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Dow and EURUSD Fight for Top Chart and Breakout on COVID, Stimulus News

Dow and EURUSD Fight for Top Chart and Breakout on COVID, Stimulus News

2020-05-19 04:00:00
John Kicklighter, Chief Strategist
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Dow, EURUSD, Crude Oil Talking Points:

  • Reports that Moderna was seeing success in early results for its coronavirus vaccination trials hit market’s clear concern in pandemic news
  • More economically tangible was news that the EU’s biggest members – Germany and France – were of the same mind on joint bonds and 500 bln euros in stimulus
  • Which will be able to support break and a follow through given the headlines: EURUSD, Dow, USDRUB, AUDUSD – or perhaps none of them

Risk Assets Post Their Best Day in Weeks

Speculative sentiment seemed to kick off the week with a robust bullish lilt. With headlines suggesting a coronavirus vaccine was a step closer and Europe’s key leadership showing approval of next level stimulus measures, it seemed there were unmistakable stepping stones for investors to follow higher. Yet, it is worth asking now just as we have so many times before: is this truly fundamentals promoting a universal climb in sentiment or conversely market bias drawing out an explanation after-the-fact with limited intent for momentum? Through scope in the many benchmarks I follow to gauge risk appetite, there seemed a resounding signal of optimism. Global indices, emerging market assets, high-yield fixed income, carry trade and speculative commodities were all higher through Monday. Further adding a unique element to that advance, their didn’t seem familiar concentrated drive to those assets that have stood as risk ‘lightning rods’. For example, the blue-chip Dow’s 3.9 percent swell outpaced the tech-heavy 2.0 percent Nasdaq move.

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Chart of Dow Overlaid Nasdaq-to-S&P 500 Ratio (Daily)

Dow and EURUSD Fight for Top Chart and Breakout on COVID, Stimulus News

Chart Created on Tradingview Platform

A subtle preference for one benchmark over another, however, doesn’t take away from the fact that most of the milestones I watch for market appetite were higher this past session. That said, there have been broad bouts of enthusiasm over previous weeks that have emerged that have floundered before a genuine trend could take traction. Taking a look at the Dow, S&P 500, carry trade and other measures; chart patterns whereby ranges have been traverse but not broken are common. One or more of these standard bearers may post a break, but market conditions have not shown such technical developments to be very fruitful. The Dow has 25,000 as a upper bound to measure, but I’m looking at other areas where similar landmarks for conviction are at hand whether they advance or not. Among the counterparts, I’m impressed by the emerging market FX crosses. And, since Russia 1Q GDP is due today, USDRUB makes as interesting case as any.

Chart of USDRUB Overlaid with 100-Day Moving Average (Daily)

Dow and EURUSD Fight for Top Chart and Breakout on COVID, Stimulus News

Chart Created on Tradingview Platform

The Fundamental Themes Fostering Speculative Appetite

Overcoming lethargy is best served in my view by a high-profile fundamental argument to prompt risk taking even in the face of the harsh economic environment that we are currently marching through. EURUSD was a particularly adept measure for this Monday. Though the world’s most liquid pair was thus far covering a bullish leg in a well-formed range, the backdrop offered an optimist’s interpretation that Fed Chairman Jerome Powell’s assessment for US recovery in the second half of the year in his weekend interview could lay out an economic mooring for risk taking. The only thing that may have superseded that view was the news that German and French leaders had finally come to agreement on joint debt issuance and a $500 billion support program for Europe represented a missing critical global pillar. Yet, how many such large stimulus programs have been announced without triggering a marathon of conviction?

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Weekly 12% 45% 29%
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Chart of EURUSD with 20-Day ATR (Daily)

Dow and EURUSD Fight for Top Chart and Breakout on COVID, Stimulus News

Chart Created on Tradingview Platform

When it comes to the push and pull of stimulus versus tangible economic recession, there is a measurable quantity that market participants can refer to when confidence starts to gain traction – or otherwise when it starts to slip. The more abstract measures still stand as an under-appreciated wellspring of speculative bid. On that front, the possibility of a vaccine to the coronavirus pandemic to ‘unlock’ the global economy and ease general concern. Reports that biotech firm Moderna (MRNA) was seeing success in its early trials carried and built upon previous optimism stoked by Gilead (GILD). Is this confidence enough?

Chart of Moderna Stock Price Overlaid with Gilead (Daily)

Dow and EURUSD Fight for Top Chart and Breakout on COVID, Stimulus News

Chart Created on Tradingview Platform

On the Other End of the Spectrum: Recession; Trade Wars; US Election and More

Whether tangible improvement or fodder for speculators to project into the future, the escape velocity for markets is to override the very real issues plaguing traditional fundamentals. A steep recession has already been booked through Q1 and forecasts for the present quarter are substantially worse. That would be the justification for Europe to escalate its efforts and the balance that Fed Chair Powell has warned regularly on these past few weeks. We will probably see more of that view from the US central bank official today when he testifies before Congress. Further, subsequent iteration of economic pain are evolving out of the core breakdown including trade wars. The US and China continue to take small but dangerous steps to cut into each other’s trade as the tangible pressure on President Trump rises as the election slowly approaches. Yet, this isn’t just a phenomena between these two key economies. China announced an 80 percent tariff on imported Australian barley Monday, building upon the decision to halt the country’s beef imports. This makes AUDUSD and USDCNH a more interesting combo to watch.

AUD/USD BULLISH
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Change in Longs Shorts OI
Daily 8% 10% 9%
Weekly 1% 21% 13%
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Chart of AUDUSD Overlaid with CNHUSD in Red (Daily)

Dow and EURUSD Fight for Top Chart and Breakout on COVID, Stimulus News

Chart Created on Tradingview Platform

Outside of the systemic, there will also be more than a few discreet updates to watch. Aside from Russia’s government growth update, there are some lower economic figures on the immediate horizon. That said, the May PMIs due Thursday and Friday will likely contain enthusiasm. Eurozone investor sentiment data today may be now dated, but it will reflect on the difficulty still at hand. UK employment figures are a docket counterpart to open conversations of BOE negative rates talk and trouble in striking a trade accord with the EU. In more technical terms, we are also heading into the June contract expiration for WTI crude oil. The last expiry brought the unprecedented negative pricing, but we seem to be tracking a very different course. If it goes off without a repeat sense of dread, it may offer a context of normalization and thereby confidence.

Oil - US Crude BEARISH
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 15% 0% 9%
Weekly -1% -11% -5%
What does it mean for price action?
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Chart of July NYMEX Crude Oil Futures Contract Over July-June Spread ( Daily)

Dow and EURUSD Fight for Top Chart and Breakout on COVID, Stimulus News

Chart Created on Tradingview Platform

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