And The Straddle Holds On: Markets Continue To Be Volatile

The markets were yet again an arena of volatility, with USD/JPY forming a long-legged doji, EUR/USD reaching close to four month highs in a swinging fashion, and the Nikkei experiencing for an eighth-straight day a different directional movement compared to its previous close. Directionality, however, does not seem to be an issue in the bond markets with the prospect of central banks stepping back from loose monetary policies rocketing bond yields to new highs. The yield on the U.S. 10yr note yesterday spiked to a 14-month high of 2.23%, but it is emerging market borrowing costs that have soared the most since emerging sovereigns also suffer from their risk-off nemesis. Straddled trades seemed to be the way to go with the U.S. equities as well, with the indices gapping higher, gaining more than 0.7% on the opening, before closing on their lows.

Overall directionality, however, seems to be less of an issue here with the S&P 500 experiencing its first three-day losing streak in 2013, with the three major U.S. indices closing the session yesterday with losses of around 1%. The bearish outlook in the U.S. equity markets and the winding down of carry trades, which have brought USD/JPY to pre-BoJ stimulus revamp levels, are triggering stop outs on long Nikkei trades, with the index at some point today wiping out more than 6% of its value.

Today sees the publication of the ECB monthly bulletin, which may come with revisions to eurozone growth and inflation forecasts. The Bank of England will also be releasing a report, its quarterly bulletin, which may come with market moving comments on the U.K. economy. Of greater market significance today, however, is the release of the World Bank’s global growth outlook, which was trimmed to 2.2% from 2.4%, partly due to a downward revision in China’s growth forecast. This bleak global outlook and the prevailing sentiment in global equity indices will most probably hit the European equities in their opening.

In the U.S. attention will be shifted back to the labour market with the release of the first jobless claims since the better-than-expected non-farm payrolls last week. Initial claims are set to remain steady, coming in at 345k, marginally lower than last week’s 346k. Continuing claims are expected to see a small increase from 2.952M to 2.975M. Simultaneously, retails sales and import and export prices are released thus giving the markets plentiful to absorb. The uneventful MoM import and export prices for May are set to remain unchanged, with the more significant retail sales forecast to show increases. Retail sales for May are due to increase 0.4%, adding to the 0.1% increase witnessed in April. The closely followed retail sales excluding automobiles are also expected to see an increase of 0.3%, halting two consecutive months of contracting sales. Shortly afterwards, business inventory for April are due to expand by 0.3% after having remained steady in March.

Overnight, the Bank of Japan releases the minutes to the June 10-11 policy meeting. In light of the market movements following the lack of further stimulus by the central bank, the minutes are likely to receive more attention than those following the May meeting.

The Market

EUR/USD
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• EUR/USD found yesterday early morning trendline and Fibonacci resistance at 1.3340 before losing 70 pips following its inability to breakout. A rebound however led to a break of resistance with support thereafter coming at 1.3320, painting a positive picture for the continuation of the rally, which thereafter found resistance at 1.3370.

• EUR/USD is currently at a frequent Stochastics resistance level of 94, making a close above 1.3370 seem less likely. Major resistance above 1.3370 comes in the 1.3425 – 1.3440 area that sees past price action and trendline resistance. Support is concentrated with 1.3340, 1.3320 and 1.3300 being notable levels, with a breakdown likely leading to 1.3230 support.

USD/JPY
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• USD/JPY found resistance at 97.05 before collapsing, finding support at 94.40, the 38.2% retracement level of the November – May rally. Weak support thereafter comes at 93.75 and 93.15, with the RSI and the Stochastics on the verge of both lying in oversold territory. The previous support levels of 94.90 and 95.30 are likely to act as resistance.

GBP/USD
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• The better than expected U.K. employment report boosted cable, as it rose to a four-month high, finding strong resistance at 1.5690, the 200-day MA and the 61.8% retracement level of the rally that occurred in the latter half of 2012.

• A breakout from the current strong resistance level sees weak resistance at 1.5730, with strong resistance found at 1.5780, which sees two coinciding, significant, Fibonacci levels.

Gold

• Gold was a major gainer catching up with its underperformance relative to the dollar witnessed on Tuesday. The gains of 1.12% since yesterday morning are more than double the losses of the dollar index, but even so, with the metal merely consolidating at these levels, trying to generate a return on gold trades may turn out to be frustrating.

• $1387 is likely going to act as an initial weak support with further support at $1378. The inability to test $1400 resistance yet again should be something the longer-term longs may want to note.

Oil

• WTI was gaining yesterday on the weaker dollar, finding strong trendline resistance at $96.35, only to dive to support at $95.50 as crude inventories in fact increased when a decrease was expected. Crude is losing today on the downward revision of the global growth outlook by the World Bank.

• The breakdown from support sees next support at $94.05 and then $93.50, the 50-day MA, with resistance coming in at $95.50 and more importantly $96.30, which sees trendline resistance.

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