Risk sentiment is now fairly stable, still caught between the opposing themes of a second wave of the virus and a V-shaped recovery.  We still think markets are likely to remain choppy as the market chases momentum in either direction but do not feel that we are likely to see any strong risk off given the amount of central bank and government stimulus which means the market is still underweight risk assets.  However, we also do not expect a large risk rally from these levels given the current backdrop.

It is quadruple witching for US stocks today as large options and futures positions will be expiring along with rebalancing of major indices such as S&P.  Therefore, there are expectations of large volumes and increased volatility and potentially a pull-back in US equities, but we do not think the support for equities will suddenly drop away as there are still huge amounts of cash in the system waiting to buy dips.

Following weak Australian employment yesterday, we had record surge in Retail Sales for May at +16.3% which has seen AUD a little stronger since the release, for now AUD just seems to move in lockstep with US equities.

Looking at the wider news, Trump tweeted that the US maintains the option of a complete decoupling from China and the coronavirus cases in California and Texas continue to increase with both posting their largest one-day increases.

Beijing’s chief epidemiologist said that the peak of the current outbreak had passed. The targeted lockdown appears to have brought infections under control quickly.

Oil is higher this morning after Iraq promised to fully implement output cuts and make up for cuts it didn’t make in previous months.  And, the EU is pushing ahead with talks on how to implement a digital tax despite the US walking away from talks and saying they would retaliate to any taxes targeted at US tech companies.

Yesterday BoE kept rates on hold and QE increased by 100bn GBP and negative interest rates were not discussed.  This led to an unexpected reaction in GB.  After an initial rally GBP sold off. At the moment USD seems to be staging a comeback across G10 and the USD buying seems to be weighing on GBP in particular. For now it is difficult to fight the price action but if EURGBP gets to 0.9055 resistance today we look to fade the move there. The next date of note for Brexit negotiations is the end of October deadline so until then the risk for GBP is to the topside if a deal can be agreed. UK retail sales for May released a few minutes ago better than expected at -13.1% vs consensus expectations at -17.1%.

USDJPY – stays in the 106’s but it seems that every time we have a bit of a move and momentum seems to gain it just stops dead. It’s becoming more difficult to read and to be fair this is pretty much the refection of the market at the moment. Currently we are just below 107.00 but still very much in the wider 106/109 range. The Japanese government has raised its economic view for the first time since January 2018, upgrades its economic assessment for June, and says the economy has ‘almost stopped deteriorating’. The range for today remains 106.65/107.00 with a break either side opening way for 107.50 and 106.20 but I would not hold my breath.

EURUSD – the common currency touched the 1.11 handle for the first time in a few weeks as the market tested the resilience of the 1.1200, we did break this level but it was more of a grind through as opposed to a quicker move reaching our first level of support of 1.1185.  For now this level which is incidentally both Fibonacci and daily Bollinger band support has held very well and as we write we are trading just above the 1.1200 area. We still advocate buying the dips but really need to remain above 1.1180 through here and we will readdress our view. Today we have virtual negotiations for the EU bailout fund resuming where France and Germany will be pushing for a decision to be agreed upon as soon as next month. The Frugal 4 will still have to compromise but this morning the Hungarian PM Orbon did state that he was in full support of the fund therefore we will be expecting headlines on both sides of the argument.  As mentioned, 1.1180 really is key followed by 1.1150/60 area and a close today above this would reassure our bullish stance. On the topside 1.1230 followed by 1.1260 are the areas we need to target to alleviate the downside pressure we have seen in the last few sessions.

GBPUSD – the BoE yesterday did what we expected leaving interest rates unchanged and added £100bn to their asset purchase programme and painted a less dovish picture of the economy going forward and stating that negative rates is not in-any sense imminent which is why we were surprised to see GBP come off so much during the session hitting a low of 1.2400.  This morning we have had better retail sales 12% v 6.3% exp and as we write we are trading around 1.2450.  Ideally, we would need to get back above 1.2470 to negate this bearishness otherwise there is a chance we have another look lower.  A break of 1.2400 would open way for 1.2307 whereas a break of 1.2470 would open way for the old support zone of 1.2515/20.

FTSE100 – the FTSE ended yesterday’s session slightly lower following the BOE’s announcement that it would expand its quantitative easing programme by 100 billion pounds while analysts expected a more generous package, and as fears of a second wave of COVID-19 and another verbal blow-up between the US and China continue to weigh heavily on investor’s minds.  Upside momentum still faces a lot of resistance, as a failure to breach higher would have the market pull back towards 6162 as the closest support target.

DOW JONES – Wall Street ended mixed on Thursday, with the Dow Jones Industrial Average ending down 0.2% as investors tracked the rise in Coronavirus cases across the U.S. The index printed lower highs as it trades below the 50 and 200 period SMA on the hourly chart. Concerns about reinstating restrictions on businesses with more than a dozen U.S states recording daily COVID-19 hospitalisations continue to outweigh signs of a stabilising labor market favouring a pullback towards our support target at 25,797, keeping in mind light volume and the possibility of high volatility on the back of “triple witching” day.

GOLD – Trump’s most forceful threat on China so far failed to provide lasting bullish momentum to the yellow metal as it ended yesterday’s session in the red at $1721.70 after printing a daily high at $1737.73 (with our long resistance target at $1738) as US government bond yields fell and a stronger greenback suppressed further gains as unemployment filings came in higher than expected. Technically, we are still stuck in a consolidation range looking for a breach for a clearer direction.

USOIL – WTI crude oil ended yesterday’s session higher by around 3% on optimism that supply and demand is re-balancing after OPEC+ reported the compliance rate with the cartel’s production cuts in May was 87%. An hourly bearish reversal bar along with a market divergence with the RSI momentum indicator favours a short entry with $38 as the closest support target as investors look ahead towards US Baker Hughes Rig count data later today.

 

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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