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by Charalambos Pissouros

Investors Start the New Quarter in a “Risk Off” Mood

Equities traded in negative waters, while Japanese yen and the US dollar were the main gainers among the G10 currencies, as investors and traders turned their attention back to the numbers and headlines surrounding the coronavirus. As for today, the limelight is forecast to fall on the initial jobless claims for last week, which are expected to hit a new record of 3.5mn.

Equities Slide, Yen and Dollar Shine as Virus Concerns Increase

The dollar traded higher against all but two of the other G10 currencies on Wednesday and during the Asian morning Thursday. It gained the most versus SEK, EUR, AUD and CHF in that order, while it underperformed only against JPY. The greenback was found virtually unchanged against GBP.

USD performance G10 currencies

With the end-of-quarter portfolio rebalancing out of the way, the strengthening of the Japanese yen and the US dollar suggests that investors and traders started the new quarter in a defensive mode. Indeed, most major EU and US indices fell around 4% as the spotlight turned back to the numbers and headlines surrounding the coronavirus outbreak. Several major banks suspended dividend payments due to the economic fallout caused by the virus’s fast spreading, while US President Trump warned US citizens of a “painful” two weeks ahead, even if the public follows strictly the “stay at home” restrictive measures. White House medical experts have forecast that the death toll due to the pandemic in the US could hit 100k to 240k. The negative sentiment rolled over the Asian session today, but eased somewhat. Although Japan’s Nikkei slid 1.59%, China’s Shanghai Composite gained 1.00%.

World global stock indices performance

As for the data, yesterday, the ADP report showed that the US private sector lost 27k jobs in March, recording the first decline since September 2017. The forecast was for a larger decline of 150k jobs. At this point, it is worth mentioning that the report was based on the total number of employees being active on a firm payroll through the 12th of the month, and thus it does not reflect the virus’s latest impact on the job market. The official jobs data, which comes out on Friday, is compiled using the same period and thus, we would not be surprised if the NFPs also fall less than expected. That said, the ADP report is far from a reliable predictor of the NFPs. Taking into account data from January 2011, the correlation between the two time-series at the time of the release (no revisions are taken into account) stands at around 0.41.

ADP vs NFP employment

With the initial jobless claims hitting a historic record of 3.3mn during the week that ended on March 20th, and expected to show a new record today, the situation during the month was likely much worse. We also got the ISM manufacturing index for the month of March yesterday, which slid to 49.1 from 50.1. The forecast was for the index to have fallen to 45.0.

As we already noted, today, investors may lock their gaze on the initial jobless claims for last week. Expectations are for a new record of 3.5mn, which may increase speculation for even more action by the Fed. On Tuesday, the Committee announced that it would broaden the ability of other central banks to exchange their holdings of US Treasuries for overnight dollar loans, while overnight, it eased capital requirements for large banks. Another record in initial jobless claims could raise questions as to what other measures officials could adopt. Will they start thinking about negative rates? We repeat that the Fed was never in favor of the “negative rates regime”, but it remains to be seen whether the damages caused by the virus outbreak will force them to make an exception. In any case, according to the yields of the Fed funds futures, investors do not anticipate something like that at the moment.

Fed funds futures market interest rate expectations

As for our overall view, yesterday’s risk off trading adds more validity to our choice not to trust a long-lasting recovery in equities. Yesterday, both new cases and deaths hit new records, enhancing our view that the worst is not behind us yet. We repeat that with the virus still spreading at an exponential pace, and with a lot of uncertainty as to how long this could last, it would be naïve to assume that everything is priced in. The economic damages could deepen and drag much longer than market participants initially believed and this may be reflected in upcoming economic data. We stick to our guns that risk assets still have room to fall further as investors keep seeking shelter in safe havens.

Coronavirus new cases and deaths on a day by day basis

S&P 500 – Technical Outlook

After failing to move above the short-term downside resistance line taken from the high of February 20th, the S&P 500 drifted south again. So far this week, the index found support near the 2447 hurdle and continues to balance above it. However, we will aim for further declines, if the price falls below that area, but for now, we will take a somewhat bearish approach.

