Is the risk recovery move coming to an end?


  • After over a week of recovery in risk appetite, there are signs that this move may be coming to an end, at least for now. Are markets getting ready once more for a corrective move? Safe haven plays are beginning to perform much better again, and if this continues then outperformance of the yen and the dollar in forex can be expected., I would expect a correction on Treasury yields which had rallied with the improved risk in the past week, whilst there would also be a corrective move on equities too. Furthermore commodities would see a split in performance again, with the growth oriented oil price likely to struggle, whilst precious metals would be likely to find support again after their corrective move. These trends are already showing signs of coming through, but will they continue?

risk off

  • Signs are that central banks are preparing to make their moves on monetary easing. The markets had barely had time to digest the failure for the Bank of England to cut rates when BoE chief economist Andy Haldane was steering for material easing measures in the next meeting. The minutes of the RBA meeting held a cautious tone and are setting up the market to expect a cut, whilst the RBNZ is laying the groundwork for easing of its own through tightening the lending conditions. The ECB is next up on Thursday this week and it is likely that they will not move quite yet, opting to wait for further data (similar to the Bank of England) but already the German ZEW Economic Sentiment has fallen to its lowest since November 2012 and this could be the first of the data deteriorations. Is the race for the bottom may be about to resume through competitive devaluation?
  • In forex markets, is the dollar about to see another upside break? US economic data showed signs of picking up last week with the retail sales coming in ahead of expectation, and if this solid data continues then the dollar should remain supported. Closing above 96.80 on the trade weighted dollar index would be a strong sign and be the highest level since mid-March. A general risk off mood in the market would also help to support the dollar (whilst also resulting in the yen outperforming again). The profit-taking on long Dollar/Yen positions may be about to come through after a rally of over 600 pips. The BoJ is next week but can it avoid disappointing the market again? Sterling remains a volatile play within significant daily swings continuing. There is still a sense that rallies are seen as a chance to sell though. The earnings growth this week (Wednesday) and Retail Sales (Thursday) are likely to drive further volatility. The euro has stalled seemingly ahead of the ECB meeting on Thursday. There is also action on the Aussie and Kiwi. The Aussie has been hit after the RBA meeting minutes were somewhat cautious and increase the potential for a rate cut of 25bps by the RBA in August. It is a similar story for the Kiwi too which is being hit by renewed expectations of a rate cut by the RBNZ as the bank tightened the loan to value ratio on mortgages, giving them more wriggle room to cut the interest rates.

dollar strong

  • Have equities come too far? The prospect of a profit-taking correction is growing as the rally on the DAX has once again corrected back from the key overhead resistance at 10,120. The DAX tends to be an underperformer when the market prefers safe haven plays and this is being seen again as the FTSE 100 is ready to outperform. The negative correlation between sterling and FTSE 100 is also supportive of sterling outperforming in a risk-off environment. The S&P 500 has broken out to several new all-time highs in recent days as investors continue to search for yield in a market that has so few alternatives to equities.
  • Commodities are set up in a mixed fashion. Ever since Brexit, the oil price has been under pressure due to the serious question marks over global growth. The balance in the supply of the market is less of an issue and whilst there is still some volatility surrounding what has become a continued drawdown in EIA oil inventories, however negative growth stories and safe haven preference will prevent oil from engaging in a sustainable rally. The gold price has started to find support in recent days as the risk recovery has begun to stall. The fact this is coming as the US dollar is also looking to breakout again is reflecting of the underlying support for gold still.
  • Economic data is relatively light for the US with announcements limited mostly to housing data. However the ECB monetary policy will be extremely important for the direction of the euro and markets will be watching for any possible further easing measures (unlikely) or jawboning to prepare the market for potential easing (more likely). UK data will drive sterling volatility this week. The UK earnings growth will be interesting on Wednesday but the retail sales on Thursday could begin to show signs of an impact from Brexit. UK inflation data has already beaten expectations so it will be interesting to see if the consumer starts to take a hit from Brexit too.
  • Watch for: UK earnings growth & retail sales, ECB monetary policy



