- The sharp rise in bond yields has been a huge driver of markets in recent weeks, however dovish comments from the ECB suggest concern in the central bank over the euro’s rise and could now be ready to turn around this move. ECB council member Benoit Coeure has said that the ECB is ready to front load QE purchases into May and June. He also said that it was possible for deposit rates to move further into negative territory. This jawboning has certainly worked this morning with Eurozone sovereign debt yields sharply lower, as is the euro, along with Eurozone equities sharply higher. However, will it last? Watch for the key support at 0.526% on the German 10 year Bund yield breaking to confirm the end of the bull run on yields.
- Greece continues to rumble on as a concern. There have been mixed messages coming out over progress being made with the Brussels Group (its international creditors). Greek Prime Minister Tsipras suggests they are close to a deal, but other reports from the ECB suggest less certainty. The EU’s Jean-Claude Junker expects an agreement to be reached by the end of the month or in early June. They best had hurry up as Greece owes just short of €6bn in June alone. Greece till needs the final €7.2bn bailout tranche to pay debts and public sector workers. As ever this is set to rumble on and as yet they seem no closer to an agreement. The markets seem to be largely ignoring Greece as a n issue for now. It will be a very different story when the situation comes to a head though. That is when the volatility will pick up dramatically.
- The dollar has strengthened in front of the FOMC minutes tomorrow. There has been continued weakness in the US economic data in recent weeks and this is not helping the case for tightening which continues to be pushed back. The minutes are not expected to do too much other than put more meat on the bones of the discussion over how “transitory” the poor economic data is. US inflation on Friday will also be interesting as it is likely to reflect a lack of pricing pressure as yet. The Dollar Index (DXY) has started to rally, but as yet there has been no important technical move seen and it could be a case of just unwinding some oversold momentum.
- Sterling is under pressure by a first dip into deflation (-0.1%) in over 50 years. With core inflation also unexpectedly lower (to 0.8%) sterling is lower. However I still see this as a temporary move with economic data tending to be more supportive and positive for the UK in recent weeks.
- Wall Street is breaking into new high ground, but on what? The economic data has been disappointing, and Treasury yields have been higher largely due to an accelerated bond market sell-off, both of which are a concerning. For now markets are trading on bad news is good, but this is certainly not the basis of a sound rally. European equities have been highly volatile during this bond market sell-off which has put them under pressure. There are clear negative correlations between bond yields and equity markets performance.
- In other events, watch for Bank of England meeting minutes, the China flash manufacturing PMI to drive risk sentiment and the German Ifo Business Climate.
- Watch for: FOMC meeting minutes, US inflation
EUR/USD – Support at $1.1130 is key near term for the bulls with $1.1035 the crucial support
- The comments from the ECB jawboning the euro lower today have had a significant impact on the outlook. If this continues to put pressure on the euro the rally on the euro will be over. The FOMC meeting minutes could also be key on Wednesday, although the consistent deterioration of the economic data in the past few weeks will have taken some of the impact off any hawkish lean. US inflation on Friday could also be crucial.
- The big support is the band $1.1035/$1.1065 and this needs to hold intact. If the rate can maintain this support then the outlook for a recovery remains positive and the bulls can look back towards $1.1450/$1.1530 resistance band.
- Watch for: Greece & Eurogroup developments, FOMC, US CPI
GBP/USD – Support band around $1.5350 needs to hold
- There has been an incredibly strong reaction to the UK falling into deflation for the first time in over 50 years. I would say this could be justified normally, but the Bank of England has largely touted this already.
- The neckline support of the big base comes in at $1.5550 with support also back around $1.5500. The bulls would not want to lose this support on a closing basis. The sell-off is over 150 pips so far today but I see this as quite an extreme move. The key support is a reaction low (from Non-farm Payrolls day) at $1.5350.
- Watch for: Bank of England meeting minutes, also FOMC minutes, US CPI
USD/JPY – Range trade continues between 118.30/120.85 (pivot around 119.40)
- Markets are not expecting anything significantly hawkish from the Fed minutes and with Japanese GDP is likely to show continued gradual fall back in Japanese GDP there is unlikely to be too much action on a pair that has traded sideways now for a couple of months.
- There is little sign of a breakout still, with classic range trading signals continuing. Support comes in at 118.30 and up towards the resistance at 120.84. There are tighter levels within the range, whilst the medium term pivot level at 119.40 continues to play a consistent role as a turning point in the range.
- Watch for: FOMC minutes, Japanese GDP and US CPI
Gold – The range between $1170/1224 continues
- Gold was breaking higher just until the dollar started to strengthen again and this has acted as a drag on gold. The prospect of a breakout and upside on gold remains though with upside pressure still on Treasury yields despite a lack of inflationary pressure, the market may be looking still for gold as a safe haven play.
- A closing breakout above $1224 has been seen but with a lack of conviction so far. This conviction needs to be seen with momentum pushing higher and a strong daily candle breakout. So far the move is consolidating but the potential for an upside break remains. A clean breakout would imply a move towards $1270.
- Watch for: The dollar stumbling again with the negative correlation back in play.
Indices – Wall Street breaking higher, will it last? DAX negative correlation with the euro, FTSE still rangebound
- S&P 500 – the move to a new all time high has not been on the back of anything more really other than the “bad news is good” of US economic data. This leaves me worried about the longevity of the move. Momentum indicators are failing to really confirm the move. Supports at 2068 and 2086.
- DAX Xetra – Significant volatility but the sharp weakness on the euro is significantly benefitting the DAX. Call the euro right and you will call the DAX right. DAX has broken above 11,710 to re-open key medium term resistance at 12,051.
- FTSE 100 – There has been little real traction gained despite the positivity of a Conservative election victory. FTSE 100 is far less volatile than the DAX as it very much underperforms on the bullish days and outperforms on the bearish. However there is a sense of a rangeboud market once more. Key near term resistance at 7084. Support at 6885.
WATCH OUT FOR THIS WEEK
Tuesday 19th May
- US – Building Permits
- US – Housing Starts
Wednesday 20th May
- Japan – GDP (prelim)
- UK – BoE meeting minutes
- US – Flash Manufacturing PMI
- US – Crude Oil Inventories
- US – FOMC meeting minutes
Thursday 21st May
- China – Flash Manufacturing PMI
- Eurozone – Flash Manufacturing PMI
- UK – Retail Sales
- US – Weekly Jobless Claims
- US – Philly Fed Manufacturing Index
- US – Existing Home Sales
Friday 22nd May
- Japan – BoJ monetary policy
- Eurozone – German Ifo Business Climate
- US – CPI
- Canada – CPI
Tuesday 26th May
- US – Durable Goods Orders
- US – Consumer Confidence
- US – New Home Sales
Wednesday 27th May
- Japan – BoJ meeting minutes
- Canada – BoC monetary policy
Thursday 28th May
- US – Weekly Jobless Claims
- US – Pending Home Sales
- US – Crude Oil Inventories
Friday 29th May
- Japan – CPI
- Japan – Industrial Production
- Switzerland – GDP
- UK – GDP (second reading)
- Canada – GDP
- US – GDP (preliminary)
- US – University of Michigan Sentiment (revised)