fx volatility near record lows: wilder times seem ahead - ecr … · 2019. 12. 9. · ecr research...

TECHNICAL TREND OUTLOOK

Independent research on asset allocation, global financial markets,

politics and FX & interest rates

FX volatility near record

lows: Wilder times seem

ahead

Thursday, 5 December 2019 | Contents

1. EXECUTIVE SUMMARY 2

2. MARKET TO WATCH HIGHLIGHT 5

Greece Athex Composite index 5

3. STOCK MARKETS 6

US 6

S&P 500 index 6

Nasdaq 100 index 7

EUROPE 7

Europe Stoxx 600 index 7

Euro Stoxx 50 index 8

DAX 30 9

Swiss market index (SMI 20) 9

UK FTSE 100 10

JAPAN 10

Nikkei 225 index 10

EMERGING MARKETS & CHINA 11

MSCI Emerging Markets index (local currency terms) 11

China Shanghai Composite index 11

4. BOND MARKETS 12

SOVEREIGN BOND YIELDS 12

US 10-year Treasury yield 12

Germany 10-year government bond yield 13

CREDIT SPREADS 13

US Investment Grade Credit spread 13

US High Yield Credit spread 13

EU Investment Grade Credit spread 14

EU High Yield Credit spread 14

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5. COMMODITIES 15

Crude oil (WTI Spot) 15

S&P GSCI Industrial metals index 15

6. PRECIOUS METALS 16

Gold 16

Silver 16

Palladium & Platinum 16

7. FX 18

Volatility 18

EUR/USD 19

GBP/USD 19

NZD/USD 20

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Executive summary

> The Greece Athex Composite index is within touching distance of multi-year highs. A breakout above

the price peaks near 900 would mean that a large ascending triangle pattern (bullish continuation

formation) is finished. This could well be the springboard for a further rise in subsequent months.

> Should we see a (further) pullback in the S&P 500 index, initial support lies near 3,030. A drop clearly

below that level, combined with another surge in the VIX volatility index to above 18, signals a larger

pullback. In such case, next support lies near 2,950.

> The medium-term outlook in the S&P 500 index is bullish as long as this latter support zone holds. If

the all-time high at 3,155 is exceeded, the benchmark index could rapidly rise further to around 3,300.

> The medium-term trend direction for both the DAX 30 and Nikkei 225 is upwards. Provided that these

indexes stay at least above respectively 12,500 and 22,300 in case of a larger pullback, we foresee a

bullish trend continuation in the coming months. Concretely, 13,600 and 24,000 serve as initial

targets.

> The short-term outlook for the US 10-year Treasury bond yield is neutral as long as support- and

resistance zones at around respectively 1.4% and 2.0% stay intact.

> Once the German 10-year government bond yield breaks through the resistance zone surrounding

-0.2%, it would suggest that a larger bottoming process is in progress. However, as long as it stays

below the aforementioned level, further weakness seems in the cards over the coming months.

> Regarding the US HY and IG credit spreads, we will gain more clarity about the trend direction as

soon as they break this years’ tightening consolidation pattern. Until then, the outlook is neutral. The

same applies to the European HY credit spread.

> A clear trend direction in crude oil is missing at present. Concretely, we consider the medium-term

picture as neutral as long as oil is trading between rising trendline support near $54 and declining

resistance, currently around $61.

> The S&P GSCI Industrial Metals index has reached a major technical inflection point. The index is

testing a significant horizontal support area near 310 once again. In case of a decisive break of this

support floor, we believe the extra downside potential amounts to 15%.

> Unless gold drops below initial support near $1,450, we will regard the pullback of the past months

as a corrective movement within a medium-term uptrend. However, should we see a clear break

below $1,450 support, this signals a larger downward correction.




> The outperformance of palladium versus platinum has reached its highest point ever. Given the

extremely overextended spread, we are on our guard for a correction in the palladium-to-platinum

ratio.

> What stands out the most regarding major FX pairs and currency indices is that (implied) volatility lies

at or near historic low levels.

> Yesterday’s bullish breakout in GBP/USD from its consolidation pattern of the past months points to

an uptrend continuation, that could target 1.34 in the weeks ahead.




