Markets are staying volatile as there are plenty of opposing stories compete for attention.  The better data yesterday from UK unemployment (3.9% vs 4.7% expected), German ZEW and US Retail Sales (17.7% MoM) are encouraging.  With the markets continued demand for equities it would appear we could get a V-shaped recovery, fuelled by central bank and government support.  However, the opposing narrative, a second wave of the virus and geopolitical friction, is pushing markets in the other direction.  The headline risk is keeping markets jittery and illiquid and there is a desire to chase the market in both directions as news swings between the positive and negative narrative.  It is therefore important to take a step back and be patient, as chasing the market in either direction can be a losing strategy in choppy markets.

There has been mixed news about the pandemic.  A study in the UK have found that a cheap steroid treatment increases survival of serious coronavirus cases. The drug dexamethasone could reduce mortality rates of the most seriously ill patients on ventilators by one-third.  But Beijing has closed all schools to contain the spread of the cluster of coronavirus cases that have emerged from the wholesale market.  And, Brazil recorded a record number of new cases and cases continue to surge in Texas and Florida.

Elsewhere, frictions remain high between North Korea and South Korea as North Korea moves to send troops into disarmed areas near the border after they blew up the liaison office they share yesterday.  Also, geopolitical friction between China and India is at boiling point after 20 Indian soldiers were killed in a confrontation between Chinese and Indian forces on the disputed border the Himalayas.

In the short term we feel that the euphoria from the Feds move to buy individual bonds and the Trump discussion of US$1trn infrastructure stimulus were overdone.  The move to buy individual bonds instead of ETFs does not increase the total value of stimulus and Trumps infrastructure stimulus is already part of the current discussion between Democrats and Republicans about whether the next round of stimulus should focus on giving money to the unemployed or spending on infrastructure and tax cuts.  The final package the Democrats and Republicans agree to is still up for some debate.

We expect that the possibility of a shut down in Beijing is going to be the driving force for AUD in the short term and may lead to some further downside for risk sentiment from these levels. AUDUSD resistance at 0.7063 and support at 0.6777 low this week.  AUDJPY so far has been supported by the move higher in equities but may test last week’s low at 72.53 if equities turn lower.

The range for the Dow yesterday was 800 points and S&P 77points, demonstrating the choppy nature of trading. Market direction has become increasingly difficult to call as there is a three-way balancing act between mass stimulus, economic data and virus statistics. The complex pull and push forces mean it is unlikely we will get further large straight line moves, adding risk for a range of investors.  Overnight stocks have been a little mixed with a tilt to the cautious side as investors are concerned of second waves of Covid-19.  At the moment US futures are reflecting this sentiment and they are pointing slightly down, but Europe looks like opening in the green.

USDJPY – we did see a move towards the top of our resistance yesterday at 107.65 on the back of the better than expected US retail sales 17.7% v 7.9% exp but we have since come off and are now trading around the 107.25/30 level. Sorry to have to say this again but it seems we are entering the boring stage of USDJPY again in a tight range of 107.05/00/107.75/80. As we have mentioned we still favour selling rallies as we are expecting broad based USD weakness in the coming months and the level on the topside very much remains 107.75/80 and then 108.00 whilst on the downside 107.00 followed by 106.25 but I would not hold my breath. The DXY still continues trading in small ranges but we are just below the old minor resistance of 97.09 and whilst below there is a chance of testing the support of 96.36.

EURUSD – the single currency appears to have lost the upside momentum it has enjoyed over the last couple of weeks as we see more volatility in risky assets however, our bullish view for now very much remains in place. Angela Merkel believes that the EU aid deal will go through in July and this is what we really need to re-ignite the upward trajectory of the pair and feel we could see 1.1500 sooner rather than later if this were to be the case.  For now it seems we will be in a consolidation mode with supports at 1.1235 and 1.1200 pivot points on the topside sits at 1.1285 and a close above this level would be very supportive.

GBPUSD – the currency is trading very nervously and does not seem to like being up high.  Yesterday we traded a high of 1.2680 and then came off pretty quickly towards 1.2540 during Chair Powell’s speech at the same time risk was being sold too. On the Brexit front, attention is now on the UK’s scramble to broker trade deals with non-EU partners with UK-Australia and UK-New Zealand discussions now eyed. A potential GBP 1 billion boost in UK exports may well result from a trade deal with the Antipodean economies.  With that said, a UK-EU trade deal is still deemed of a far higher importance when it comes to the determination of the UK’s fate, post-transition. Latent and significant downside risks remain for the GBP for as long as a healthy UK-EU trade deal is not set in stone. Eyes are next on the resumption of EU-UK talks on 29 June for further key updates on the matter.  The range for today is 1.2518/1.2630 with the 1.2775 an important pivot point on the day.

DAX – is looking stronger than its peers, ending yesterday’s session with a daily close above the 200 period SMA at 12,286 as it prints higher in early trade today after following Asian markets lower on the back of escalating geopolitical tensions, with China and India clashing military at the Himalayan border and North Korea blowing up a joint liaison office with South Korea. Not as bad as expected European car registration data released today proved not enough for the index to breach our resistance level at 12380 which coincides with the 200 period SMA as we keep a lookout on that key resistance level for clearer market direction.

DOW – ended yesterday’s session in the green at 26,308 after monthly U.S retail sales registered a record rebound, the highest since the start of the survey in 1967, and amidst renewed Fed readiness for further stimulus. A mixed start of the trading session today as virus numbers surged in Florida and Texas, recording the highest single day jump in cases so far, as investors await Fed Powell’s second day testimony. Further upside momentum will only be possible upon clearing our resistance level at 26381 along with the 200 period SMA, while an hourly close below our support at 26551 will open the door towards lower prints.

FTSE – is trading around the 200 period SMA on the hourly chart in early trade today after hitting our target at 6290 in yesterday’s session, printing a daily high at 6300 after a major development in an Oxford University clinical trial, which have proven to reduce risk of death in severe COVID-19 patients, received government authorisation and lifted investor sentiment. Looking ahead, better than expected CPI data to be released today could weigh down on the index as a failure to breach the 200 period SMA would have 6162 as the closest support target.

GOLD – ended yesterday’s session little changed, trading in a channel between our support and resistance levels at $1717.50 and $1730 as fears of a second wave of Coronavirus infections offset optimism around a potential COVID-19 drug and a stronger U.S. dollar on the back of higher than expected May retail sales. Expecting a pick up in demand today on the safe haven as geopolitical tensions rise with India-China on one hand and North and South Korea on the other, with an hourly close above $1730 to boost bullish momentum having $1738 and $1744 as the next resistance targets.

US OIL – after issuing a buy signal, WTI hit both of our resistance targets higher as it printed a daily high at $39.04, one cent below our resistance level at $39.05, on the back of an IEA report that forecasted a record rise in demand in 2021. Crude retreated below the 200 period SMA in early trade today after Beijing closed schools and markets as new COVID-19 clusters emerged with an hourly close below $37.20 to favour further downside with $36.50 as the next support target.

 

Rony Nehme
Chief Market Analyst at SquaredFinancial

Rony has over twenty years of experience in financial planning and professional proprietary trading in the equity and currency markets. Prior to joining SquaredFinancial, Rony educated and coached numerous traders helping them find their edge and arming them with proven trading methodologies to successfully battle the markets. Rony obtained a B.S. in Finance from Concordia University in Montreal, and his professional designations include Certified Financial Planner CFP® obtained from the Canadian Securities Institute.

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