A risk rally on open-ended easing commitment from the Fed, but will it last?

Market Overview

Central banks and governments are coming out with measures to mitigate the economic impact of the Coronavirus. The commitment for ever easier monetary policy was cranked up several notches by the Federal Reserve yesterday on a pledge to expand its balance sheet as much as is necessary (rather than its previous commitment for a set amount of additional asset purchases). Countries of the EU now allowed to spend whatever they like too, as the conditions of the Stability and Growth Pact have been eased. Sentiment has turned more positive this morning, but the final signal that the market may need to develop meaningful support will be the US Congress agreeing on a package of fiscal support. For now at least, equity futures are higher, commodity prices are recovering and the strength of the US dollar is dissipating. These all need continue to move in this direction for confidence to build. With US Treasury yields plunging back (on the enormity of the potential Fed easing) this has weighed on the dollar, but yields are fairly steady today. How the dollar responds to this will be key. It is weakening still this morning, and if yields are steady as the dollar falls further, this should be seen as a positive sign for broader markets.

Wall Street lurched another leg lower last night with the SP 500 -2.9% into the close (to 2237) but US futures are strongly higher today (+4.3% currently). Asian markets were strong in response overnight, with Nikkei +7.1% and Shanghai Composite +2.3%. In Europe a similar positive response with FTSE futures +4.5% and DAX futures +5.5%. In forex the USD weakness is the main mover, with a risk positive bias to the majors. The AUD and NZD are the main outperformers, with EUR and GBP also performing well. CHF and JPY are performing less well in their rallies against the dollar. In commodities, the sharp rebound on silver (+3%) is also dragging gold higher (+1%), whilst oil is the big beneficiary over +4% higher.

The flash PMIs for March will be a crucial early snapshot of how the Coronavirus is impacting across major economies. Eurozone data is at 0900GMT and is expected to show economic growth indicators falling off a cliff. The Eurozone flash Manufacturing PMI is expected to drop alarmingly to 39.0 (from 49.2 in February. The flash Eurozone Services PMI is expected to be just as bad, at 39.0 way down from the 52.6 of February. This would all add up to the flash Eurozone Composite PMI dropping back to 38.8 (down from 51.6 in February). March data for the UK at 0930GMT is expected to show performance also cratering, with Flash UK Manufacturing PMI expected to drop to 45.0 from 51.7 in February. Flash UK Services PMI is expected to also plummet to 45.0 from 53.2 in February, meaning the Flash UK Composite PMI is expected to drop to 45.1 from 53.0 in March. Into the afternoon we get a gauge of how the US is performing at 1345GMT with the flash US Manufacturing PMI which is expected to drop sharply to 42.8, down from 50.7 in February. The flash US Services PMI is expected to fall back to 42.0 (from 49.4). Given the alarming deterioration in the regional Fed surveys, the risk will certainly be for a downside surprise. US Hew Home Sales are at 1400GMT which is expected to show 750,000 units in February (down from 764,000 in January).

There are no central bankers expected to speak today.

 

Chart of the Day – Silver  

Silver got absolutely panned in the course of the past couple of weeks, however with three positive candles in the past three sessions, is this a serious recovery building? The precipitous decline started to dissipate in the early part of last week, with the market making a new low at $11.62. The daily chart shows an improvement with the price picking up and RSI crossing back above 30 (a basic buy signal) and Stochastics also bull crossing. Last week saw the RSI hit a closing level of 12, the lowest ever recorded so this looks to be a decisive recovery now. However, it is the hourly chart which really shows improvement in momentum configuration (hourly RSI consistently above 40 and pushing above 70, whilst MACD is solid above neutral). Resistance in the band $13.00/$13.25 had been a barrier for the past week but this has been overcome overnight. This completes a breakout to imply c. $15.00 of recovery target. With the market so fast moving on the way down, a recovery could also be fast through the little real resistance until $15.10. For the prospect of recovery to be sustained, the bulls will be looking to use $13.00/$13.25 as a news basis of support, something which is already showing overnight. Initial overnight resistance is at $14.10.

 

 

WTI Oil

The tide of massive selling pressure has been stemmed over the past few sessions (even if a new multi-year low of $19.45 was touched on Friday). A mix of positive and negative candles are forming and a degree of consolidation is developing. The volatility is still huge, but at least this is no longer resulting in persistent price crashes. This is beginning to now be reflected in momentum indicators. Daily studies are ticking higher (especially the RSI which back above 30 would be a two week high). The next step though is breaking key lower highs, and that means $27.90 (Friday’s high) needs to be breached on a closing basis. Already we are seeing hourly momentum suggesting consolidation (RSI between 30/70 for the past three sessions). The hourly RSI moving above 70 would suggest recovery beginning to form. Above $27.90 would be a small base pattern and imply $8.50 of additional upside recovery. The bulls need to hold on to $21.80 as initial support today to maintain the sense of hope.

 

Dow Jones Industrial Average

After a mammoth climb for over three years, yesterday the Dow Jones Industrial Average entirely retraced the gains of the Donald Trump presidency. Another breach of support (last week’s low at 18,917), another multi year low, and a continuation of the sell-off. This time, the support had at least held for two sessions, so that was an improvement on the past two weeks, but the decline continues. Momentum indicators just look resigned to it now. They are just entrenched in a perpetual bearish configuration now, drifting in negativity and steadfast in position of selling into strength. The hourly chart shows little cause for encouragement either, with RSI stuck in a rut between 25/50 and MACD lines stuck below neutral. We now see 18,915 as initial resistance and it would take a rally above 20,518 to suggest there is any realistic hope of momentum in a rebound. Futures are looking positive early today, but keep in mind that throughout the sell-off there has never been two positive sessions in a row. Yesterday’s low around 18,215 is initial support, whilst 17,885 (the November 2016 low) is the next key support of note and is a test which has to be anticipated.

 

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