Market to Watch highlight

Greece Athex Composite index

Within the global stock market complex, the Greece Athex Composite index has been a clear

outperformer. Year-to-date, the index has already surged almost 50% and Greek stocks are headed for

their best year in two decades.

Technically, the index is currently testing past quarters’ price peaks near 900. If (and only if) we see a

significant breakout above those peaks, this will likely mean that this sideways consolidation - a big

ascending triangle pattern - is finished. In such case, we think chances are high that the established

upwards trend (dating from early 2019) will continue. Taking into account the minimum theoretical price

target formula for such a bullish pattern - its vertical distance, projected to the upside -, this yields a

minimum target price of at least 1,000 in subsequent months.

In contrast, should the index fail to sustain the levels it has broken out of, and / or eventually drops below

short-term support (the most recent higher low at 850), this would invalidate the aforementioned bullish

breakout scenario. In that case, investors should reckon on a fall back towards medium-term support

around 780 instead (the lower end of the triangle pattern).




Stock Markets

US

S&P 500 index

Given the rapid gains of the past months, the (shallow) setback over the past week did not come as a

surprise. US markets were rather overextended while various sentiment surveys and market indicators

showed a high degree of bullishness and complacency. The above could well set the stage for a further

(healthy) pullback or even a larger price correction in the near term. In concrete terms, initial support lies

near 3,030 (the bullish breakout point of early November). A drop clearly below that level, combined with

another surge in the VIX volatility index to above 18, signals a larger pullback and more profit-taking to

come. In such case, the area in the S&P 500 index around 2,950 (= the support-line connecting the

consecutive higher lows since June) should be a strong support floor.

Still, as long as this support zone holds, we could well see a continuation of the momentum driven rally.

If the all-time high at 3,155 is exceeded eventually, the benchmark index could rapidly rise further to

around 3,300. Other market signals could add to this medium-term bullish outlook (see our former

Technical report).

To the contrary, if the index would stage a deeper correction below 2,950 (on a weekly closing basis), this

would clearly weaken the bullish outlook and the whole upmove of the past months could proof to be a

classic false breakout. In that case, investors should highly reckon with the scenario of a downward trend

reversal. In other words, further price weakness at least towards a key support zone near 2,730 but likely

(much) lower.




Nasdaq 100 index

Given the size of the >10% market rally since early October, this index just as vulnerable to a pullback to

digest these rapid gains. A downward break of initial support at 8,000 would be a clear signal of more

weakness ahead towards the 2019 upward support trend line, currently around 7,750 (see graph).

However, as long as this latter support zone holds, the technical outlook will remain bullish and there is

a reasonable chance of a bullish trend continuation over the coming months.

Europe

Europe Stoxx 600 index

In the past weeks, this broad European index seemed on the verge of a bullish breakout above a very

significant resistance zone (the former price peaks from 2000, 2007, 2015 and 2018). However, we did

not see a breakout so far (see graph). The prerequisite - a significant rise above the 2015 all-time high




around 415 - failed to materialize yet. Still, we would not be surprised to see another attempt to surpass

this formidable hurdle somewhere in the coming weeks or months.

As soon as this happens, we can calculate a bullish target price of nearly 500, which may ultimately be

expected in subsequent quarters. As the index has never been trading higher, there is no technical

resistance above. This minimum theoretical price target is calculated by taking the vertical distance of

the 2019 high-low range and by adding this bandwidth to the breakout price (the 'pendulum swing'

method). Finally, a decline below the August low near 360 would negate this bullish long-term bullish bias

and signals a further weakening instead towards long-term support near 325.

Euro Stoxx 50 index

Mid-October, this EMU based blue-chip index staged an upside breakout above the downward resistance

line since 2015 which brightened the medium term technical picture. It points to a further rally in the

coming months. Once the index exceeds the 2015 high just above 3,800, the 2007 price peaks near 4,550

will be a realistic target in the quarters ahead. To the contrary, a downward move significantly below the

early October bottom at around 3,400 would invalidate this bullish outlook.




DAX 30

Until a further pullback falls through the significant chart support zone at around 12,500, the medium-

term trend is upwards. As such, there is a very reasonable chance that the German benchmark index will

eventually extend its uptrend towards the 2018 all-time highs (around 13,600) at minimum.

