Jittery Risk Sentiment, ECB Next Catalyst

The State of Affairs in Financial Markets

I’ll start the day analyzing, as usual, the RORO (risk-on risk-off) conditions in the marketplace, even if we must keep at the top of our minds that is Central Bank day, with the ECB next in line to update its monetary policy outlook following the ‘Fed Put’ by Chairman Powell earlier last year.

The price action in the RWI (risk-weighted index) is by far the most unstable and jittery it’s been this year, with a big red sell-off candle followed by a topside rejection, which has led to the 5-DMA to start flattening its upward slope since the double bottom found earlier in the year.

By looking at the individual components of the RWI on a 60-minute perspective, we’ve seen back-to-back sell off days in the ES, an indication that supply is returning. Notice both pushes were characterized by impulsive movements. The cluster of bids circa 2,630.00 is still keeping the upside potential intact, even if the 60-minute structure has now shifted into a consolidation mode. The same profile can be observed via the long-dated US 30-year bond yield, stuck in a 5bp range.

What’s arguably keeping the environment from a ‘by the book’ risk-off mode are not only the limited downward moves in US equities and US yields for now, but the breakout lower in the DXY, which has obviously been a positive for the likes of EMs, the Chinese Yuan and the overall sentiment.

The main takeaway, as noted on Wednesday, is that all the signals I’d require to be more convinced of a further deterioration in risk sentiment are yet to line up. If the ES can find equilibrium sub 2,630 on a daily closing basis and US money markets see further demand, combined with the roll over of the 5-DMAs, that will start to make investors nervous to sell risk. If on top of this assumption, a recovery in Gold prices ensued by a break above the 1,286.50 resistance on a daily closing basis, you should start playing much more defensive, with the usual suspects (JPY, CHF, USD) in demand.

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The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth ...

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