Stimulus money in the US, but Equity markets responded with a bear market rally
Source: Economic Events Calendar April 6 – 10, 2020 - Admiral Markets' Forex Calendar
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:
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%.
Check out Admiral Markets' most competitive conditions on the DAX30 CFD and start trading on the DAX30 CFD with a low 0.8 point spread offering during the main Xetra trading hours!
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.
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
Don't forget to register for the weekly "Trading Spotlight" webinar with presenters including Jens Klatt, every Monday, Wednesday and Friday at 2pm London time! It's your opportunity to follow Jens and others as they explore the weekly market outlook in detail, so don't miss out!
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:
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%.
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:
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%.
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:
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%.
Discover the world's #1 multi-asset platform
Admiral Markets offers professional traders the ability to trade with a custom, upgraded version of MetaTrader 5, allowing you to experience trading at a significantly higher, more rewarding level. Experience benefits such as the addition of the Market Heat Map, so you can compare various currency pairs to see which ones might be lucrative investments, access real-time trading data, and so much more. Click the banner below to start your FREE download of MT5 Supreme Edition!
Disclaimer: The given data provides additional information regarding all analysis, estimates, prognosis, forecasts or other similar assessments or information (hereinafter "Analysis") published on the website of Admiral Markets. Before making any investment decisions please pay close attention to the following:
- This is a marketing communication. The analysis is published for informative purposes only and are in no way to be construed as investment advice or recommendation. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
- Any investment decision is made by each client alone whereas Admiral Markets shall not be responsible for any loss or damage arising from any such decision, whether or not based on the Analysis.
- Each of the Analysis is prepared by an independent analyst (Jens Klatt, Professional Trader and Analyst, hereinafter "Author") based on the Author's personal estimations.
- To ensure that the interests of the clients would be protected and objectivity of the Analysis would not be damaged Admiral Markets has established relevant internal procedures for prevention and management of conflicts of interest.
- Whilst every reasonable effort is taken to ensure that all sources of the Analysis are reliable and that all information is presented, as much as possible, in an understandable, timely, precise and complete manner, Admiral Markets does not guarantee the accuracy or completeness of any information contained within the Analysis. The presented figures refer that refer to any past performance is not a reliable indicator of future results.
- The contents of the Analysis should not be construed as an express or implied promise, guarantee or implication by Admiral Markets that the client shall profit from the strategies therein or that losses in connection therewith may or shall be limited.
- Any kind of previous or modeled performance of financial instruments indicated within the Publication should not be construed as an express or implied promise, guarantee or implication by Admiral Markets for any future performance. The value of the financial instrument may both increase and decrease and the preservation of the asset value is not guaranteed.
- The projections included in the Analysis may be subject to additional fees, taxes or other charges, depending on the subject of the Publication. The price list applicable to the services provided by Admiral Markets is publicly available from the website of Admiral Markets.
- Leveraged products (including contracts for difference) are speculative in nature and may result in losses or profit. Before you start trading, you should make sure that you understand all the risks.