Tuesday started off with a positive tone but by the end of the day, equity markets were under pressure as traders showed their nervousness about the re-opening of the US economy as well as those in Europe. Spikes in the number of German cases as well as fears about the potential for a similar outcome in many US states sparked a downturn in stocks. Testimony from Dr. Anthony Fauci, the top infectious disease expert in the US, alluded to the potential consequences of re-opening the economy too quickly. In the UK, while some restrictions on every day life are being lifted, there are also concerns about the effects of a 14 day quarantine period for all air travelers apart from those arriving from France and Ireland. Just more pain for the airlines and tourism sectors.

Wednesday would begin with focus on the NZ rate decision. The RBNZ would leave rates unchanged but would expand the spectrum of their QE program. The end result was a sharp sell off in NZDUSD dropping from 0.6095 to 0.6000. This in turn saw AUDNZD rally from 1.0615 to 1.0780. Quite the move for a country that has handled the current pandemic as well as any. Next up would be UK GDP and Manufacturing Production numbers. While obviously not great numbers, they were not as bad as the market had been expecting with Q1 GDP down 2% versus -2.5% expected. GBPUSD would rally from 1.2250 to 1.2340 prior to the US day beginning. But the highlight of the day would be Fed Chairman Powell’s webcast interview with the Peterson Institute for International Economics. His first words would be ‘More policy help maybe needed to pull the US out of economic downturn. Fed sees significant downside risks’.  Equity futures immediately drop with the DJ backing off 180 points. Next, he pushes back on the idea of negative rates, something the market was keenly watching for clarity on. The end result is a sustained sell off in equities and a move higher for the USD. The DJ would close lower by over 500 points dragging the S&P and Nasdaq along for the ride. EURUSD would slip to a low of 1.0811 and GBPUSD to 1.2210. USDJPY would rally up to 107.05. AUD, NZD and CAD all weakened with NZD continuing its earlier drop, hitting a low of 0.5980. XAU would find some support sub 1,710 trading up to 1,718. Today was one of those watershed moments. For days many of us have scratched our heads about the rally in equities. Some very learned commentators have suggested the equity markets are overvalued, overbought and overzealous in their belief that the global economy will bounce back sharply. We question it, yet we still rally. Apparently it takes the Chairman of the US Federal Reserve to deliver a rather more sobering assessment and one which has traders doing a U-turn. A one day reaction? Or the beginning of a reversal? We will see.

I keep talking about equity markets so I felt I might as well put up an S&P chart and take a look. As you will see we have bounced off the 2,190 low and had 2 attempts to hurdle the 61.8% retracement at 2,936. Twice we have flirted with a break, both times failing in the vicinity of 2,950. Back we come to the 50% retracement level for the 3rd time at 2,793. As of writing we hold – just. So the set up is an interesting one. Do we have another attempt at a clean break of the 61.8% retracement or will support at 50% give way for a deeper correction lower? The market is poised and I’m pretty sure the answer is only a session or 2 away.

David Hannigan

A graduate of the Cass Business School, Dave's career began with Credit Suisse as an Equity Options Trader on the London Stock Exchange, before moving into the world of FX with Chemical Bank and Citibank. 1994 saw him join National Australia Bank, first as a Senior Dealer, then Senior Vice President and Chief Dealer.

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