What are we looking at today:
- USD correction remains on track today: There has been a shift in broad market sentiment, with equity markets falling back again. However, the USD correction which has been playing out over the past week remains on track this morning.
- Indices falling back: Another lurch of selling pressure has hit NASDAQ, weighing on Wall Street markets overnight. How markets react to this renewing downside will be key. There had been signs of support building in recent days. This is an important test of whether rallies are still a chance to sell.
- Crypto is holding up well today: Negative risk appetite has tended to hit cryptocurrencies over recent months, but they are holding up well today. Bitcoin is trading around flat, although under the $30,000 levels once more.
- Data trading: It is a day of flash PMIs today for major economies. With Australia, Japan, and the Eurozone already out, the UK data is next and will elevate volatility for GBP, with the US later this afternoon impacting the USD and broader risk appetite. The Composite data is the key takeaway.
There has been a swing back towards a negative risk bias overnight. A profit warning from US tech stock Snap has weighed on NASDAQ futures, with the associated drag back on the S&P 500 futures and slightly less so, Dow futures. European indices are seeing their recent recoveries waning as a result. The sustainability of this early decline today will help to paint a picture of whether near-term rallies remain a chance to sell.
However, it is interesting to see that there is no notable strengthening of the USD on the back of this souring of risk appetite. The JPY is performing well (helped by the upside surprise in Japanese flash PMIs), but so is the EUR (buoyed by a speech from ECB President Lagarde), whilst GBP is stable. Although the commodity currencies are slipping back slightly, the corrective move on the USD over the past week remains on track. This is also allowing the recovery of precious metals to be sustained.
The flash PMIs dominate the economic calendar today. With Australian, Japanese, and Eurozone data already out, traders will be bracing themselves for the UK this morning and US data later. With inflation soaring in the UK, the services data is likely to be a sizeable drag on the overall Composite which is expected to be dragged down by almost 2 points. For the US, the deterioration is expected to be more moderate. Any surprises will move markets. Elsewhere, New Home Sales and the Richmond Fed Manufacturing will be watched. However, there is also a speech by Fed Chair Powell to watch in the middle of the US session.
Market sentiment has soured: Indices are especially feeling the weight of a deterioration in risk appetite. Although the JPY is performing well, this may have
Treasury yields have dropped slightly: Negative sentiment is helping to pull yields slightly lower, but only by -3 or -4 basis points on the 2-year and 10-year yields.
Australian flash PMIs fall sharply: The Composite PMI has fallen to 52.5 (from 55.9) missing expectations of 55.0.
Japanese flash PMIs were slightly better than expected: The Composite PMI has ticked higher to 51.4 (from 51.1) having been expected to fall to 50.5.
Eurozone flash PMIs have come in slightly below estimates: The deterioration in Eurozone flash Composite PMI to 54.9 (from 55.8) is slightly below the 55.3 forecasts.
ECB’s Lagarde boosts the EUR: The ECB President has set out the terms for the end of negative rates. She says that rates are likely to be positive after Q3
Fed Chair Powell eyed: Powell always has the power to move markets, and he has done in recent weeks. On the last two occasions, markets reacted to a slight dovish hint which helped to improve broad sentiment, but then subsequently he remained fairly hawkish. With inflation pressures beginning to recede his comments today will be key. The speech is scheduled for 1720BST.
Cryptocurrencies holding this morning: Despite a late decline in yesterday’s US session, cryptos are relatively stable today. Bitcoin has slipped back but remains steady above initial support at $28,600. Resistance is building between $30,700/$31,400.
- UK flash PMIs (at 0930BST) The May Composite is expected to fall to 56.5 (from 58.2) driven by a decline in Manufacturing to 55.0 (from 55.8) and a deterioration in Services to 57.0 (from 58.9).
- US flash PMIs (at 1445BST) The May Composite is forecast to fall slightly to 55.5 (from 56.0) with Manufacturing falling to 57.5 (from 59.2) and Services falling to 55.2 (from 55.6).
- US New Home Sales (at 1500BST) A decline of -1% is forecast to 755,000 in April (from 763,000 in March)
- Richmond Fed Manufacturing (at 1500BST) A slight reduction to +12 is expected in May (down from +14 in April).
Major markets outlook
Broad outlook: Sentiment has turned negative, weighing on indices and to a slight extent with commodity currencies underperforming.
Forex: USD has not strengthened despite the negative risk sentiment today. JPY is outperforming, whilst NZD is underperforming.
- EUR/USD broke sharply above 1.0640 and has continued the move in the wake of comments from Lagarde. Moving decisively clear of the resistance at 1.0640 has opened a test of 1.0750/1.0800. There is also now support at 1.0640/1.0675.
- GBP/USD continues to sustain the recovery and is positioning for a test of the key resistance at 1.2640. A breakout above resistance would be a breach of the first lower high in the sell-off and a key signal of sustainability of the recovery rally. Support is building at 1.2435/1.2525.
- AUD/USD continues to recover. Having broken a downtrend dating back to the beginning of April the pair is building higher off a recovery uptrend of the past eight days. A slight early decline this morning is looking to build off breakout support at 0.7030/0.7070. Initial resistance is 0.7125 above which opens 0.7160 whilst 0.7265 is the key lower high.
Commodities: Precious metals continue to build on the recent improvement. Oil trades with a slight positive bias within the seven-week range.
- Gold continues to build on a series of positive candlesticks in recovery and is looking for a move clear of $1858 to be the next step in recovery. A decisive move above $1858 opens $1890 as the next resistance. Support at $1832 is the first important higher low in recovery now.
- Silver has been less decisive in recovery than gold as resistance is still yet to be breached which would break the shackles. The barrier is now between $21.95/$22.19. Above here would complete a base pattern and imply $23.27 as the next key test in a recovery. The key higher low in this recovery is at $21.28, with initial support at $21.60.
- Brent Crude oil looks to be faltering once more around the resistance of a now eight-week trading range between $99/$116. Three positive sessions in a row have just eased back from around $114.50 this morning, just shy of the $116.15 resistance. We continue to play the range and if there is a breach of $111.20 initial support this could open another retreat to the mid-range pivot area between $105/$107.
Indices: Wall Street is being dragged back this morning, with European markets also weighed down.
- S&P 500 futures had been looking strong in recovery until the overnight drag lower. This is now threatening the higher low at 3906 and a decisive breach of this initial support would effectively re-open the 3807 low from last Friday. The psychological damage would also be that rallies remain a chance to sell and the prospect of a sustainable recovery remains some way off.
- German DAX had been looking good for a test of the resistance at 14,260/14,320 but the overnight selling pressure weighed on the index once more. For now, this is a minor blip in what still looks to be an improving outlook after the phase of selling into strength. This could be seen as an opportunity and if support quickly forms (ideally above the 13,675/13,885 support band) then the bulls will find increasing control of the market.
- FTSE 100 has just eased back this morning after two strong bull candles in recent days. Initially, the early weakness is looking to build support in the band 7407/7437, whilst 7322 is a higher low. However, resistance is building at 7520/7545 too, to retain what is still a mixed and uncertain outlook.
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