15-Apr-2020

1) Risk Appetite Takes a Turn, As Oil Tumbles
2) S&P500 Retraces Dragged by IMF’s Negative Outlook
3) GBP/USD Has Been Falling From the Heights
4) NZD/USD Pulls Below Trend line
5) Gold: Severely Overbought Conditions

 

 

1) Risk Appetite Takes a Turn, As Oil Tumbles

Crude oil has been hit hard this morning, as a massive drop in demand highlights the shortcomings of the OPEC+ production cut. Meanwhile, US banks are back in focus, with the looming recession likely to hurt the sector.

European markets are on the slide this morning, with risk sentiment taking a turn for the worst despite recent promise over a potential loosening of European restrictions on movement.  With many major stock markets having regained around 50% of their losses, the potential upside becomes less and less given the expectation of a sharp global recession this year. Notably, we have seen the dollar push sharply higher this morning, breaking back into a more bullish position. Given the negative correlation between the dollar and stocks, signs of dollar resurgence could bring a bearish period into play for stock markets.

Oil prices have grabbed the headlines once again this morning, with prices slumping despite the efforts of OPEC+ over the weekend. The latest IEA report does little to boost confidence in the sector, with demand looking set to plunge by a whopping 29m bpd in April alone. Whether today’s slump in oil prices serves to rally OPEC+ into another cut remains to be seen. However, with the group having difficulty achieving the 9.7m bpd cut, an inability to enact further restrictions would likely lead to further downside for the months ahead. In the UK, this crude slump has been most detrimental to those smaller producers on the FTSE 250, with the likes of Tullow and Premier Oil hit hard given that they will likely find it harder to weather this storm compared with the FTSE 100 majors.

On the earnings front, all eyes will be on the banks again today, as Morgan Stanley, Citigroup, Bank of America, and Goldman Sachs follow on from the financial theme seen after both JPMorgan and Wells Fargo posted sharp declines in earnings yesterday. The impact of this slowdown is clear for the sector, with many unable to pay loans given the freeze on business. With a sharp recession looming, it makes sense that we see the banks suffer as they typically thrive off a buoyant economy. However, with huge measure s put in place to mitigate the current slowdown, Societe General have switched their sell recommendation to buy for a number of investment banks.

Ahead of the open we expect the Dow Jones to open 395 points lower, at 23,555.

 

2) S&P500 Retraces Dragged by IMF’s Negative Outlook

The US benchmark S&P 500 retraces on Wednesday, accompanied by the bearish sentiment created by the IMF’s negative economic outlook published on Tuesday 14th, which warns that the current recession might be more profound than the Great Depression.

The Elliott wave short-term perspective shows the S&P 500 index advancing on a bullish wave that could correspond to a wave ((iii)) or ((c)) of Minute degree labeled in black, which began in early April when it found new buyers in the 2,430.5 pts.

In the 2-hour chart, we observe the US index developing a corrective structure of Intermediate degree identified in blue. This wave started with the high of wave (5) in blue at 3,398.2 pts, reached on February 20th.

Once S&P 500 found sellers in its record high, the price plummeted, taking it to the bear market territory and finding its bottom at 2,179.3 pts on March 22nd, where new buyers came in.

The ascending channel, on the other hand, shows that the short-term bias remains on the bullish side. Also, the RSI oscillator, moving above level 60, confirms the short-term upward bias. However, it is worth noting the bearish divergence shown by the oscillator. This situation leads us to suspect that the S&P 500 is near to complete the wave (iii) of Minuette degree identified in blue.

If this scenario were correct and S&P 500 is developing a diagonal ending pattern, then the index could find resistance in the area between the 2.866 and 2.902 sts, from where it should start to fall back.

In this context, a price decline leaves two control areas to be taken into consideration. If the price falls to 2,638.7 and bounces, then it is possible that the S&P 500 could make a new high, probably around 3,000 pts, and the current bullish sequence could result in a five- wave movement.

Now, if this happens, the next move should be a three-wave sequence. Consequently, the price could be forming a zigzag pattern, which has an internal structure 5-3-5.

The second scenario is given if S&P-500 retracement goes below the 2,638.7 pts. In this context, the S&P 500 index will have completed a three-wave sequence and thus a wave ((c)) of Minute degree. At the same time, considering the Elliott wave theory definition, the next movement would correspond to a three-wave sequence, and then we would observe a 3-3 formation in the S&P 500.

Consequently, this scenario would reveal that the S&P 500 would be developing a flat pattern or a triangle formation.

In conclusion, in the short-term, we expect a corrective movement that has two possible bearish extensions, so our preferred positioning changes from bullish to neutral. In the mid- term, we foresee a new bullish move, which could be of similar dimension to the current bullish wave; therefore, our positioning remains on the bull side.

