Bond yields point to deepening recession fears, yet US Equities with new ATHs? Who is wrong?
Economic Events July 8 – 12, 2019
Source: Economic Events Calendar 08 – 12 July 2019 - Admiral Markets' Forex Calendar
DAX30 CFD
In our last weekly market outlook we wrote:
"[…]Nevertheless and in general, we tend to believe that any signs of ongoing negotiations between the two countries could already be interpreted as positive an leave DAX bulls with the chance of another attack of the current yearly highs around 12,450 points.[…]"
And indeed: the DAX30 CFD started the week with a gap higher and new yearly highs, recapturing 12,600 points into the end of the week after 'super-dove' Christine Lagarde was brought into position to succeed Mario Draghi as ECB president (details in the Euro paragraph below).
From a technical perspective, this break higher levels the path in the German index up to 12.850/900 points in the days to come. This bullish outlook stays true as long as the DAX30 CFD holds above 12,150 points.
Still, traders should be cautious and watch the developments especially in US equity markets carefully: US president Trump is now tweeting neary every day about the S&P500 making new highs which can be considered a first sign of the market overheating a little.
In addition to that potential sentiment-extreme, bond markets should also be carefully watched: here we saw, until the solid NFPs on Friday, 10-year US yields trading below 2%, 10-year Eurozone yield nearing -50 basis points with German yields being negative out to 20 years and now also UK 5year yield below 2-year yield for first time since August 2008.
These are clear signals of market participants becoming overly sceptical about the global economic outlook, putting any rally in equities on a very fragile fundament, leaving indices and here the DAX30 CFD vulnerable to an aggressive, at least a short-term correction:
Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD daily chart (between 23 March 2018 to 05 July 2019). Accessed: 05 July 2019 at 10:00 PM GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2014, the value of the DAX30 CFD increased by 2.65%, in 2015, it 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%, meaning that after five years, it was up by 10.5%.
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US Dollar
When markets started to price out a 50bp rate cut by the Fed on a very good job report last Friday, the US dollar saw a strong weekly close.
But till that day, especially after the weak ADP reading, it is probably difficult to understand the solid performance of the USD Index Future which gained over the last few days.
But in fact and in our opinion, it was not difficult at all: we seem to find ourselves in a classic 'race to the bottom' and even if US president Trump does not make any secret of his intention to do everything to devalue the Greenback, the EU did a better job here last week with bringing up Christine Lagarde, current Managing Director and Chairwoman of the IMF, as the successor of Mario Draghi as ECB president (details on that in the Euro paragraph below).
All in all, the outlook for the US dollar hasn't significantly changed from our last weekly market outlook on Monday.
With the drop below 2% in 10-year US-Treasury yields and stabilisation below that level for some time, markets are obviously more and more pricing in rate cuts from the Fed in the months to come, the question only seems to be: 'how many?'
That said, the outlook for the USD stays bearish in the days to come and any rally should be sold in our opinion (similar to our 'buy the dip' approach in the Gold paragraph below.
Still, from a technical perspective the mode in the USD index Future stays at least neutral above 95.00 points on a weekly time-frame.
Source: Barchart - U.S Dollar Index - Weekly Nearest OHLC Chart (between May 2016 to July 2019). Accessed: 05 July 2019 at 10:00 PM GMT
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Euro
The Euro saw a very surprising development over the last few days with the currency pair dropping significantly below 1.1300, accelerating once again on the downside on a solid US employment report.
After Mario Draghi failed with his dovish remarks in Sintra/Portugal around three weeks ago to bring the European currency significantly under pressure in anticipation of a dovish Fed, with the nomination of Christine Lagarde, current managing director and chairwoman of the IMF, and known 'super-dove', selling in the Euro set in.
The reason: while Lagarde has been heard to be sceptical about the ECB's stimulus program, she is also known to praise the Chinese and PBOC of their aggressive stimulus programs which she is likely to transfer to the Eurozone if she becomes ECB president.
While last week saw the Euro dropping against the USD, the overall picture hasn't significantly changed and above 1.1180/1.1200 EUR/USD will likely see further gains: the nomination of Lagarde is also a sign to have someone at the top of the ECB who is willing to do whatever it takes to save the Euro and continue with Draghi's way of running the central bank.
This resulting trust in combination with the ongoing threats of US president Trump which are obviously aiming on pushing the US dollar lower to the Euro, leave EUR/USD with the potential of a stint up to 1.1450/1500.
A drop below 1.1180/1200 on the other hand activates again the region around 1.1100:
Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between 06 April 2018 to 05 July 2019). Accessed: 05 July 2019 at 10:00 PM GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2014, the value of the EUR/USD fell by 11.9%, in 2015, it fell by 10.2%, in 2016 it fell by 3.2%, in 2017 it increased by 13.92%, 2018 it fell by 4.4%, meaning that after five years, it was down by 16.5%.
JPY
In one of our last technical pieces on the USD/JPY our headline read:
"USD/JPY positive on Mnuchin's trade deal comment – sell the bounce?"
and indeed the rally which was seen after the announced truce at the G20 summit between the US and China in regards to their trade conflict was short-lived.
The move kept the currency pair below 108.70/109.00, leaving USD/JPY technically bearish on a daily time-frame.
With the drop of 10year US yields then dropping below 2% and holding their most of the time last week (and bouncing back on Friday after a solid NFP reading with markets pricing out a 50bp rate cut at July 31), while 10-year Eurozone yields neared -0.50%, German yields being negative out to 20-years and now also UK 5-year yield below 2-year yield for first time since August 2008, recession fears deepened and with associated risk aversion and slowing economic growth, we continue to see a high probability of near-term safe-haven inflows which will bring the region around 106.80/107.00 soon into our focus again.
A break lower levels the path down to the Flash Crash lows from January around 105.00.
If we, on the other hand, make it back above 108.70/109.00 we still remain doubtful whether such a push is sustainable and would be very careful in terms of USD/JPY long engagements:
Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between 06 April 2018 to 05 July 2019). Accessed: 05 July 2019 at 10:00 PM GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2014, the value of USDJPY increased by 13.7%, in 2015, it 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%, meaning that after five years, it was up by 4.1%.
Gold
Gold kept on presenting itself volatile over the last week. The main reason can most likely be found in a Tweet from US president Trump: in this tweet he talks about his intention to nominate Judy Shelton to be on the board of the Federal Reserve.
What's interesting about Shelton is, that beside her ongoing criticism of the Fed, in 2019, she said that she hoped for a new Bretton Woods-style conference where countries would agree to return to the Gold standard.
As a result of Trumps tweet and 10-year USTs dropping below 2% again, Gold attacked again its current yearly highs around 1,440 USD.
After solid NFPs were published on Friday and markets completely pricing out a 50bp rate cut at the end of July, a break wasn't seen and the yellow metal closed the week around 1,400 USD.
But we still see some serious bullishness in the precious metal and a break of 1,440 USD in the days to come could potentially level the path up to 1,480/490 USD in.
Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between 04 April 2018 to 05 July 2019). Accessed: 05 July 2019 at 10:00 PM GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2014, the value of Gold fell by 1.7%, in 2015, it 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%, meaning that after five years, it was up by 6.4%.
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