What are we looking at today:
- USD easing back: The Dollar Index yesterday broke above 105.00 for its highest level since December 2002. This move is just easing back slightly this morning.
- Indices attempting a rebound: After huge selling pressure in recent sessions, there has been a basis of support looking to form. However, already this support is looking tentative.
- Data trading: German ZEW in the European mid-morning is expected to improve slightly. However, the big risk event is the US PPI with market focusing squarely back on US inflation after the upside surprise in Friday’s CPI caused a huge risk appetite sell-off.
The upside surprise in US inflation has sent shockwaves through major markets. Markets had become comfortable with the prospect of 50 basis points hikes in the next two Fed meetings. However, suddenly the chatter is that this may not be enough. A rush to price for potential 75 basis points hikes has sent bond yields sharply higher (with an inversion re-emerging on the yield curve), a lurch back into the USD, and massive selling pressure across risk assets. Crypto has felt the full force of this move, but also equity markets too with Wall Street back into bear market territory (S&P 500 down over -20% from its January highs).
We are seeing some semblance of calm being restored this morning, with a kickback against the USD strength and a basis of support for indices. However, the fears over 75 basis points hikes will remain at least until Wednesday’s FOMC meeting. Subsequently, support for risk assets seems a little tenuous and tentative. This could just be a dead cat bounce. If the Fed announced a 75 basis points hike on Wednesday would send further shockwaves through markets.
The economic calendar focuses on the German economy and US inflation again. The German ZEW Economic Sentiment is expected to improve slightly in June but still remain negative at -27.5. Into the US session, inflation is again the theme, this time at the factory gate with the US Producer Prices Index. Both core and headline are expected to improve slightly, and this will take on added interest after the upside surprises in both headline and core CPI last Friday.
Market sentiment is looking calmer: Markets look more settled this morning after the recent rout on risk assets. However, moves look tentative and market still look nervous.
Treasury yields pulling back lower: The 2s/10s spread went negative yesterday (yield curve inverted). Both have unwound some of the sharp move higher this morning. But remain above 3.25%.
UK Unemployment increases: The headline rate picked up to 3.8% in April (from 3.7% in March) which was above the 3.6% expected. Average Weekly Earnings including bonuses have dropped to 6.8% (from 7.0%) which was below the 7.6% expected.
BoJ announces additional JGB purchases: The Bank of Japan has announced that it will buy an additional JPY 800bn (c. $6bn worth) of 5-year to 10-year Japanese Government Bonds. This was larger than previously expected. This will weigh on yields and should be JPY negative.
UK Government introduces the Northern Ireland Protocol Bill: This is an attempt to override parts of the original Brexit bill. However, the EU sees this as effectively a breach of international law. This will add to negative pressure on GBP.
Cryptocurrency remains volatile, trying to bounce: Bitcoin plummeted to below $21,000 overnight but has tried to rebound intraday. The day performance is still down over -1% from yesterday but is trying to recover above $23,000.
- German ZEW Economic Sentiment (1000BST) Consensus is looking for an improvement in the deterioration to -27.5 in June (from 34.3 in May)
- US PPI (1330BST) Consensus is expecting headline PPI to fall slightly to 10.9% in May (down from 11.0% in April, with core PPI falling to 8.6% (from 8.8%)
MAJOR MARKETS OUTLOOK
Broad outlook: A turnaround on previous sessions. USD is slipping back, and precious metals and indices are rebounding.
Forex: USD is giving back gains versus all major currencies this morning. The EUR and CHF are leading the recovery.
- EUR/USD is looking to rebound after three days of significant selling pressure. A bounce off 1.0396 this morning has kept the 1.0350 key May low intact, for now. This rebound has taken off as the European session has kicked in, moving through some minor resistance on the hourly chart. Unwinding from near-term oversold, the first resistance of any significance is at 1.0495. We would be looking for the rally to fizzle out before a preference to sell into the strength.
- GBP/USD has fallen sharply to break the crucial May low at 1.2155. Although the market has found a basis of support at 1.2106 we would be using any failed rallies as a chance to sell. With momentum bearish, and with downside potential, we see further tests of support and downside as likely. Initial resistance is at 1.2200/1.2210 before 1.2260/1.2320.
- AUD/USD accelerated lower to hit a low of 0.6910 before rebounding early today. This rebound is already starting to look a little tentative with resistance 0.6970/0.6990. Intraday charts suggest this is just a move that is unwinding oversold momentum and may therefore not be long until selling resumes for a retest of the lows. The key May low is c. 0.6830.
Commodities: Precious metals have seen wild swings in volatile moves since the US inflation and the dust is yet to settle. Oil looks to be regaining support from the trend channel again.
- Gold has seen huge intraday volatility since the US inflation data. Friday’s gains turned sharply lower again yesterday, with a fall of -$53. This has broken the trading range support at $1828/$1837 and if a rebound from $1810 this morning starts to falter around here, it would be a negative confirmation which would favour selling into strength. Once the market settles from this phase of volatility we will see more of a decisive outlook.
- Silver has been volatile in recent sessions but there has been a trend of lower highs in the past week and a bias of selling into strength. A close below $21.28/$21.42 turns the outlook corrective and if this morning’s rebound starts to falter in the $21.28/$21.43 range (old support becomes new resistance) then we would favour short positions for a test of $20.45. Resistance at $22.00 is now a key lower high.
- Brent Crude oil has re-affirmed the one-month uptrend channel as yesterday’s rebound from$120.40 bolstered the support of the channel. A tick higher again today will encourage the bulls for a test of the resistance at $126.35. Initial support at $122.75.
Indices: Wall Street dropped sharply to breach crucial supports of the key May lows.
- S&P 500 futures closed below the key support at 3807 yesterday to form a new 16-month low. This has opened the downside of the next leg lower towards the next support band 3655/3720. There is a mild rebound early today but how the market now reacts around 3807 will be key, as this is a basis of resistance. Any stuttering bull failure would likely be another chance to sell. There is a gap still open at 3895 leaving a resistance band 3807/3895.
- German DAX has sold off sharply but is beginning to steady above the support of the key May low at 13,270. However, resistance lies overhead now between 13,650/13,735 (a downside gap is open at 13,735 and needs to be filled), and given the now corrective momentum outlook, any bull failures could be pounced upon. A breach of 13,270 would re-open the March lows at 12,435 once more.
- FTSE 100 has fallen sharply into the key medium-term 7157/7227 support band of old May lows. For now, this level is holding as the market is consolidating this morning, but a breach opens a much deeper correction. Subsequent support is at 7051. Initial resistance is at 7292/7364.
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