Markets looking cautious ahead of Trump’s announcement on China [Video]

Market Overview

For the past few days, markets have been building with anticipation of an impending escalation of tensions between the US and China. Whilst equity markets have been positive with focus on COVID-19 vaccines and economy re-openings, looking large overhead has been the US response to China over its treatment of Hong Kong. Tension is being cranked up today as President Trump is set to hold a press conference to announce the US response to China imposing its will over China with a security bill. If he announces the intention for punitive sanctions on China and the status of Hong Kong, then it could really hit risk appetite. Market sentiment has taken a hit overnight in anticipation. Equities fell back into the close on Wall Street and futures are pointing lower this morning. Safe haven asset plays are benefitting, with US Treasury yields lower, the Japanese yen outperforming major currencies, and a rebound continuing on gold. What is interesting in all this is that the dollar is suffering amidst this move. Historically, where US/China tensions flare up, the dollar has been strong. For now, this does not seem to be the case. We see that the risk rally that had held such positive momentum earlier in the week is hitting the buffers today and markets are on a knife edge ahead of Trump’s press conference. Furthermore, overnight Japanese data for April on retail sales and industrial production coming in worse than expected has played into a more cautious outlook across major markets, although May’s Japanese consumer confidence did come in slightly ahead of forecast.

Wall Street closed around session lows last night as S&P 500 fell -0.2% at 3029. US futures are also weaker today with the E-mini S&Ps -0.6%. Asian markets were mixed overnight with Nikkei +0.2% and Shanghai Composite -0.2%. However, European markets are reacting negatively today, with FTSE futures -0.9% and DAX futures -1.3%. In forex, we see USD is the main underperformer, whilst JPY is outperforming other majors to hint at a cautious outlook. In commodities, gold is holding yesterday’s rebound, whilst silver is a shade lower, but oil is around -1% lower.

There is a focus on inflation for both the Eurozone and US in the economic calendar today. Eurozone flash HICP inflation for May is at 1000BST and is expected to show headline inflation falling back to +0.1% YoY (from +0.3% in April), whilst core HICP is expected to remain steady at +1.1% (+1.1% in April). Into the US session, the Fed’s preferred inflation gauge, the core Personal Consumption Expenditure (PCE) for April is at 1330BST and is expected to fall by -0.3% on the month down to +1.1% YoY (from +1.7% in March). The final May reading of the University of Michigan Sentiment is at 1500BST, and is expected to see a slight upward revision to 74.0 (from the 73.7 prelim, and higher than the 71.8 final April reading).

Later in the session , it will also be worth keeping an eye out for Fed chair Jerome Powell speaks at 1600BST, who may induce some elevated volatility.

 

Chart of the Day – Silver

The strength of the rally in silver has been one of the most remarkable charts of the broad market recovery since the middle of March. The price has rebounded around 48% from its low of $11.62 in a move that has been far greater than the move on Wall Street. It has also retraced through the 76.4% Fibonacci retracement (of the $18.93/$11.62 sell-off) at $17.20 and this suggests that the next upside breakout should be for a full retracement. Although the market has been consolidating now over the past couple of weeks, we continue to see a strong technical set up for further gains in due course. The consolidation is coming within the support of a three week uptrend (which comes in today at $16.95. With a continual offering of neutral to positive candlesticks, the bulls are consistently showing strongly throughout the session. Momentum indicators are strong and set up to buy into weakness, with the RSI around the high 60s and Stochastics above 80. The market is positioning for a breakout above the rally high of $17.62. A closing break would complete a consolidation breakout and imply around $1.00 of targeted upside towards $18.60. Support is increasingly strong at $16.65 now as we look to buy within the uptrend.

 

Brent Crude Oil

The strength of the bulls showed through once more yesterday and an appetite to buy into weakness continues. Throughout the recovery there have been occasional tests of resolve for the bulls. The early May consolidation threatened to see the recovery roll over, but weakness was bought into. In the past two sessions there has been another threat to the recovery, but the weakness has again been bought into. A strong reaction into the close formed a strong positive candle and maintains what is now a consolidation range between $33.55/$37.00. The uptrend since the April low at $16.00 has come in to support the market and maintains the positive outlook for pressure on the $36.40/$37.00 resistance. There are though some caveats to this positive outlook, with the length of this consolidation now beginning to weigh on the strength of the Stochastics (which are now drifting over) and this will need to be watched. However, whilst RSI remains above 50 and MACD lines are not crossing lower, we remain positive of the outlook for the recovery. Support at $33.55 is important, along with the $32.25 previous range breakout.

 

Dow Jones Industrial Average

The prospect of a near term correction has reared as markets have reacted to the prospect of Donald Trump announcing something during today’s press conference on relations with China that will be negative for sentiment. On the Dow, this comes with a negative candle forming into the close last night and futures pointing lower initially today. For now, any corrective move back towards the 24,765 breakout would be seen as an opportunity for the bulls, but if the measures that Trump announces, markets could be spooked and profit taking could be more significant. At things stand coming into today, the technical set up suggests that weakness into support is a chance to buy. Although the market has pulled back from yesterday’s high around 25,760 (which is now resistance), there is a strong basis of support around the breakout from the previous consolidation rectangle high of 24,765. There is the prospect of a (minor) 2%/3% corrective move back into support which can be well contained within the recovery. Momentum remains strong and a near term unwind can easily be contained within what is an ongoing medium term recovery. The important support to watch would be a breach of 24,060/24,295. If this were breached then the correction is more serious than just a minor pullback to the neckline of the breakout.

 

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