Swiss market index (SMI 20)

The long-term outlook is bullish. Last June, the Swiss benchmark index staged a breakout above a decade-

long resistance zone near 9,600 (previous peaks formed in 2007, 2015 and 2018). This points to a bullish

trend continuation in the coming quarters. Given the length of the up move since early 2016 (projected

to the upside), we can calculate a minimum price target of approximately 11,800. Nevertheless, in the

short-term, we are anticipating the possibility of a further pullback in the index to digest the strong price

gains from this year. In such case, the ascending (blue dotted) trendline drawn under the higher lows of

2019 - currently near 9,800 - will likely serve as a solid support area (see graph).




UK FTSE 100

As long as the index fluctuates between resistance (the July year high peak) near 7,650 and the horizontal

support floor surrounding 7,000, the medium-term outlook is neutral. We think a drop to below the latter

level - finishing a head-and-shoulders topping pattern at the same time - would be a clear indication of

another falling phase towards 6,400. Finally note that UK index is strongly underperforming its global

peers.

Japan

Nikkei 225 index

Provided that the Japanese benchmark index stays at least above 22,300 in case of a larger pullback, we

foresee a bullish trend continuation in the coming months, on balance. Concretely, the two price peaks

of 2018 above 24,000 serve as an initial target.




Emerging Markets & China

MSCI Emerging Markets index (local currency terms)

There will only be more clarity regarding the future direction of the EM index once it leaves the lengthy

sideways consolidation phase. Once the index exceeds the resistance zone near 60,000 decisively, we

foresee a 'retest’ of the all-time high near 66,000 in subsequent months. That is to say, an additional

upside potential of 10% or more. On the other hand, a downward move significantly below rising trend

line support - currently near 55,000 - would point to additional weakness towards at least 52,000.

China Shanghai Composite index

The short-term technical outlook is neutral as long as the support zone around 2,750 and initial

resistance near 3,050 remain intact. Once the index exceeds the last-mentioned level, the year high near

3,300 will be a direct bullish target. Later on, we could see an additional rally to 3,600 (the 2018 high) or

higher. To the contrary, a drop significantly below the aforementioned level of 2,750 would suggest

further pullbacks to the year low near 2,450.




Bond Markets

Sovereign bond yields

US 10-year Treasury yield

The short-term picture remains neutral as long as support- and resistance zones - at around respectively

1.4% and 2% - stay intact. The medium-term technical outlook is negative though as long as this latter

resistance cluster is not exceeded to a significant degree. In such case, renewed weakness seems in the

cards over the coming months. Once the 10-year yield also drops below the 1.4% price support cluster

to a significant degree, there is a very high chance of a considerable drop towards (at least) 1%. To the

contrary, a breakout above aforementioned resistance zone will affirm the case of a medium term

bottoming process in place, which opens the door for a further rise to at least 2.35% eventually.




Germany 10-year government bond yield

Once the yield breaks through the resistance zone surrounding -0.2% (among others the 38.2% Fibonacci

retracement level of the prior huge decline since early 2018 as well as the declining 200-day moving

average), the technical picture brightens. It would suggest that a larger bottoming process is in progress.

In such a scenario, we foresee a further rise to at least +0.15% eventually. However, as long as it stays

below the aforementioned -0,2% level, further weakness seems in the cards over the coming months.

Another drop below near-term support near -0.4% will open the door for a re-test of the all-time low

from September at around -0.75 (at minimum).

Credit spreads

US Investment Grade Credit spread

The IG credit spread is presently testing its support zone of the past few months. Once it drops below

this support floor around 1.05% to a significant degree, we foresee a further weakening over the coming

months. In such case, the early 2018 lows will be a realistic downside target in subsequent months. That

is to say, the extra downside potential for the IG credit spread could run to 40 basis points. The medium-

term technical picture would only improve once the spread breaks above resistance (the downward

sloping trendline drawn over its January/August highs) at 1.25%.

US High Yield Credit spread

Regarding the HY credit spread, we will gain more clarity about the trend direction as soon as it breaks

this years’ tightening consolidation pattern with horizontal chart support near 3.6% and the falling

resistance trendline surrounding 4.25%.




