There have been signs of strain in recent days, but the risk recovery came to a shuddering halt yesterday as Wall Street sold sharply lower.
The Federal Reserve remains highly accommodative but is rightfully very cautious on the economic recovery. However, coming amidst news that states in the US are suffering from increased second wave infections have hit markets that have been seemingly priced for perfection of a serene V-shaped recovery. A bump in the road to demand recovery for oil has hit the oil rally hard and similar -6%/-7% declines on Wall Street also ensued.
Investors who have been seen a rally going only one way until this week are waking up to a sobering reality that markets can often take the stairs higher but the elevator back down. How they respond to this realisation in the coming sessions will be key. If this is a sell-off that gathers momentum, then a reversal back lower could really take some stopping. Right now, this morning, there is an element of stability, with US futures clawing back +1%. The sharp -30 basis points move of recent days in the 10 year Treasury yields has stabilised early today and the yield is slightly higher. Forex markets took a hit of risk aversion yesterday but are also settling down. Newsflow surrounding the potential for re-imposing “stay at home” orders for certain parts of the US (Houston in Texas has been suggested) could be triggers for selling pressure.
In the UK, the impact of the lockdown was worse than feared in April, with monthly GDP falling by worse than expected at -20.4%. With the suggestion that the UK will also formally rule out a Brexit transition period extension today, it may be of little surprise that GBP is an underperformer.
EURUSD popped to a new high and reversed. My view is that a corrective decline is underway. The median line is possible support along with the late March high at 1.1148. The high volume level at 1.1344 remains proposed resistance.
AUDUSD is into a noted bounce level at .6855. If price bounces then resistance should be .6933 (high volume level and underside of neckline). Downside focus remains the lower parallel.