Swissquote Bank: Thin volumes, hesitation hint at weakening risk appetite

June 22, 2020

By Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank

Markets kicked off the week on a mixed note, as investors couldn’t decide on where to go next as two major opposite forces muddle the sentiment at the moment: the rise in new coronavirus cases and the massive monetary and fiscal interventions.

Low volumes and high volatility were on the menu of Monday.

Asian indices painted a mixed picture. Major Asian indices and US equity futures first slumped, then recovered into the afternoon session. The Nikkei (0.25%), the ASX 200 (+0.18%) and the Shanghai’s Composite (+0.28%) turned positive, but the Hang Seng (-0.32%) remained offered as news that China will open a bureau in Hong Kong to ‘lawfully handle national security cases’ and gather intelligence has not been a positive development for the HK’s freedom.

The People’s Bank of China (PBoC) maintained its 1-year LPR rate unchanged for the second straight month despite the recent lockdown of certain food businesses near Beijing.

The Dow futures tumbled over 200 points before switching to gains, but the European futures extended losses. FTSE (-0.70%) and DAX futures (-0.98%) point at a weak start to the week, but the market sentiment could change rapidly here as well.

Meanwhile, news of recent uptick in Covid-19 cases in Germany could give cold feet to European investors reminding them that the risk of a second wave is serious in the old continent. But the rising risks also increase the chances of the latest 750-billion euro fiscal rescue package to be accepted among the EU nations before July 9, or at least to encourage policymakers to find the best possible solution to avoid a severe recession across the bloc.

Demand in US treasuries and the dollar remains firm as we see a pause in the rising trend across the global equity indices. The US 10-year yield stands below the 0.70% mark. The yen and the Swiss franc continue collecting the safe haven inflows.

Gold shortly jumped to $1758 per oz on the back of an intense risk sell-off in Asia. If the investors sentiment deteriorates, the yellow metal could finally make the much-expected breakout to the $1800 mark. Otherwise, we should see a consolidation to $1725/1750 area.

The EURUSD will likely extend weakness to 1.1160, the major Fibonacci 38.2% retracement on April – June rebound. The golden cross formation on the daily chart (50-day moving average crossing above the 200-day moving average) should boost short-term tactical long positions and throw a floor under the euro weakness. The latest CFTC data confirmed a peak in long speculative positions in euro last week, meaning that investors remain firm on their long euro view. But the latter also carries the risk of a rapid unwind if the market sentiment deteriorates, as the euro’s moves are mostly coupled with risk assets’ at the moment. Technically, a slide below 1.1160 could mark the end of the actual bullish trend and encourage a further downside correction toward 1.1025, the 200-day moving average.

Cable rebounded to 1.24 after retreating to 1.2335 early in Asia. Sterling owes its recent strength to a globally weaker US dollar. Moving forward, a significant reversal in USD appetite could easily pull the rug from under the feet of sterling and encourage a slide toward the 1.22/1.20 region.

Appetite in oil remains resilient to the investor mood swings. WTI crude tests the $40 offers per barrel on the back of improved demand/supply dynamics. But the overall hesitation in risk assets could also weigh on the positive momentum above the $40 mark.