain the spread. Financial markets are taking real concern for implications of economic growth and safe haven plays such as bonds and gold are benefitting. Monetary policy response is being factored in as dovish, but longer term growth expectations are also being hit. Subsequently, we see yield curves flattening. The US 3 month/10 year spread is now -13 basis points, whilst the 2s/10s spread is at four and a half month lows. Forex markets are also beginning to differentiate far more between countries most acutely impacted. Whilst the commodity currencies such as Aussie and Kiwi are being hit due to their economic ties with China, it is the sell-off on the Japanese yen which is the starkest mover. There is a tendency for markets to over-react, so volatility will be the big winner here. The sharp rally on gold is also a key factor, with this morning’s gap higher coming with another bout of worrying COVID-19 headlines over the weekend. Equities are also increasingly threatened. The longer-term concerns are yet to be ascertained, but markets are making their move.
Wall Street closed with significant losses on Friday with the S&P 500 -1.1% at 3337, however, US futures are once more surging lower today by -1.5%. Asian markets have been broadly hit this morning (Nikkei closed for a Japanese public holiday) even though the Shanghai Composite was just -0.3% lower. In Europe, the outlook seems to be very negative with DAX futures -2.0% and FTSE futures -1.5%. In forex, there is a renewed strength and outperformance of USD, with JPY actually holding ground today. The commodity currencies are under the most pressure with AUD and NZD half a percent lower against the dollar. In Commodities, gold continues to soar higher, up around +1.8% (+$28), whilst oil is being hit hard, -2.5% lower.
Sluggish German growth and the impact on the Eurozone has been a key feature in recent weeks and this comes into focus on the economic calendar again today. The German Ifo Business Climate is at 0900GMT and is expected to slip back to 95.3 in February (from 95.9 in January). This move is expected to be driven by deteriorations on both components, with the Ifo Current Conditions to drop back to 98.6 (from 99.1 in January) and Ifo Current Conditions to fall to 92.2 (from 92.9 in January).
Chart of the Day – EUR/JPY
The yen has come under considerable corrective pressure in recent sessions. Coinciding with a rebound on the euro means that EUR/JPY has bounced considerably from its four-month low of 118.45. The move has now recovered back to around a key pivot resistance band between 120.75/121.45. This has been a turning area for the market on numerous occasions over the past 8 months. Is this again set to be a failure point for a rally? The strength of the recovery has really improved the outlook on momentum signals. The rise on Stochastics, RSI above 50 and bull cross on MACD lines suggest a key shift in market sentiment is building. However, already we can see the 120.75/121.45 band is a ceiling. Friday’s small-bodied uncertainty is turning back lower again today. Near term, momentum is faltering amidst hints of negative divergences on the hourly chart. So the bulls need to step up today. There is a support band 120.00/120.60 which will now signal the recovery is faltering is breached. This is a key test of the recovery now and the bulls need to prevent the renewed formation of bearish candles again. Trading back below 120.00 would be negative again. A decisive closing breach of 121.45 would suggest continued recovery towards the January high of 122.85.
WTI Oil
The recovery on oil has lost its way in the past session or so. A base pattern implied target of around $55.00 saw the market coming up just short at $54.50 before posting a negative candle on Friday and another today. This is a concern as bear market rallies will often undershoot their recovery targets when the bigger picture outlook remains negative. With a retreat back towards the neckline of the breakout around $52.20, how the market responds this morning will be key. Already we see Stochastics bear crossing over, whilst RSI has turned back around 50. A close on RSI below 40 would be a real concern for the near to medium term recovery prospects now. The hourly chart shows the bulls now need to step up this morning, to prevent a quick retracement back. Hourly momentum is on the brink of turning negative again. Support in the band $50.60/$50.80 is key, so the bulls would be looking to forge support as a higher low above there. Initial resistance at $52.65 this morning needs to be seen with a closing breach for the bulls to post a positive daily candle and regain some confidence again.
Dow Jones Industrial Average
The Dow comes into the new week increasingly corrective. The mild slide over the past week or so began to accelerate back on Friday. A decisive negative candle cutting around -0.8% off the Dow (-227 ticks) means the old key pivot around 28,950 is under pressure. With futures pointing sharply lower this support will be broken today. The hourly chart shows that this pivot marks the neckline around a top pattern. A closing breach (highly likely) of 28,950 would confirm the growing corrective move and imply around -600 ticks of downside target. Already we see momentum indicators weighing and leading the market lower, with RSI falling below 50 at three week lows, MACD bear cross and Stochastics also deteriorating. Initial support below 28,950 is at 28,795 but a retreat towards the January low at 28,170 is threatening. There is resistance initially at 29,070.
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