What we are looking for
- USD recovering after sharp decline: A massive bear key one-day reversal on the Dollar Index yesterday is a big near-term corrective signal. How the buyers react to this morning’s rebound could be key now.
- GBP remains volatile: Despite the Bank of England (BoE) moving to ease systemic risk in UK Gilts, GBP remains very volatile. It is leading major forex lower again today.
- Indices fall over: The sharp intraday rallies of yesterday and a strong close on Wall Street have faltered today, with selling pressure taking hold once more on US futures. How the bulls react to this disappointment will be key.
- Commodities fall back: After yesterday’s rebound, we see metals and oil back lower. With silver leading the way lower this shows it is a risk negative move.
- Data trading: EUR traders will be watching the sentiment gauges but also German inflation for hints of the euro area inflation tomorrow. It is a light US data calendar, but USD traders will watch for the Fed speakers. GBP traders will be glued to the speech from Dave Ramsden of the Bank of England.
There was a decisive turnaround in sentiment on the back of the move by the Bank of England yesterday. With systemic risk rising, UK pension funds have been at risk of liquidation amid a massive sell-off on their UK Government (Gilt) holdings. The BoE moved to buy Gilts. This has pulled yields sharply lower, and at least temporarily eased the systemic risk but also the risk of contagion. Major financial markets responded decisively, with a big USD correction, whilst commodities and indices rallied sharply.
However, this morning we are seeing this recovery in risk appetite souring once more. How traders respond to this early disappointment will be an important gauge now. If they see the Bank of England as the first of many central banks flinching in their massive hawkish positioning, this could induce a risk rally. The first step of this would be to see this morning’s decline in major forex, commodities and indices as an opportunity, rather than the start of another leg lower in the bear market. Looking at the strong USD rebound along with the declines in US futures and European equities, the moves look a little ominous right now.
It is a mix of Eurozone sentiment gauges and central bankers on the economic calendar today. There is a range of Eurozone Sentiment gauges this morning. All are expected to show continued deterioration in the economic outlook. Traders will also be watching out for German HICP inflation which is expected to jump towards 10%. US Jobless Claims are forecast to increase slightly, although claims have been lower than forecast in each of the past 8 weeks. Aside from the data, there is also another wave of Fed speakers. Arch-hawk James Bullard is speaking, along with Loretta Mester (another hawk) and the slightly dovish Mary Daly. Also, watch out for the Bank of England’s Dave Ramsden who dissented at the last meeting in voting for a 75bps hike.
Market sentiment turns sour again: The USD has rebounded strongly on major forex this morning, with commodities and equity markets sharply back lower again.
Treasury yields are rebounding strongly: The US 10-year yield posted a massive bearish key one-day reversal yesterday. However, a decline of -26bps is being followed by a +14bps rebound this morning.
The Bank of England steps in: The BoE bought £1bn of long-dated Gilts (above 20 years) yesterday. Although this was lower than it was prepared to buy, it will conduct buying operations every weekday until 14th October. The UK 30-year Gilt yield dropped from around 5.00% to close the day at 3.93%. However, yields are rising once more this morning, with the 30-year at 4.08%.
Cryptocurrencies fall over with risk appetite: Crypto has dropped back this morning. Bitcoin is -1.3% at $19300 whilst Ethereum is -2.4% at $1318.
And more Fed speakers: The FOMC’s chief hawk Bullard (2022 voter, very hawkish) speaks today at 13:30 GMT. The FOMC’s Mester (2022 voter, very hawkish) speaks at 17:00 GMT, with Daly (2024 voter, leans dovish) at 20:45 GMT.
- Eurozone Economic Sentiment (at 09:00 GMT) Sentiment is expected to have deteriorated to 95.0 in September (from 97.6 in August)
- Eurozone Industrial Sentiment (at 09:00 GMT) Industrial sentiment is forecast to have dropped to -1.0 (from +1.2)
- Eurozone Services Sentiment (at 09:00 GMT) Services are forecast to fall to +7.0 (from +8.7)
- German HICP inflation (at 13:00 GMT) German inflation is expected to increase sharply to +10.0% in September (from 8.8% in August)
- US Weekly Jobless Claims (at 13:30 GMT) Claims are expected to have increased only slightly to 215,000 in the past week (up from 213,000 previously)
Major markets outlook
Broad outlook: After yesterday’s sharp risk rally, sentiment has soured this morning, seriously questioning the recovery prospects.
Forex: USD is significantly rebounding across major forex, with the AUD, NZD and GBP leading the underperformers.
- EUR/USD posted a huge bullish engulfing candle yesterday, but the recovery prospects are being seriously questioned already this morning as the market falls over. Clearly, this is a highly volatile moment for currencies and we need to see how the bulls react to the disappointment of the early decline. If this move is supported and bought into then it could provide the basis for a sustainable near-term recovery. Support of the key low is at 0.9535. Resistance at 0.9750 will now be key.
- GBP/USD has a higher low at 1.0538 above the spike low of 1.0327. However, volatility is elevated and the market has dropped back from 1.0915. This now becomes the key resistance for a recovery to take hold. In light of this morning’s decline, if this move lower is bought into and 1.0915 can be overcome, then there is plenty of room for a near-term recovery.
- AUD/USD posted a big bullish engulfing candle from the low at 0.6363 yesterday. However, the early decline this morning will need to find support quickly otherwise the positive implications of the move yesterday will evaporate. Resistance at 0.6530 is now key to recovery.
Commodities: The big positive recovery signals of yesterday are already being questioned on precious metals. Oil has failed at resistance.
- Gold posted a big bullish engulfing candle at $1615 yesterday and swung decisively higher. However, the move is already being questioned this morning on a bull failure at $1662. This now becomes the key resistance to a near-term recovery. The overhead supply at $1680/$1691 is also still a big barrier to recovery. Reaction to this pull lower this morning will be an important gauge.
- Silver has rebounded sharply with a bullish engulfing candle, but the move is faltering in the resistance between $18.77/$19.05. Also with the RSI failing under 50 this questions how far a rebound could go. There is still room for a bounce within the big 5-month downtrend but questions are already arising over how far a recovery can go. The low at $17.96 is now key.
- Brent Crude oil has recovered well in the past two sessions, but old support continues to act as new resistance. The previous September lows between $88.25/$89.75 are the basis of overhead supply. This coincides with the resistance of a four-week downtrend too. We still favour selling into strength for a retest of the $83.55 low.
Indices: The attempted rally on equity markets is being smashed early this morning.
- S&P 500 futures rebounded impressively from 3613 to effectively defend the old key June low (which was at 3639). However, already this morning we are seeing the rally falling back again. This is still a highly volatile market and how the buyers respond to this disappointment this morning will be key. If this is bought into and support can again form above 3613/3639 support, then a potential recovery could take hold. Resistance at 3750 will be key now.
- German DAX engaged a strong intraday rally into the close yesterday. This has left a low at 11849. However, rallies continue to look on shakey ground and the early decisive fall over will seriously question recovery prospects. Intraday technicals (four-hour chart RSI) look to still be suggesting that rallies are a chance to sell. The low of yesterday will need to hold in the least. Additionally the reaction high at 12309 also becomes key. How the market reacts to this morning’s decline will be key.
- FTSE 100 has fallen sharply back this morning. After posting arguably a bull hammer candle yesterday from a low at 6837, a sharp decline early this morning seriously questions the recovery prospects. How the market settles and reacts to this early disappointment will be key. A close at a new low will scupper any immediate recovery prospects. The resistance is building between 7034/7079.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.