EUR/USD – Settled in front of ECB but still prefer selling strength

  • The Bank of England held off from easing, and the ECB is likely to also take a wait and see approach. However it is also likely to try and jawbone the euro lower in an attempt to help guard against the impact that further sterling weakness would have on the trade weighted euro..
  • The market remains stuck in a range between $1.1000/$1.1188 however medium term technicals still suggest weakness and rallies should be seen as a chance to sell. The ECB will create volatility but any rallies are likely to find resistance still between $1.1100/$1.1200.
  • Watch for: ECB monetary policy

GBP/USD – Rallies into $1.3320/$1.3500 are a chance to sell

  • It is surely only a matter of time before the Bank of England cuts rates. However the data showing the immediate impact of Brexit are starting to come through, with average earnings growth and retail sales key. If these start to show deterioration the markets could be spooked.
  • The recovery may have stalled at $1.3480 but the sellers are unable to regain definitive control. A move below $1.3130 would re-open the downside, with momentum indicators already tailing off and rallies seen as a chance to sell.
  • Watch for: UK earnings growth & retail sales

USD/JPY – Looking for the next sell signal under 106.80  

  • How will the BoJ react to a 600 pips rally on Dollar/Yen? The emphasis on stimulus is still likely to take more focus from the fiscal easing and this could mean that the BoJ disappoints the market again at its meeting which concludes on Friday next week.
  • I’ve been expecting a rally to find resistance but so far there has been a continued move through the resistance and is now close to a breakout above 106.80. I still hold this expectation and the near term charts are reflecting a minor deterioration in the momentum. The medium term bears have lost control above 107.67.
  • Watch for: General risk appetite and concerns over the impact of Brexit

Gold – Ideal entry point for medium term longs remains $1306

  • Support is forming as the safe have preference in the market is starting to return. Any hints at easing from major central banks will also add to the support. The ECB meeting this week therefore becomes key.
  • A near term retreat is starting to form support gain above the breakout at $1306. A move back above $1347 resistance could re-engage the bulls again, with momentum suggesting that corrections will be bought into.
  • Watch for: ECB monetary policy

Oil – Outlook remains negative near to medium term

  • The EIA oil inventories drawdown creates near term volatility which continues to be seen as a chance to sell as concerns arise over global demand with a strong of GDP downgrades following the Brexit decision.
  • Whilst the selling pressure has slightly alleviated in the past week there is still a sequence of lower highs which are adding to pressure. Indicators are not signalling a decisive downside break, yet (RSI below 40 would be bearish).
  • Watch for: EIA oil inventories to drive volatility

Indices – Equities now seem to be struggling once again    

  • S&P 500 – A strong outperforming market which is being supported by earnings season so far and the search for yield. However, the impetus in the bull run is beginning to slow and this could give rise to profit taking.
  • DAX Xetra – Always an underperformer in a risk off market. The overhead resistance at 10,120 seems to have capped the recovery again. A move below a medium term pivot around 9750 would be bearish again.
  • FTSE 100 – If sterling begins to decline again, this would help to insulate the FTSE 100 from significant selling in a risk off market. There is now good support between 6427/6612.

Economc Calendar


Tuesday 19th July

  • US – Building Permits & Housing Starts

Wednesday 20th July

  • UK – Unemployment & Average Weekly Earnings
  • US – Crude Oil Inventories

Thursday 21st July

  • UK – Retail Sales
  • Eurozone – European Central Bank monetary policy and press conference
  • US – Philly Fed Manufacturing
  • US – Weekly Jobless Claims
  • US – Existing Home Sales

Friday 22nd July

  • Eurozone – Flash Manufacturing PMIs
  • US – Flash Manufacturing PMI



Monday 25th July

  • Eurozone – German Ifo Business Climate

Tuesday 26th July

  • US – S&P Case Shiller House Price Index
  • US – Flash Services PMI
  • US – CB Consumer Confidence
  • US – New Home Sales
  • US – Richmond Manufacturing Index

Wednesday 27th July

  • Australia – CPI
  • UK – GDP (Q2 prelim)
  • US – Durable Goods
  • US – Pending Home Sales
  • US – Crude Oil Inventories
  • US – FOMC monetary policy (statement only)

Thursday 28th July

  • US – Weekly Jobless Claims

Friday 29th July

  • Japan – CPI
  • Japan – BoJ monetary policy
  • Eurozone – Flash CPI
  • Eurozone – GDP (Q2 Preliminary Flash)
  • US – GDP (Q2 Advance)
  • US – Employment Cost Index
  • US – Michigan Sentiment (revised)

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