Today we have a morning of European data for the Consumer Price Index readings of Germany and the Eurozone confidence and sentiment readings for March. Year-on-year the market expectations are for a slight uptick in the German CPI but month=on-month analysts are warning of a bit of deflation and that would be down to the increasing covid-19 lockdown restrictions as case rise. Overall European economic sentiment is expected to rise but from a pretty poor starting point of -17 and only up to -14.4 so hardly optimistic in their outlook. It’s hard to see where the positive data come from in the near future but if Europe could get on top of their covid-19 rising case count and get the majority of their citizens vaccinated, that would be a good start. Research out says the 1st vaccine shot from Pfizer and Moderna vaccines has an 80% efficacy and that is why US President Biden is determined to get as many people vaccinated before May and why he is extending it to young adults of 16 years and above in the coming months.
Looking at the benchmark 10 year Treasury yields versus the German 10 year Bunds yields, the divergence is getting really clear. Post-market trauma from 2008 to 2013, they literally matched each other 1:1, since 2013 the spread has widened but the movement was similar. Now the Bunds yields are basically flat, whilst in comparison, the UST 10 year yields are skyrocketing. Looking at the COT report the Shorts open interest in the 10 year Treasury is mainly speculative, so if the Reflation Trade should dissipate, the Bonds could catch a sustained bid.
EURUSD is suffering at the hands of the mighty bullish dollar. The US dollar index has now closed and held above the 200 Exponential Moving Average (ema) on the daily chart and it is starting to rise. If we clear a little swing high from November 2020 the $95 price level looks the most obvious target currently as traders will want to test the upper side of the balance area carved out between July and November last year.
Unfortunately for the retail traders, they are being short squeezed currently with 77% of them bullish on the EURUSD pair, this would be a great trade in the long run but for now, while the US dollar index is climbing higher, it is a Bear Market rally. These traders at some point will get to max pain, so we should wait for them to flip from overall Bullish to Bearish and note whether or not a turning point has or is likely to occur. On the Daily EURUSD chart I have highlighted a double bottom from September - November 2020 which for me is my short target, if price were to break lower, I would start looking for previous swing highs as potential targets too.
A weaker euro is doing wonders for the DAX as the stock index continues to make new highs. Similarly, the DJIA is pushing higher but without the S&P500 and the Nasdaq. Small to medium cap stocks are starting to show that they are truly falling behind the major large-cap stocks and that is a reflection of the post-pandemic economy. If the governments can’t stimulate the SME’s and get the banks to lend to these companies we could be in for a rough market turn in the coming months.
A little while ago I commented on a bearish trade scenario for Oil. That could be in play now, as we have swept the highs of a swing high made on the 22nd March 2021 and we are now trading back into the range for the last week. A stronger US dollar is bad for the WTI prices usually and while demand is not guaranteed I now will be looking for lower prices in oil and energy and the start of the deflationary effects that the Fed ét al has said would be transitory. The lower range around $52-$54 looks the most obvious place to trade towards with a rising daily 200 ema coming to meet price around those levels too.
Copper and Gold are both signaling lower prices today as the US dollar impacts them directly. A slowing Chinese economy would be a signal that Copper could fall further and no inflation or fear would be a further reason to short the Gold and precious metals.