DAX with help from Eurobonds, soon back at 12,000 points?

May 25, 2020 10:30

Source: Economic Events Calendar May 25 – 29, 2020 – Admiral Markets’ Forex Calendar

DAX30 CFD

The German DAX30 started the last week of trading with massive gains. While we pointed out in our last weekly market outlook that:

[…]we are still careful in terms of DAX30 CFD long engagements, even though short-term and technically we stay positive as long as the German index trades above 10,200 points.[…]

we did not expect gains of more than 5% into the start of the week.

The main driver was the comments from Fed chairman Powell on CBS’ “60 Minutes” and Merkel’s and Macron’s proposal of a 500 billion EU recovery fund that would offer grants to European Union regions and sectors hit hardest by the coronavirus pandemic.

This move moves the EU more in the direction of a transfer union and can be interpreted as bullish for Equities.

If the bullish momentum continues over the next few days and the DAX30 breaks above the April highs around 11,350 points, a re-test of the SMA(200) around 12,000/050 points is a realistic option.

If the DAX30, on the other hand, fails to break higher, a re-test of the region around 10,200 points is likely, initiated by disappointing news around developments respectively missing progress in terms of a Coronavirus vaccine as of last Tuesday with Moderna’s vaccine trial not working as well as expected:

Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD Daily chart (between February 5, 2019, to May 22, 2020). Accessed: May 22, 2020, at 10:00 pm 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

And again: when looking at the USD Index Future, the picture hasn’t significantly changed over the last few days, but with the Euro about to gain momentum against the Greenback, the USD Index Future could see a sharp drop back below 100.00 points in the days to come.

Our USD skepticism was elevated again, by Fed chairman Powell’s appearance on CBS’ “60 Minutes” on May 17.

In fact, we see a confirmation in his remarks in front of the US Congress on May 13, in which one could easily interpret that the Fed will do everything and flood markets with trillions of US dollars if necessary to avoid a collapse of the US economy.

On CBS he said that “In the long run and even in the medium run, you wouldn’t want to bet against the American economy” while acknowledging that the unemployment rate could hit as high as 25%.

If we have to translate this, we’d say it means that a worsening situation in regards to the US economy should be expected, but that the Fed will deliver the fuel which is needed to keep “the engine” running.

In anticipation of this “liquidity boost” could rather sooner than later result in a sustainable drop in 10-year US Treasury yields below 0.60%, bringing the USD under pressure, probably especially against the Euro after Merkel’s and Macron’s 500 billion Euro EU recovery fund (further details in the Euro paragraph).

Still, technically the USD Index Future can be considered neutral between 94.00 and 104.00 points:

Source: Barchart – U.S Dollar Index – Weekly Nearest OHLC Chart (between July 2017 to May 2020). Accessed: May 22, 2020, at 10:00 PM GMT

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Euro

In our last weekly market outlook, we wrote

[…]While the Euro presented itself stable (and choppy) against the US dollar over the last week of trading and the performance could be interpreted as quite strong after the German Constitutional Court ruling on the 05th of May, we stay skeptical for the Euro.[…]

and that

[…]the Euro (is) vulnerable to upcoming uncertainty and leaves the current yearly lows around 1.0630 and making even a significant drop lower on the table, is probably a little under-priced into the currency in our opinion.[…]

Well, the Euro-tide has turned over the last week of trading and we are now Euro bullish.

On Monday, Germany, and France respectively Merkel and Macron proposed a 500 billion EU recovery fund that would offer grants to European Union regions and sectors hit hardest by the coronavirus pandemic.

In fact, one could see this as a first step towards a transfer union and is, in addition to the massive monetary stimulus from the ECB, bullish for the Euro.

Indeed, the EUR/USD gained bullish momentum and is currently eyeing the region around 1.1000 with a break higher leveling the path up to 1.1200 and probably even higher in the months to come.

This is probably especially true since the US dollar should stay under pressure and while European yields should stay “bid”, a sustainable drop in 10-year US Treasury yields below 0.60% would narrow the yield differential between EU and US bonds further, favoring gains in the EUR/USD:

Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between March 25, 2019, to May 22, 2020). Accessed: May 22, 2020, at 10:00 pm 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

While the overall picture in the USD/JPY didn’t change over the last week of trading, did the stable performance in US yields help the currency pair to make fresh monthly highs.

Still, the sustainability of this move should be questioned and we keep our overall bearish outlook on the currency pair.

That may be especially true after Fed chairman Powell’s appearance on CBS’s “60 Minutes“. After his remarks in front of the US Congress on May 13, he said that “In the long run and even in the medium run, you wouldn’t want to bet against the American economy” while acknowledging that the unemployment rate could hit as high as 25%.

If we have to translate this, we’d say it means that a worsening situation in regards to the US economy should be expected, but that the Fed will deliver the fuel which is needed to keep “the engine” running.

In anticipation of this “liquidity boost” could rather sooner than later result in a sustainable drop in 10-year US Treasury yields below 0.60%, bringing the USD under pressure and thus drive the USD/JPY lower, too.

That in mind, a test of the region around 105.00 and even a push lower seems a realistic option in the coming days and weeks in the USD/JPY and as long as the currency pair does not recapture 109.00/50:

Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between April 1, 2019, to May 22, 2020). Accessed: May 22, 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

Gold stays on its bullish path, pushing to new yearly highs last week. While technically the bearish divergence in the RSI(14) on a daily time-frame is still on the table, our take for the yellow metal stays clearly bullish, and we expect a stint to the all-time high of around 1,920 USD.

While Gold bulls should stay cautious in regards to overly aggressive long engagements with the technical bearish divergence pointing to some diminishing bullish momentum, from a fundamental perspective the path higher seems level.

After Powell’s remarks in front of the US Congress on May 13, we see a confirmation of our take from this testimony that the Fed will do everything and flood markets with trillions of US dollar if necessary to avoid a collapse of the US economy, in his appearance on CBS’ “60 Minutes” where he said “In the long run and even in the medium run, you wouldn’t want to bet against the American economy” while acknowledging that the unemployment rate could hit as high as 25%.

That in mind and if we get to see a sustainable drop in 10-year US Treasury yields below 0.60% in the days to come leaves us with a bullish expectation and a target around 1,920, If technically as long as we trade above 1,660 USD:

Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between February 21, 2019, to May 22, 2020). Accessed: May 22, 2020, at 10:00 pm 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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