The US gets a stimulus, but Equity markets to see a bear market rally?
Source: Economic Events Calendar March 30 – April 3, 2020 - Admiral Markets' Forex Calendar
DAX30 CFD
In our last weekly market outlook, we wrote
[…]While we saw the DAX30 CFD recapturing the region around 9,150/200, which slightly brightens the technical picture and thus could now see a sharper bounce with stronger bullish momentum, resulting in a re-test of the psychological important region around 10,000 and probably as high as 10,250/300, bulls should stay very cautious: a next leg down may be similar brutal and push the German index even lower[…].
And we weren't that far off. After last Tuesday, the Dow Jones Industrial Average clocked its biggest daily gain since 1933 and helped the DAX30 to see its biggest daily gain in terms of points (+959.42), as well as the third biggest daily gain with 10.98%, pushing the German index back above 10,000 points, but the German index dropped again sharply shortly after.
Another attempt followed on Thursday, driven by US Equity markets and here the Dow Jones extending its surge to 21% in three days, bringing it technically back into bull market territory, but again the German index failed to sustainably recapture 10,000 points.
In our opinion, there might be an easy explanation: bear market rallies are just as sharp and massive as we have seen them over the last week.
And with this in mind, the mode in the German index, but also in US equities, stays clearly short and at least a re-test of the region around 8,000 points, probably a drop even lower stays a serious option.
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 significant above 10,000 points stays on the table:
Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD Daily chart (between December 7, 2018, to March 27, 2020). Accessed: March 27, 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
After the massive squeeze higher, resulting out of the world-wide USD shortage and pointing to liquidity issues in global credit markets, the US dollar saw a sharper rebound over the last week of trading.
The main driver came from the next wave of massive monetary stimulus from the Fed by going "All In" and announcing to buy an unlimited amount of US Treasuries and Mortgage-Backed-Securities (MBS).
While in addition to the massive government spending, mid- to long-term short-engagements in the Greenback should be attractive from a risk-reward perspective in our opinion.
But short-term, we'd stay cautious since we still expect short-term the demand for the US dollar to stay high, even though the massive monetary stimulus from the Fed adds a "calming element" to the current situation. That said, a technical target on the upside in the USD Index Future can be found around 105.00 points.
On the other hand: as long as financial markets keep on stabilising and no further wave of forced liquidation hits the markets, a drop in 10-year US Treasury yields significantly back below 1.00% could result in a deeper corrective move in the USD as low as 99.00 points in the USD Index Future:
Source: Barchart - U.S Dollar Index - Weekly Nearest OHLC Chart (between January 2017 to March 2020). Accessed: 27 March 2020 at 10:00 PM GMT
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Euro
After the Euro dropped to new yearly lows the week before, the next wave of massive monetary stimulus from the Fed with going "All In" by announcing to buy an unlimited amount of US Treasuries and Mortgage-Backed-Securities (MBS), causing a short-term stabilisation in the EUR/USD.
And given this massive stimulus from the Fed in addition to the massive government spending, it is certainly true that the US dollar should be cautiously viewed from a mid- to long-term perspective.
But short-term, FX traders should be careful in regards to EUR/USD long-engagements.
In fact, we still see the option of another, sharper leg down, resulting of the still given shortage of USD liquidity in European markets and which is still given, despite the "All In" of the Fed.
That said and if the ECB starts to massively 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 new wave of stronger selling pressure in the EUR/USD.
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.
Ongoing 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 January 21, 2019, to March 27, 2020). Accessed: March 27, 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
Even though volatility in forex markets and US yields stayed elevated over the last days and thus in the highly yield-sensitive USD/JPY, the picture compared to our last weekly market outlook didn't change much.
Despite the next wave of massive monetary stimulus from the Fed with going "All In" and announcing to buy an unlimited amount of US Treasuries and Mortgage-Backed-Securities (MBS), 10 year US Treasury yields dropping back below 1.00% and a plan of massive government spending, the USD/JPY stabilised at an elevated level over the first half of the week, saw a short-term push above 111.00.
Interesting enough, the USD/JPY dropped significantly back below 110.00 into the second half of the week, despite US Equity markets and here the Dow Jones extending its surge to 21% in three days, bringing it technically back into bull market territory.
Here voices grew louder, that it could be a massive bear market rally and investors should be cautious and probably the performance in the USD/JPY is pointing to exactly that with US Equities rather sooner than later following with another leg lower.
In regards to the USD/JPY, we nevertheless want to stay cautious in regards to USD short engagements since markets are still in USD shortage and thus the usage of the re-installed swap lines of the Fed from the BoJ could result in an ongoing squeeze higher and a test, probably even break of the region around 112.00/30.
This is also true, if the upcoming US economic projection, especially from the US labour market (ADP, NF) do not come in as bad as markets may anticipate due to the Corona-shutdown:
Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between February 4, 2019, to March 27, 2020). Accessed: March 27, 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
While Gold has found a (short-term) bottom around 1,440/450 USD, the situation around the yellow metal and conditions in financial markets in general stay very tense.
After the Fed went "All In" and announced last week on Monday to buy an unlimited amount of US Treasuries and Mortgage-Backed-Securities (MBS), the yellow metal saw a sharp move higher, pushing back above 1,600 USD.
But in our opinion market participants should stay very careful to see this aggressive Gold buying as the beginning of the (longer-term) expected sharp rise back above 2,000 USD.
In fact, we could imagine getting to see another wave of selling, also in classic "safe-haven" assets like Gold, resulting out of a credit crunch and liquidating everything to stay solvent.
The reason for that can not only be found in the massive monetary stimulus delivered by the Fed, pointing to a massive liquidity issue, but also in the current developments in Gold markets.
In fact, over the last days major Gold liquidity providers have asked the CME to allow gold bars in London to be used to settle its contracts to ease disruption to trading.
When looking at the gap between (paper) Gold Futures and physical Gold, the spread between the two has widened by as much as 70 USD per ounce, pointing to 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.
Still, the risk of a next liquidation wave and ongoing deflationary shock stays given and could realistically result in a sharper drop in Gold at any time.
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 December 27, 2018, to March 27, 2020). Accessed: March 27, 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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