Espresso Morning Call: Sentiment hit by higher yields & USD

What we are looking at

• Higher yields are helping USD to strengthen once more. Cautious sentiment plays into this move.  
• GBP falling: UK PM Johnson wins the confidence vote which leaves his position as Prime Minister safe for the time being. However, the vote leaves the Conservatives deeply divided over support for their leader.
• AUD outperforming after hawkish RBA hike: A 50bps hike was more than expected. AUD is benefitting from this today.  
• Indices leaking lower again: Selling into the close last night on Wall Street is continuing this morning.  
• Data trading: UK final Services PMI is expected to be unrevised. The US Trade Balance is expected to recover in April after a sharp increase in the deficit in March.

Overview

Markets are trading with caution once more. US bond yields moving higher are helping to strengthen the US dollar once more and this is putting the shackles on the recent recovery in equity markets. There is now a lack of conviction as indices swing first one way and then the other on seemingly an almost daily basis now. This makes for tricky positioning for any traders taking anything other than an intraday view. 

UK Prime Minister Boris Johnson has won a confidence vote forced by his own MPs. However, at what cost? His party is now more divided than ever with 41% of his MPs voting against him as a leader. Keeping in mind that 170 of the 359 Conservative MPs are directly on the Government payroll, this will make for an uncomfortable time ahead for Johnson. Elsewhere, overnight, the Reserve Bank of Australia has hiked rates by more than expected. This is helping to support the Aussie dollar.

It may be a little quiet on the data front for the economic calendar again today. The UK Services PMI is a final reading for May and is expected to be unrevised, as is the final Composite PMI. The US Trade Balance might spark some USD moves a little later. A strong recovery is expected in April after a huge increase in the deficit in March. However, with data fairly backwards looking the market impact may be limited.

Today's news

Market sentiment looks cautious: With bond yields higher and the USD strengthening, a risk positive bias has ebbed away from markets. This is weighing on indices and cryptocurrencies.  

Treasury yields around 4-week highs: Yields moved sharply higher yesterday and are consolidating around these levels today.  

UK Prime Minister Johnson survives confidence vote: Johnson “wins” his confidence vote of Conservative MPs by 211 (59%) votes to 148 (41%). The size of the rebels is considered to be larger than expected and shows a divided Conservative Party. GBP is unreactive initially.  

RBA hikes rates by 50 basis points, more than expected: The Reserve Bank of Australia had been expected to hike by +25bps but went more aggressively. The RBA believe that inflation has increased significantly and is set to be higher than expected just a month ago. The RBA will do what is necessary to ensure that inflation returns to its target.  

China re-opening continues: The Shanghai Port daily volume has improved to c. 95% of its normal levels.  

Cryptocurrency swings continue: Crypto has been swinging around in recent days. Sessions of sharp gains are once more subject to retracement moves. Bitcoin was over +6% yesterday but has fallen back by as much this morning. It is back below $30,000 once more.  

Economic Data:

• UK final Services PMI (0930BST) – The final May reading is expected to be unrevised from the flash reading of 51.8. This is down from 58.9 in April. The final Composite PMI is expected to be unrevised at 51.8 as a result.
• US Trade Balance (1330BST) – The deficit is expected to improve to -$89.3bn in April (from -$109.8bn in March.

Major markets outlook

Broad outlook: USD gaining once more, with AUD also performing well after the RBA rate hike. 

Forex: USD gaining once more, with AUD also performing well after the RBA rate hike. The JPY and NZD are the main underperformers.

• EUR/USD is drifting back from the resistance band 1.0750/1.0800 once more. The selling pressure is muted but it is on the way toward testing the key 1.0600/1.0640 support band. These will be the key levels to watch in the days ahead (the ECB meeting and US inflation will be key). 
• GBP/USD has been increasingly testing support around 1.2460/1.2470 in recent days, with GBP pressured lower in the wake of the growing UK political risk. A spike to 1.2430 has rebounded initially today but a close below 1.2460 would open the move lower once more. The next support is then 1.2330  before the crucial low at 1.2155. Resistance is growing at 1.2575/1.2590.
• AUD/USD The Aussie has been swinging around in the wake of this morning’s RBA rate hike, but from a technical perspective, the move lower in recent days has now broken the near four-week uptrend. The pair is unwinding back towards initial support around 0.7125/0.7140. Resistance at 0.7282 is growing, whilst 0.7246 could become a lower high. 

Commodities: Precious metals have been far more uncertain recently, whilst oil is easing back from the March high.

• Gold has turned into a choppy range play on a near term basis. Falling over at $1874 on Friday has left the price in a two-week range above $1828 support. RSI momentum is also reflecting this uncertainty, whilst even this morning’s price action is too, trading around the flat-line. We look for a break above $1874 or below $1828 for direction.
• Silver has also developed into a choppy range play in recent weeks. Support is holding around $21.28/$21.43 but the moves into $22.25/$22.50 continue to fail. We look for a breakout for direction.
• Brent Crude oil has rallied in recent days back towards the March high of $24.40 but once again faltered yesterday, forming a candlestick with a bearish bias to question the run higher. Support at $120.80 will be an initial gauge today whilst a move below $118.25 would see positive momentum lost again. For now, the daily chart shows positive momentum on the RSI, but a second negative candle would add doubt over a breakout.

Indices: Wall Street remains choppy above breakout support, but recent moves suggest the sellers are mounting again. 

• S&P 500 futures have been trading broadly above the 4100 pivot area in recent days, however, the rally has stalled and daily candlestick analysis would suggest the sellers are winning the intraday battle. This adds downside pressure on the support band 4072/4100 and a closing break of this would be a breakdown again. Initial resistance is 4168.

• German DAX is still building in its recovery uptrend following the breakout above 14,320 (which is now a basis of support). Momentum retains a mild positive bias and the run of near term higher lows and higher highs points towards a move towards a test of resistance at 14,800/15,000. Initial support is at 14,435. 
• FTSE 100 is holding up well, but there are concerns that moves into the resistance band of several key highs in 2022  between 7624/7695 consistently get hit by profit-taking. Momentum retains a slight positive bias but also suggests that upside is a struggle. Initial support is now at 7518.

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.