Market Overview

There still seems to be a fine balance struck between whether markets lean positive or negative on any given session. Sentiment fluctuates between bullish and bearish. Hopes for vaccine and treatment drugs are still able to boost sentiment, but the traction seems to be limited now. The weight of concern comes with the economic impact on the US economy from rising COVID-19 infection rates. Consistently over 60,000 new cases per day, is driving the need to reverse re-opening measures. The state of California closing bars, restaurants and other businesses is a concern for retail sales recovery and consumer confidence. The data for July and as Q3 develops is likely to reflect this and scale back expectations of economic recovery. Add in a dose of concern over the tit-for tat relations between the US and China over Hong Kong, interests in the South China Sea and Huawei. The risk recovery has been built for perfection and with reinfections growing in the US, it seems that a China recovery needs to be a heavy lifter for the global economy again. China trade data out overnight has been encouraging, but Singapore reported a larger than expected decline in Q2 GDP and a move into recession for the first time since 2009. UK GDP for May has also disappointed, a data miss driven by underperformance by the dominant services sector. Any good news on the economic data front that markets were served in the past month, seems to be running dry. At the least, this makes it much harder for the risk rally in the weeks ahead.

Market Overview

Wall Street fell sharply into the close, weighed down by a drop in tech stocks, with the S&P 500 -0.9% at 3155. Even though US futures have rebounded slightly today (E-mini S&Ps +0.5%) there has been pressure through Asian markets, with Nikkei -0.9% and Shanghai Composite -0.9%. In forex, there is a mixed look to major pairs, with little real theme, however, with US Treasury yields lower this should suggest a weight on risk appetite. In commodities, gold and silver have slipped slightly in early moves, whilst oil is around -1% lower.

It seems a while since there was any economic announcements of note but given the releases earlier this morning and also due later, the economic calendar has a pretty steady stream of data today. The German ZEW Economic Sentiment at 1000BST is expected to slip back slightly in July, back to 60.0 (from 63.4 in June). This deterioration comes despite a continued pick up in the ZEW current conditions component which is expected to recover further in July to -65.0 (from -83.1 in June). The big focus for today will come with US consumer inflation for June, with the US CPI at 1330BST. Headline CPI is expected to improve by +0.5% in the month of June which would improve the year on year reading to +0.6% (from +0.1% in May). Core CPI is forecast to improve by +0.1% but the year on year inflation would be dropping to +1.1% (from +1.2% in June).

Keep an eye out for the FOMC’s Lael Brainard (voter, leans dovish) who is speaking at 1900BST today.

 

Chart of the Day – German DAX

The DAX is still positing higher lows and we would love to be able to fully back the rally. However, almost every session is a hard grind for the bulls. In the past three weeks, the number of negatively configured candles (with a close below the open) have outweighed the positive candles. This suggests that the DAX rally is reacting off other markets (mostly Wall Street) whilst it is a real struggle for any sustained traction. This is effectively reflected in the MACD lines which have been drifting lower for the past month and lack conviction in the bullish outlook. Despite this though, the old gap from 12,470 has now become a pivot and good basis of support, whilst the market has used the support of a six week uptrend (today at 12,520) to squeeze the market for a test of the key 12,915 resistance.  With futures pointing to the market sharply lower in early moves today, these supports look set to be tested again. The response of the bulls could be key. So we look at the uptrend (12,520) and the pivot (at 12,470) as key near term indicators. How the DAX reacts to these levels in the next couple of days will give a strong indication as to whether 12,915 resistance can be tested. The daily RSI is still low 50s to low 60s and Stochastics positively configured to suggest buying into weakness is still the strategy. A close below last week’s low at 12,415 would signal real strain to the bullish outlook.

DAX

 

Brent Crude Oil

Price action over the past week on Brent Crude has shown how the emphasis of who is in control of the market has shifted. Previously, throughout June into July, although the upside impetus was waning, the bulls still had control in the market. After repeated failures to breakout above $43.95, the bulls seem to have been neutralised at best. Friday’s rebound candle was once more sold into yesterday and there is an early slip lower once more today. Although the shallow eight week uptrend was broken last week, there is nothing overtly negative yet, and this could still just be part of a consolidation. However, Friday’s support at $41.30 needs to be watched, as a breach would just begin to form a more corrective outlook, near term. Support at $39.50 is still more important, but with momentum indicators all tailing lower now, there is a threat that the bull run since March is increasingly mature.

Brent Crude Oil

 

Dow Jones Industrial Average

For the trading outlook on the Dow, our focus in recent weeks has been on the resistance band 26,300/26,610 and the key downside gap at 26,940. Yesterday’s bull failure at 26,640 which formed a “shooting star” candlestick set up, is now a concern for the bulls. A shooting star tends to be most indicative of a reversal after a trend higher, and its effectiveness in a range can be limited. However, the pattern coming on an attempted break above resistance, but which also failed to “close” a gap, really does steer at another potential swing lower. There is nothing too negative yet on momentum, but the Stochastics are beginning to threaten a rolling over. Futures are flat early today. However, if the hourly chart is anything to go by, the selling pressure was mounting into the close last night and the corrective signals are mounting again. Support at 25,525 needs to hold otherwise a retreat to the key range lows will set in again, with 24,765/24,970 as the floor.

Dow Jones Industrial Average

 

Read More Analysis Here: EUR/USD, GBP/USD, USD/JPY, Gold

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