EU Investment Grade Credit spread

This is a reiteration of the call we made two weeks ago. As long as a further rebound in the European IG

spread does exceed short-term resistance near 1.5%, the underlying downtrend since the peak in January

remains intact and we think that a re-test of the early 2018 low at around 1.1% is the most likely scenario

in the coming weeks and months.

EU High Yield Credit spread

The HY credit spread is on the verge of a downside breakout from its tightening consolidation range of

the past year, which will be confirmed as soon as horizontal chart support (the year low at 3.9%) breaks

down to a significant degree. From a pattern perspective, this would indicate a further decline towards

2.6%. That is to say, the spread could narrow by some 130 more basis points in subsequent months. Only

another rise above falling trendline resistance near 4.4% would negate this medium-term bearish bias.




Commodities

Crude oil (WTI Spot)

WTI remains in a sideways consolidating mode. In the past quarters, we see the contours of a so-called

symmetrical ‘triangle’ (convergence of upper and lower trendlines), which can be a continuation or a

reversal pattern. As such it is best to take an unbiased attitude until a break is made (that could well

produce a significant directional move). Theoretically, that ideal breakout point generally occurs 2/3 to

3/4 of the way through the pattern's development or time-span - and that phase is forthcoming.

Concretely, we consider the medium-term picture as neutral as long as crude oil is trading between rising

trendline support near $54 and declining resistance, currently around $61.

S&P GSCI Industrial metals index

The index is close to a significant horizontal support area (just above 310) formed over the past years. A

lasting break of this support zone would be an outright bearish signal. In that case, an even further

decline towards at least 265 over the coming months and quarters can be expected (approximately 15%

further downside risk). However, an upward move significantly above key resistance around 330 would

negate this medium-term bearish bias.




Precious Metals

Gold

Unless gold drops below initial support near $1,450 (among others, the 38.2% Fibonacci retracement of

the rally since early June), we will regard the pullback of the past months as a corrective movement within

a medium-term uptrend. In concrete terms, an eventual break above the year high near $1,566 would

confirm the mildly bullish forecast and likely sets the stage for a further rise towards above $1,700. To

the contrary, should we see a clear break below $1,450 support, this would first trigger a larger

correction-signal. It suggests a re-test of the significant support cluster near $1,380 (where gold staged a

bullish breakout during last summer).

Silver

The chart pattern of silver is rather similar to gold, but it should be noted that the technical picture over

the past months looks less strong. Silver has already staged a larger corrective movement compared to

gold and we see a process of consecutive lower highs and lows since the spike top of September. As such,

we have to reckon with further retreats, possibly towards the support area just above $16. Still, we stay

positive in the long-term on technical grounds as long as this significant support zone (the 61.8%

Fibonacci retracement level of the prior multi-month rise, as well as the bullish breakout area from last

summer) holds.

Palladium & Platinum

Outperformance of palladium versus platinum reaches its highest point ever.

In this section, we also like to address the two lesser-known precious metals, namely platinum and

palladium. From a relative perspective, palladium is showing enormous relative strength

(outperformance) against platinum, on balance since 2016. While the former metal has mostly traded

sideways in the past few years, palladium has skyrocketed (see graph). This year alone, palladium prices




have already risen by more than 45%*. On average, the palladium-to-platinum ratio has been around 0.5

over the past three decades. This month, the ratio touched all-time high levels just above two - see graph.

As the ratio is way more than three standard deviations above the historical mean, this suggests an

extremely overextended spread. In other words, palladium is historically enormously expensive in

relation to platinum. In concrete terms, we think the spread looks very vulnerable for a correction. Once

the palladium-to-platinum ratio narrows to below 1.85 initial support eventually , the year-low near 1.5

will become a direct bearish target.

