Though it's a shortened week for U.S. equities due to Monday's Memorial Day holiday, there will likely be plenty of significant moves in both global and U.S. markets during the week ahead. Here are five of the most important charts to watch for these potential moves.
GBP/USD (British Pound vs U.S. Dollar)
After intense speculation over UK Prime Minister Theresa May's future as Britain's leader amid ongoing Brexit chaos, May announced her resignation on Friday. During the previous week, Brexit talks between the two major parties – the ruling Conservative Party and the Labour Party – collapsed yet again, prompting a continued sharp sell-off for the British pound. Up to that point, the Brexit negotiation process had long been rife with setbacks and chaos as Theresa May attempted three times without success to get her deal passed in Parliament. Last month, the European Union granted the UK a substantial extension of the original Brexit deadline, to October 31 of this year.
After three full weeks of plunging against the U.S. dollar, the British pound received a boost on Friday with May's resignation announcement. This is likely due to hopes that a new leader may be better equipped to unite the country and the divided factions in Parliament with respect to a Brexit deal. Whether such a leader will emerge remains anyone's guess. Going forward, the pound will likely be subject to significantly increased volatility as uncertainties surrounding new leadership and Brexit negotiations intensify.
The chart above shows the GBP/USD (British pound vs U.S. dollar). The U.S. dollar has been relatively strong of late, helping to weigh on the GBP/USD currency pair. But for the past three weeks, the sharp drop in the currency pair can be attributed in large part to increasing weakness in the British pound due to widespread skepticism over parliamentary Brexit negotiations and Theresa May's viability as prime minister. During the past three weeks, GBP/USD has fallen sharply from near 1.3200 down to the 1.2600 handle last week. Though Friday's pop on May's resignation was a hopeful sign of respite for the beleaguered pound, near-future uncertainties are apt to apply further pressure on sterling as the likelihood of a no-deal, or hard, Brexit remains on the rise. In this event, the next major downside target for GBP/USD currently resides around the key 1.2500 support level.
Crude Oil Futures
Crude oil prices continued to be heavily pressured last week as concerns over U.S.-China trade tensions deepened. These concerns have hit all corners of the market, most notably global equity markets. But the impact on oil prices has been particularly severe due to expectations that an extensive trade war would pressure global economic growth and demand for oil, especially in the U.S. and China, the world's largest oil consuming nations.
Aside from rising trade conflicts between the two economic superpowers, a slew of global manufacturing data last week showed lower-than-expected numbers from Japan, Germany, the eurozone, and the U.S. As the manufacturing sector is a major source of oil consumption, those disappointing results do not bode well for demand and prices. On the supply side, U.S. inventory data from the past two weeks has shown far greater supply than expected, which has also weighed heavily on the price of crude oil.
As shown on the chart, the drop in crude oil futures since the late-April high has been pronounced – around -11% in slightly more than a month's time. Prior to that high, price had been in a strong uptrend since late December as OPEC countries and their allies voluntarily limited output in efforts to stabilize oil prices. Also, geopolitical tensions and sanctions involving the U.S. and major oil-producing nations like Iran and Venezuela helped to boost prices. Lately, however, demand worries have prompted a sharp drop below both the 50-day and 200-day moving averages, as well as major support at $60. In the process, oil futures fell to a new two-month low late last week. Clearly, the previous uptrend recovery has been either severely interrupted or possibly reversed. With any continued pressure on oil due to trade war fears, the next likely downside target is around the key $55 support level.
10-Year US Treasury Yield
Last week's release of minutes from the early May FOMC meeting clearly struck a dovish tone, pressuring government bond yields like the benchmark 10-year U.S. Treasury yield. The summary of the FOMC meeting indicated that the Federal Reserve will likely refrain from raising interest rates "for some time." Even more dovish was the addition of "even if global economic and financial conditions continued to improve." Generally, an improving economy helps place upward pressure on interest rates. But the Fed has now said that it would resist that pressure, at least for the foreseeable future.
As shown on the chart, the 10-year Treasury yield has virtually been in a state of free fall since the major double-top pattern around 3.250% completed forming in November of last year. Most recently, the tables have turned and the 10-year yield formed a double bottom right around the 2.350% level. The first bottom was in late March, which hit a level not seen since the end of 2017. And in mid-May, the benchmark yield dropped down to test March's trough. Since that second bottom, the yield was on the rebound until last week's dovish Fed minutes were released, after which the yield tentatively broke down below the double-bottom.
Strong declines in bond yields have been driven in recent months by fears of slowing global economic growth, dovish-turning central banks, and expectations of low interest rates for longer. Most recently, the escalating trade war between the U.S. and China has reignited fears that protectionist policies on both sides could further weigh on global economic growth. Now that the Fed has indicated in no uncertain terms that it intends to keep rates on hold, the outlook for yields continues to be neutral to bearish below the double-bottom breakdown.
Nasdaq Composite Index
Concerns surrounding trade tensions and global economic growth have not only weighed on bond yields and crude oil this month, but also on major equity markets. Case in point, the tech-heavy Nasdaq Composite has been hit hard this month by rising fears of an ongoing trade war between the U.S. and China, and the potentially negative economic and business implications of such a conflict.
As shown on the chart, the Nasdaq Composite had just reached up to a new record high in late April – slightly surpassing the high from late August – before hitting major volatility once again. From early May, the Nasdaq has experienced sharp drops and heightened volatility that have pulled the index down more than 6% from its new all-time high. In the process, Nasdaq has broken down below both a key uptrend support line and its 50-day moving average, and has also dipped slightly below an important support area around 7645. Directly to the downside is the major 200-day moving average, currently situated around the 7530 price level. Any further breakdown and sustained trading below that level would be a significantly bearish technical signal for the index.
Shanghai Composite Index
Finally, we have the Shanghai Composite (SSEC), China's most prominent benchmark equity index. One of the global indexes affected most negatively by the resurgence of U.S.-China trade tensions, the Shanghai Composite is currently down more than 12% from its April highs. Though the first four months of the year saw a sharp recovery for the SSEC, the current plunge has erased around half of those gains. In the process, the index has plunged back down below its 50-day moving average, approached its 200-day moving average to the downside, and formed a potentially bearish inverted pennant pattern. With any further breakdown of both price and U.S.-China negotiations, the next major area of support to the downside is around the 2700 level.