Eventually, if the index drops below that 2447 zone, this will confirm a forthcoming lower low and more sellers may join in. This is when we will examine the 2395 obstacle as our next potential support, a break of which may lead S&P 500 further down. We will then aim for the 2280 level, marked by the low of March 19th and an intraday swing low of March 24th.

In order to shift our attention to the upside, we would like to see a break of the aforementioned downside line and a push above the 2646 barrier, marked by the current high of this week. The S&P 500 could then travel to the 2709 area, which is the low of March 11th and the high of March 13th. Slightly above it runs the 200 EMA on the 4-hour chart, which may provide a bit of resistance and temporarily keep the price lower. That said, if the buyers are still feeling comfortable, this may help them lift the index further north, possibly targeting the 2848 level, marked near the lowest point of February and an intraday swing high of March 10th.

S&P 500 cash index 4-hour chart technical analysis

NZD/JPY – Technical Outlook

In the beginning of this week, NZD/JPY fell back below all of its EMAs again on the 4-hour chart. The pair is also trading below a short-term tentative downside line drawn from the high of March 25th. Although we are seeing a small correction this morning, we will remain sceptical against any further advances higher, especially if the rate stays below all of its EMAs. We will take a cautiously-bearish approach and wait for a break of the current low of this week, at 63.22, before examining a further decline.

As mentioned above, if we see NZD/JPY dropping below the 63.22 hurdle, this will confirm a forthcoming lower low and more sellers may join in to drive the pair further south. That’s when we will target the 62.48 obstacle, a break of which could set the stage for a fall to the 61.77 level, marked by the low of March 23rd.

Alternatively, in order to get comfortable with higher areas, we would first like to see a break of the aforementioned downside line and second, a push through the 65.49 barrier, marked by the highs of March 26th, 27th and 31st. That’s when more bulls could run into the field and lift the rate. The next possible resistance zone to consider could be near the high of March 25th, at 65.91. NZD/JPY may get a hold-up around there, as it may also get held by the 200 EMA. The pair may correct a bit lower, however, if it stays above the 65.49 zone, the buyers could try and take advantage of the lower rate and push it north again. If NZD/JPY overcomes the 200 EMA, the next resistance level to consider could be at 66.62, marked by the high of March 11th. If the buying continues, this could lead to a test of the 67.34 level, which is the high of March 6th.

NZD/JPY 4-hour chart technical analysis

As for the Rest of Today’s Releases

During the European morning, we get Eurozone’s PPIs for February. The mom rate is forecast to have slid to -0.2% mom from 0.4%, which will drive the yoy one further into the negative territory. Specifically, it is expected to have declined to -0.7% from -0.5%.

In the US, apart from the initial jobless claims, we also get the trade balance and factory orders data for February. The nation’s trade deficit is forecast to have narrowed to USD 40.0bn from 45.3bn in January, while factory orders are expected to have rebounded 0.2% after sliding 0.5%.

We get trade data from Canada as well, with this nation’s deficit expected to have widened somewhat, to CAD 1.87bn from 1.47bn.

As for tonight, during the Asian session Friday, Australia’s retail sales for February are coming out and expectations are for a 0.4% mom rebound after a 0.3% slide. China’s Caixin services PMI for March is also released but no forecast is available. However, bearing in mind the strong rebound above 50 in the official print, we see the case for a similar move.

 Disclaimer:

The content we produce does not constitute investment advice or investment recommendation (should not be considered as such) and does not in any way constitute an invitation to acquire any financial instrument or product. The Group of Companies of JFD, its affiliates, agents, directors, officers or employees are not liable for any damages that may be caused by individual comments or statements by JFD analysts and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his investment decisions. Accordingly, you should seek, if you consider appropriate, relevant independent professional advice on the investment considered. The analyses and comments presented do not include any consideration of your personal investment objectives, financial circumstances or needs. The content has not been prepared in accordance with the legal requirements for financial analyses and must therefore be viewed by the reader as marketing information. JFD prohibits the duplication or publication without explicit approval.

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