Stimulus money in the US, but Equity markets responded with a bear market rally

April 06, 2020 14:00

Economic Event

Source: Economic Events Calendar April 6 – 10, 2020 - Admiral Markets' Forex Calendar

DAX30 CFD

While the DAX30 CFD was stable over the course of the last week of trading, the German index failed to recapture the important level of 10,000 points.

As we wrote in our last weekly market outlook, chances seem high that the recent correction was nothing more than a bear market rally, and DAX bulls should be extremely cautious in regards to Long engagements.

In fact, the main driver for the run higher in Equities (especially US Equities) at the end of March (and thus the end of the first quarter) could be a necessary rebalancing of the portfolios of money managers with the need to step up their Equity exposure, and the selling of bonds in order to maintain their allocation targets.

Now, the problem: once this "rebalancing" demand diminishes and with the failure to recapture the mark of 10,000 points, bears are still in control of the price action, and the advantage remains clearly on their side.

That said, a re-test of the region around 8,000 points, and probably a drop even lower, stays a serious option, especially if the situation around the Coronavirus in the US darkens again, with no hints of a lift of the current shutdown with unforeseeable negative consequences for the US and the global economy materializes again.

This is especially true if the DAX30 CFD drops sustainably back below 9,150/200 points again.

Above that level, another attempt to sustainably recapture and rise even more significantly above 10,000 points stays on the table:

Daily Chart

Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD Daily chart (between December 17, 2018, to April 3, 2020). Accessed: April 3, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of the DAX30 CFD increased by 9.56%, in 2016, it increased by 6.87%, in 2017, it increased by 12.51%, in 2018, it fell by 18.26%, in 2019, it increased by 26.44% meaning that after five years, it was up by 34.2%.

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US Dollar

Over the last week of trading, the US dollar Index Future was stable, finding support against the region of 99.00 points.

While this might surprise at first glance, especially when considering the significant drop below 1% in 10-year-US-Treasury yields and the massive monetary stimulus delivered from the US central bank Fed with pumping up their balance sheet to over 5.8 trillion USD, but it seems to underpin the risk of a new wave of de-leveraging hitting global financial markets which will naturally result in high demand for the US dollar given the global USD shortage.

That in mind, the re-test of the region of around 99.00 points can certainly be interpreted as a long-trigger for another stint higher, around 105.00 points.

Mid- to long-term, the massive government spending and given the massive monetary stimulus from the Fed, leaves us with massive USD-scepticism and short-engagements in the Greenback should be attractive from a risk-reward perspective.

Bar chart

Source: Barchart - U.S Dollar Index - Weekly Nearest OHLC Chart (between January 2017 to April 2020). Accessed: April 3, 2020, at 10:00 PM GMT

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Euro

Given the recent price action in the Euro and here especially the EUR/USD, volatility stays high, but the overall picture hasn't substantially changed over the last week of trading.

After the EUR/USD pushed back above 1.1100, the currency pair couldn't stabilise there, instead, it dropped clearly back below 1.1000 and we'd stay very cautious in regards to "buying the dip".

We still consider the short-term picture in the EUR/USD bearish, see a serious chance of a re-test, probably even a drop below the current yearly lows around 1.0600/30.

As pointed out in the USD paragraph above, this expectation mainly results out of the ongoing shortage of USD liquidity in European markets.

That said, and if the ECB starts to use the reinstated swap lines from the Fed again, given a next wave of "panic liquidation", a stronger US dollar should be imagined could result in a nee wave of stronger selling pressure in the EUR/USD.

And despite the massive stimulus from the Fed in addition to the massive government spending, our Euro outlook with further bullish potential would only be given if EU governments deliver clear signs towards any kind of unity and sending a clear signal in regards to supportive packages of the European economy (e.g. like a EU coronavirus rescue fund, Euro bonds, Coronabonds, etc.)

Technically, a break below 1.0600/30 makes a further drop in the EUR/USD as low as 1.0500 and probably even lower a serious option.

A next wave of bullish momentum could drive the EUR/USD probably as high as 1.1200/30, but should be carefully reviewed in terms of sustainability:

Daily Chart

Source: Admiral Markets MT5 with MT5-SE Add-on EURUSD Daily chart (between February 4, 2019, to April 3, 2020). Accessed: April 3, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of the EUR/USD fell by 10.2%, in 2016, it fell by 3.2%, in 2017, it increased by 13.92%, 2018, it fell by 4.4%, 2019, it fell by 2.2%, meaning that after five years, it was down by 7.3%.

JPY

The USD/JPY continued to trade lower after its sharp bearish stint on March 26-27, resulting in a sustainable drop below 108.50/109.00.

Driver for the continuation on the downside was potentially the drop in 10-year-US Treasury yields.

And as we expect a new risk-off wave to hit global financial markets which might, under "normal" circumstances, drive the USD/JPY even lower, letting the currency pair eye the region around 105.00. But such a risk-off wave has the potential to result in a sharp USD/JPY reversal.

As pointed out in our USD section above, we consider such a risk-off wave going hand in hand with an increasing demand for the US dollar given the global USD shortage where the usage of the re-installed swap lines of the Fed from the BoJ could result in an ongoing squeeze higher.

While we certainly need to wait if such a wave of risk-off really hits the markets and will really result in a strong USD demand, a test, probably even break of the region around 112.00/30 would be an option.

As already pointed out, further bearish momentum brings a test of the region around 105.00 into play:

Daily Chart

Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between February 11, 2019, to April 3, 2020). Accessed: April 3, 2020, at 10:00pm GMT

In 2015, the value of the USD/JPY increased by 0.5%, in 2016, it fell by 2.8%, in 2017, it fell by 3.6%, in 2018, it fell by 2.7%, in 2019, it fell by 0.85%, meaning that after five years, it was down by 9.2%.

Gold

The technical picture in Gold stays tense: after finding a (short-term) bottom around 1,440/450 USD and the push back above 1,600 USD given the massive monetary stimulus from the Fed on March 23, and the precious metal dropped back below 1,600 USD over the course of the last week of trading.

As pointed out in our USD paragraph above, we consider chances at least elevated, that a new wave of de-leveraging hitting global financial markets stays a serious option and will naturally not only result in high demand for the US dollar given the global USD shortage, but potentially also in a new wave of aggressive selling the precious metal.

This can also be seen in the still wider than usual spread between physical and paper Gold out of the massive short-supply in regards to physical Gold, resulting out of feared (Coronavirus) shutdowns of precious metal refineries.

That disruption in mind and given the massive steps from the Fed in addition to the massive deficit spending from the US government, to be Long Gold mid- to long-term stays an interesting bet from a risk-reward perspective, but short-term a sharper drop in Gold could happen at any time in our opinion.

Technically the key-support can still be found around 1,440/450, above that level another push up to 1,700 USD stays realistic.

Nevertheless, another "liquidation wave" could bring a short-term drop below 1,440/450 USD into play which would technically darken the picture, activating 1,250/260 USD as a first target:

Gold Daily Chart

Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between January 4, 2019, to April 3, 2020). Accessed: April 3, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of Gold fell by 10.4%, in 2016, it increased by 8.1%, in 2017, it increased by 13.1%, in 2018, it fell by 1.6%, in 2019, it increased by 18.9%, meaning that after five years, it was up by 28%.

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