 

3) GBP/USD Has Been Falling From the Heights

Sterling is stumbling – and for good reasons. While broad dollar strength alongside a retreat in stocks is also behind the slide in GBP/USD, there are three significant UK-related reasons for the fall.

What is the real scale of the disease’s death toll? A leap in UK mortalities – from all causes – implies that there are far more COVID-19 deaths than the ones confirmed. Deaths at care homes have been rising and fatalities in other places may also be lacking confirmation. The new statistics and estimation weigh on the pound.

According to Johns Hopinks’ tracker, the UK has nearly 95,000 cases and over 12,000 deaths from coronavirus.

The government is trying to ramp up testing for the disease, but the goal of 100,000 probes per day seems elusive. Without having the ability to test, it will also be hard to ease restrictions.

The British government is set to decide on extending the lockdown tomorrow. The dates that have been thrown into the air are May 3 and May 7 – and these may be extended later on. Apart from uncertainty related to testing, the lack of leadership is also an adverse factor.

Prime Minister Boris Johnson continues recovering in Chequers and Foreign Secretay Dominic Raab – who is deputizing for the PM – lacks the political clout. Ministers are clashing behind the scenes with some desiring a longer shuttering of the economy and others wanting to open it up. Keir Starmer, the leader of the opposition, has demanded a plan.

The Office for Budget Responsibility (OBR) published a scenario in which the economy shrinks by 35% in the second quarter and then rebounds. For the whole of 2020, the institution foresees a drop of 13% in Gross Domestic Product.

It also provided outlooks for a ballooning government deficit amid the economic damage and the fiscal boosts. Nevertheless, small businesses seem to be struggling with getting funds from the government.

Apart from these UK-related events, US retail sales for March are of high interest. The world’s largest economy has likely suffered a hit to consumption in the month when “stay at home” orders began.

See Retail Sales Preview: Can consumers stare down unemployment?

Later in the day, the Federal Reserve releases its Beige Book, which consists of economic reports from the Fed’s various regions and also serves as a hint toward the upcoming decision in two weeks.

Pound/dollar has fallen below the uptrend support line that accompanied it since hitting a low of 1.2165 last week. Upside momentum on the four-hour chart has waned. On the other hand, cable continues trading above the 50, 100, and 200 Simple Moving Averages.

Significant support awaits at 1.2490, which was a stubborn cap in late March. It is followed by 1.2385, a resistance line from last week and also where the 200 SMA hits the price. Next, we find 1.2280 and 1.2165.

Resistance is at 1.2580, which was a temporary stop on the way up, and by Tuesday’s peak of 1.2645. The next line to watch is 1.2720.

 

4) NZD/USD Pulls Below Trend line

NZD/USD stopped last week’s rally as the descending trend line and the 50% Fibonacci retracement of the decline stretched from the 0.6754 top proved hard to break once again, with the pair drifting south on Wednesday.

The falling RSI and the downside reversal in the Stochastics which have peaked in the overbought territory are discouraging signals and hence the focus may remain largely to the downside in the near-term unless the supportive area around the 38.2% Fibonacci of 0.5960 comes again to the rescue, pushing the price back towards the trend line. Otherwise, the pair may keep sliding, with the 0.5850 barrier and the 23.6% Fibonacci of 0.5770 being the next targets before all eyes turn to the 0.5600-0.5665 restrictive zone.

In the event the bulls return to the game, lifting the price above the descending trend line and particularly above the 0.6150 resistance, the door would open for the 61.8% Fibonacci of 0.6260. Slightly higher, the area between the 0.6325 number and the 200-day simple moving average (SMA) at 0.6380 will be closely watched by medium-term traders as any decisive close above that wall would upgrade the bearish outlook to a neutral one.

Summarizing, NZD/USD bears may dominate below 0.5960, while a clear break above the descending trend line could be the key for a more aggressive rally. In the medium-term, the negative trend may come to an end above 0.6380.

 

5) Gold: Severely Overbought Conditions

Gold we were buying in to weakness & doing so at support at 1710/09 certainly worked. We shot higher to beat 8 month trend line resistance at the 1721/23 in the bull trend & reached 1746.

Gold is now severely overbought with key resistance at 1730 today. It is possible we hold below here & consolidate gains to ease these conditions. Shorts remain too risky in the bull trend. Above 1730 re-targets 1737/39 before a retest of 1746/47. A break higher cannot be rules out, targeting 1752/54.

If we are to establish a sideways range we are likely to hold first support at 1722/20. Longs need stops below 1717 for a buying opportunity at 1705/03, with stops below 1700.

Silver holding strong resistance at 1590/92 in severely overbought conditions & could also establish a sideways trading range. Above 1600 however meets more minor resistance at 1618/22.

Holding strong resistance at 1590/92 as I suspect meets first support at 1545/35. Downside is expected to be limited but below here look for strong support at 1520/17. Longs need stops below 1512.