Espresso Morning Call: Risk-off as indices fall once more

What are we looking at

• USD is consolidating after strong gains yesterday: There is a sense of consolidation this morning, however, this could just be a pause for breath after the USD has regained upside momentum in recent days
• Indices selling off once more: Wall Street has fallen for the past three sessions (although only minor losses yesterday) and the selling pressure is taking hold once more overnight. This could be a bout of month-end, quarter-end squaring of trading books though.
• Data trading: It is a fairly quiet European morning after the overnight data. However, in the US session the Fed’s preferred inflation gauge, the core PCE, is announced. A headline PCE increase is forecast whilst the core PCE is expected to drop slightly, similar to the CPI data a couple of weeks ago.

Overview

As we hit the end of the month and the end of the quarter, we are seeing selling pressure ramp up once more on equity markets. This could be a case of squaring off of positioning into the period end, whilst trades start with a clean slate tomorrow. However, the broad appetite for risk remains negative and selling into strength has been the consistent mantra for 2022. Bitcoin is off -4% and decisively below $20,000 just adds to the concern across cryptocurrencies. Elsewhere, after regaining strength in recent sessions, there is a mixed feel to major forex and commodities. However, once more, the trends of USD strength remain firm.

It is interesting to see that the China official PMIs came in much better than expected overnight. This was driven by a jump in the Non-Manufacturing readings, driven in part by the easing of lockdown restrictions. This is not impacting major market sentiment today but as the dust settles for the beginning of the new quarter tomorrow, it may begin to factor into risk appetite.

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After a relatively quiet European morning for the economic data, into the US session, the focus is on inflation and jobs. The Fed’s preferred inflation gauge is the core Personal Consumption Expenditure. The PCE data for May is announced a couple of weeks after the CPI inflation and as such can lose some of its impact. Analyst expectations suggest that, just like the CPI, the headline inflation for PCE will increase, whilst the core PCE is forecast to decline slightly. On the jobs front, the weekly jobless claims are expected to be at similar levels to last week, whilst the continuing claims are forecast to drop slightly.

Today's news

Market deteriorates again: Although forex and commodities are mixed and are in consolidation, we see a sharp sell-off taking hold of equity markets again. US futures are down well over -1% whilst European indices are -2% in early moves. 

Treasury yields falling: A slight “bull steepener” (shorter-dated yields falling more than longer-dated yields), with the US 2yr yield -5bps and the 10yr yield -3bps.

Chinese official PMIs: A big jump in the June Composite PMI to 54.1 was much higher than the previous 48.4. Although Manufacturing was lower than expected there was a big increase in the Non-Manufacturing data to 54.7 which was well ahead of the 50.5 forecast.

Final UK Q1 GDP: The third reading was in line with expectations and no change from the second reading at +0.8%

Cryptocurrencies falling again: Bitcoin fought back to restrict intraday losses yesterday, but the price is down another -4% early today. This is decisively below $20,000 now. The key mid-June low was $17,585.

Economic Data:

• US Personal Consumption Expenditure (1330BST) Headline PCE is expected to increase to 6.7% in May (from 6.3%) with core PCE expected to fall slightly to 4.8% (from 4.9%)
• Weekly Jobless Claims (1330BST) Claims are forecast to fall slightly to 228,000 (from 229,000 in the previous week).
• Canadian GDP – for May ( (1330BST) MoM GDP is expected to be +0.1% (after +0.2% in April)

Major markets outlook

Broad outlook: Sentiment deteriorated yesterday and is looking negative again today. Despite a mixed outlook for forex and commodities, we see indices sharply lower once more.

Forex: A sense of early consolidation on forex, although the JPY outperformance reflects the risk negative outlook of major markets. 

• EUR/USD has failed at the resistance around 1.0600/1.0640 with the outlook having deteriorated once more with a breach of initial support at 1.0470. With two strong negative daily candles in a row, the momentum is once more growing to the downside and a decline to retest 1.0350 appears increasingly likely now. There is now a band of initial resistance of 1.0470/1.0535 which will be seen as a near-term sell-zone.
• GBP/USD has tailed off from the 1.2330 resistance area in recent days and has now broken under support at 1.2160. This is another sell signal and continues the negative trend where rallies are used as a chance to sell. This has re-opened a test of the 1.1933 low. There is a band of resistance now between 1.2160/1.2215. Resistance at 1.2405 is key.
• AUD/USD continues to post lower highs within a sharp trend lower over the past four weeks. This is once more putting pressure on the support band 0.6830/0.6870. With a faltering look to the RSI (struggling around 40/45), the rallies continue to look like a chance to sell. The resistance at 0.6965 is mounting. 

Commodities: Precious metals continue a negative drift as the recent recovery in oil is tested.

• Gold continues with its negative bias and once more another negative close last night. This is bolstering the 4-month downtrend (c. $1848) and lends a negative bias to the 6-week trading range. A drift towards a test of the $1805 mid-June low remains likely, but we are watching the RSI for consistent moves below 40 which would suggest a  move back towards a test of the May low at $1786. Lower highs continue to be posted, with $1833 initial resistance before $1841 and $1848. Above $1857 would be needed to start an improvement in outlook.
• Silver fell over at $21.53 to continue a run of lower highs and is now looking to test the support of a 6-week trading range ($20.45/$22.50). The RSI is in negative configuration, but not calling for breakdown yet. We retain our preference to sell into strength for continued pressure on the $20.45/$20.60 range lows. Initial resistance is at $21.05 with $21.53 strengthening too.
• Brent Crude oil outlook has improved in recent days following the break back above the mid-range pivot area of $112/$116. However, an unwinding candle yesterday has questioned the continuation of the upside. Near-term technicals suggest that there is still an upside bias whilst the support at $114.10 remains intact. Initial resistance is now yesterday’s high at $119.65.

Indices: Indices are sharply deteriorating once more. 

• S&P 500 futures did well to consolidate following the negative implications of Tuesday’s big “bearish engulfing” candlestick reversal (bear key one-day reversal) from 3950. However, selling pressure has ramped up overnight and an 8-day uptrend has been broken. A move below 3800 also turns the market decisively corrective again. The next support is 3735 with 3693 being the higher low protecting the 3641 June low. Initial resistance is at 3840.
• German DAX has fallen sharply lower since faltering around the resistance between 123,210/13,430. Two consecutive bull failure candles have been followed by a sharp negative session yesterday and further selling pressure today. The support of the 12,822 low from last week has been breached this morning and the next support is the key March low at 12,436. There will now be an overhead supply between 12,825/13,105 which may become a near-term sell-zone. 

• FTSE 100 has been holding up well in recent sessions whilst other peer indices have fallen away. However, the market has buckled this morning and fallen away. Moving below 7200/7215 support leaves the market open for another decisive swing lower, with the lows around 6970/6995 potentially set to come back into view. Resistance at 7370 is strengthening now.

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.