If we zoom in on palladium individually, it is very clear that the overall (short-, medium- and long-term)

trend direction is strongly upwards (as expressed by the rising 20-day, 50-day and 200-day moving

averages). However, given the size of the already enormous rally, the metal is very stretched (persistent

overbought conditions) on multiple timeframes. At the same time, there is persistent negative

momentum divergence (14-day RSI Index) in recent quarters. It indicates that the latest rises have been

far from strong. Given the above, we are anticipating at least a sideways consolidation as the steadily

steepening price development seems unsustainable. At the same time, we think there is a high chance

that we will see a correction in palladium somewhere in the months ahead. In such case, a significant

support cluster lies near $1,600. Price drops below aforementioned zone to a significant degree would

point to a substantially higher chance that an important high has already been set - as part of a larger

peaking scenario.

Regarding platinum, the medium-term outlook is neutral as there seems no clear trend in either direction

present. As such, an unbiased attitude here seems best, as long as larger zones of support- and

resistance (at respectively $780 and $1,000) stay intact.




FX

Volatility

What stands out the most is that the (discounted) volatility for EUR/USD as well as other major FX pairs

and currency indices lie at or near its historic quiet levels. A different way to illustrate the current climate

of serene tranquillity is the fact that the average daily change - positive or negative – (in EUR/USD) is

currently near the lowest level in history (+0.18%). For comparison's sake, this average daily fluctuation

was more than double in the past two decades (see the various graphs). As periods of high volatility often

follow periods with low volatility so a tipping-point could be reached in the not too distant future. It would

make sense, we think, if investors take strongly into account that volatility may well be much higher in

2020 compared to most recent quarters.




EUR/USD

Once the FX pair exceeds initial resistance zone near 1.12 (where we find, among others, the declining

200-day moving average as well as a downward sloping resistance line), we will likely see more bullish

follow up in subsequent weeks and months towards at least 1.141 (the previous peak formed in June).

To the contrary, a fall below short-term support around 1.10 will suggest that the rebound since early

October is already complete and indicates a resumption of the downtrend since early 2018. As soon as

year low support near 1.088 also caves in, a further downward move towards at least 1.05 is the most

likely scenario.

GBP/USD

Yesterday, the FX pair staged an upside breakout from the tight sideways consolidation range of the past

months (1.277 - 1.30). It points to an uptrend continuation, that could target 1.34 in the weeks ahead.

However, price drops below short-term support near 1.283 would negate this bullish bias.




NZD/USD

The short-term technical picture is increasingly showing signs of strength. First note the oversold bounce

from a significant horizontal support area (near 0.62), that took place in the past weeks. Second, a near-

term resistance zone near 0.65 is now being tested. Should we see further relief rallies above the latter

level, it points to an upside breakout from a multi-month bottom pattern. In such bullish case, a further

upward correction towards the most recent weekly lower high (near 0.68) is in the cards. Such an upmove

may well be fuelled by an unwinding of speculators' net bearish bets on New Zealand dollar futures.

Currently, the very significant amount of speculative net-short positions in NZD/USD indicates highly

negative sentiment among investors (which can be interpreted as contrarian bullish).

On the downside, another drop below short-term support near 0.64 will invalidate this bullish setup and

likely suggest that the rebound is already complete. It would indicate a resumption of the medium term

downtrend (towards 0.62 or below).


DISCLAIMER

© ECR Research BV, The Netherlands. All rights reserved. No parts of this publication may be reproduced, stored in a retrieval

system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the

prior written consent of the copyright owner. This publication is intended as general background information and not as definitive

recommendation. The publishers and authors accept no liability whatsoever for any damage that may be incurred in connection

with this publication should you consider concluding transactions on the basis of information supplied in this report.


*From a fundamental perspective, both precious metals derive a large part of their use from the auto industry

as palladium and platinum are metals that clean toxins from the air in catalytic converters. Very briefly

speaking, the emissions scandal in 2015 has fundamentally altered the landscape for vehicles powered by

diesel and gasoline engines and, by extension, platinum and palladium. The former has generally seen a

demand decrease, and the latter a huge demand increase as there is a shift away from diesel-powered cars

towards gasoline-powered cars. This has been very bullish for palladium and bearish for platinum.

Disclaimer: Finally note this report is solely based on technical analysis. As such, the opinions expressed may therefore differ

or even contradict from our fundamental, macro or political analysis.

fx volatility near record lows: wilder times seem ahead - ecr … · 2019. 12. 9. · ecr research...

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