Positive sentiment gathers amid signs of peaking of COVID-19 in some countries [Video]

Market Overview

Markets have been under the strain of uncertainty of how long the economic disruption will last from the Coronavirus. However, this morning we are seeing a positive reaction as some light has been seen at the end of the tunnel. Whilst it is still very early days, there are signs of a peaking of the rate of increase in the numbers of deaths in countries such as Italy, Spain and the UK. Markets rallied hard a couple of weeks ago on the huge monetary and fiscal response, however in the past week this rally has been ebbing away. Markets need to see a sustainable improvement in the virus numbers now if this positive reaction today is going to be more than just a blip. Treasury yields are higher, equity futures pointing to strong gains, whilst higher beta major commodity currencies (Aussie, Kiwi and Loonie) are performing well. The safe haven yen is the main underperformer whilst the dollar rally has stalled this morning. To add to the positive sentiment today is the apparent progress in the discussions between Saudi Arabia and Russia over oil production cuts. The oil price has rallied hard in the past couple of sessions. The news that a virtual meeting of OPEC+ penned for Monday had been pushed back to Thursday initially hit the oil price this morning, but the rumour mill is working from a positive perspective today and suggestion is that Saudi and Russia are “very close” to a deal. This is helping oil to regain earlier losses. However, we should expect further bumps in the road and newsflow/rumour to drive volatility in oil over the coming days ahead of Thursday’s meeting.

Wall Street closed lower on Friday with the S&P 500 -1.5% at 2488, but US futures are reacting strongly today, around +4.0% higher. This has helped Asian markets positive overnight with the Nikkei +4.2% although interestingly, the Shanghai Composite has lagged -0.6%. In Europe, a strong open is in prospect with FTSE futures +2.7% and DAX futures +4.0%. In forex, there is a risk positive bias, with JPY underperformance, AUD and NZD outperformance and USD mixed. In commodities, oil is around -1%/-2% into the European session but well off its lows which were over -10% at one stage. Gold and silver are around half a percent higher.

The second week of the month tends to be a little quieter for the economic calendar. There is not much on the docket today aside from a couple of entries in the European session. The UK Construction PMI at 0930BST is expected to decline to 44.0 in March (from 52.6 in February). The Eurozone Sentix Index for April at 1000BST is expected to decline to -30.0 which would be the lowest since August 2012 (from -17.1 in March).

Chart of the Day – AUD/USD

Risk sentiment has taken a turn for the worse in recent sessions and the question for traders on Monday morning is whether a mild improvement can be the turning of a corner. The strengthening of the dollar and retreat of the Aussie has reflected the worsening of sentiment. This has seen a new trend formation of lower highs and lower lows developing and a run of negative candlesticks. A mild tick back higher has done nothing to sustainable improve the picture and looks on the hourly char that unless the rebound gathers strength it will just be another chance to sell. Daily momentum indicators show the RSI falling over under the 50 mark and now below 40, whilst Stochastics are now on the brink of another bear cross (the last two bear crossed of February and March were excellent sell signals). The hourly chart shows a mini trend channel formation, with the hourly RSI failing consistently around 50 and going to 30 in classic bear market configuration. It suggests intraday rallies are a chance to sell. The hourly chart shows an old pivot at $0.6075 is resistance now, whilst the 23.6% Fibonacci retracement (of the $0.5505/$0.6213 rebound) is a basis of the next pivot resistance, along with the falling 55 hour moving average.  A further retreat below $0.5985 opens the key near term higher low at $0.5870 but a deeper retracement is threatening now.

WTI Oil

Oil is predominantly a news driven market in the near term as traders respond positively to the suggestion that Russia and Saudi Arabia are preparing for an agreement over production cuts. The sharp bull candle of Thursday was backed by another positive and strong move higher on Friday, meaning two very strong candles have changed the outlook. On a technical basis, a closing breakout above $27.90 is a base pattern, but given the volatility in the market still, waiting for confirmation of a second close above $27.90 may be wise. This is especially the case given the huge early gap lower at the open today. Although the market has since recovered, it shows that the headlines are still a key factor. Looking at the daily chart, there are strong positive recovery signals coming through on momentum, with bull crossed on MACD and Stochastics, whilst RSI is above 40. There is initial good support now at $23.35/$23.70 and following this morning’s dip, a higher low at $25.40. Market sentiment has seeming now turned a corner and we look to use weakness into support as a chance to buy. This is clearly still a very volatile market, but there is the serious prospect of recovery now. A confirmed two day close above $27.90 would complete a big base pattern and imply $36.50 in due course. The next real resistance is not until $33.85.

Dow Jones Industrial Average

The near term outlook on the Dow is still a very uncertain. Volatility remains elevated (albeit less than a week ago, with the Average True Range falling fast now but still at around 1250 ticks). This comes as the impetus of a recovery has drained away in the past week or so as the rally has turned back from 22,595 but latterly has found a pivot resistance around 21,470. The near term outlook will be defined by this pivot now, as it has turned from a basis of support into a basis of resistance in the past few sessions. Futures early today would suggest that this pivot will be broken back to the upside, and if so, the bulls need to hang on to this move and make the pivot into an area of support once more. This is an important moment with momentum indicators beginning to roll over too. The bulls need to move to prevent a series of sell signals from posting on Stochastics and RSI. Support at 20.735 (Thursday’s low) is growing now, a level around the 23.6% Fibonacci retracement (of 29,567/18,213) around 20,890.

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