Are CBs going to facilitate next run?

17 April, 2019

Are central banks going to facilitate the next run on sentiment?


US INDEXES: S&P500

Despite the fact that World Trade Organization has cut its forecast for trade growth, the S&P 500 is 1.1% away from all-time highs. Markets seem to be ignoring the trade war. There is not enough tension and questions to shake market sentiment. At this stage of the monetary stimulus cycle Central Banks have very few tools left, both conventional and unconventional. They don’t have anything that can restore investor confidence if they start losing it.

Major US indexes are within their historical range of highs. Keep in mind that restoring all-time highs and continuation of the major trend are two different things. Right now, the US stock market, particularly the S&P 500 has a strong influence on sentiment. If the index does not reach its highest point it will prevent the other risky assets from moving higher as well. The situation is the same with bonds, currencies, and commodities.

When there is such a huge psychological level ahead as an all-time high, price tends to head to that area. Even if there is a full trend area to fill. All world stock markets look very similar with a last area to fill before the gap is filled. This is a difficult task considering the dried up liquidity in the markets and the upcoming Good Friday in the G7 countries.

However, there still is an opportunity to use a leg up, before we lay low and follow the market decide on what the next move will be. We recommend that you go long on world indexes.

US Dollar

Currencies remain range-bound. The Pound, Euro, Canadian and US Dollar hardly have any technical or fundamental factors to propel a gap. The Aussie has made a lame attempt to break. Before opening a long position, wait for a continuation of the trend.

The historical range of the Dollar index is all-time low now. The historical range indicator shows the 3rd narrowest range on record. The moves that follow such constrictions are often impulsive, as we can see on the chart below. It will be broken but we don’t know when this can happen. Some high-risk events are to take place this week. First of all, China releases its GDP on Wednesday, which will be followed by the PMI release in the Eurozone.

The US and the EU are next in line to butt heads over trade tariff disputes. Boeing and Airbus are the world leaders in aviation and they are located on the opposite sides of the Pacific Ocean. The two governments are making preliminary lists of additional tariffs on this industry, which will not necessarily lead to growth of these companies.

China has been performing better than investors had expected. Their trade balance and yuan loans were much higher than forecast. This would in turn affect the price of oil in the following weeks. We are still waiting for an official Trump-Xi meeting.  

In Britain, the unsolved Brexit remains a threat. Together with the EU, negotiators have postponed Brexit until October 31, giving the parliament time to decide which plan to agree on.

Traders can take an advantage of reduced market volatility and use technical analysis to work with the AUDUSD, EURCHF, GBPUSD pairs. We expect the dollar to be weak next week.

Crude oil

Oil prices are continuously affected by the world events. Prices are close to local highs as Libya clashes continue. Fighting has moved into the capital city of Tripoli. Being an OPEC member, the country currently produces around 1.1 million barrels per day. This could come to an end, which is currently being priced in. There might be a huge drop of supply.

The effect of the US sanction on Venezuelan oil production is adding tension notes. Venezuela is reporting a sharp drop in oil production due to the sanctions imposed. The International Energy Agency reported Venezuela’s output was 600,000 barrels per day less than a year earlier. Venezuela is also a member of OPEC, which reported a 500,000 barrels drop in Venezuela’s production.

China has also released good economic data. The economic slowdown was not as bad as many people had expected. The trade balance of China soared to 221.3 billion in February while yuan loans rose sharply in March to 1,690 billion, which was far beyond the experts’ forecasts.

Currently, the oil market is bullish. There is a support level at 63.40 and the price is reaching the Ichimoku cloud on the 4H TF. We use this indicator in a trending market. We can see that the cloud has expanded to its biggest size since April 11. This is an indication of a strong trend, the price does not seem to decline soon. There is a good entry point for opening a long position at 63.80 with a take profit at 66.00. A stop loss should be set below 63.25.

Concerning the current situation in the financial markets and the greenback trading within its lowest range since 2014 it is difficult to forecast a breakout of any single asset. We recommend sticking to trade strategies based on use of oscillators and range bound entries, as well as buying the lows and selling the highs.


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