28 March 2016
Written by Lukman Otunuga, Research Analyst at FXTM
Global stocks were placed on a chaotic rollercoaster ride last week following the horrible cocktail of events which dampened sentiment towards the global economy and soured investor risk appetite. This pressure trickled into the European markets which were already depressed from the declining energy stocks and heightened caution ahead of the Easter holiday break. Although Europe may be closed today, the bearish contagion may punish American markets that are currently engaged in a battle with rising expectations of a possible April US interest rate rise. On a positive note, Asian markets have started Monday on a firm footing, but this may be short term as the risk-off trading environment should boost appetite for the safe-haven Japanese Yen, which could drag Japanese stocks lower consequently leaving Asian equities capped.
The erratic movements in the stock markets may be attributed to the ongoing fears over the current unstable economic landscape which in turn has produced an explosively volatile trading environment dictated by oil prices. With concerns over slowing global growth still lingering in the background and heightened expectations of another US rate rise in April empowering the Dollar, stock markets may be open to further losses moving forward.
US GDP exceeds at 1.4%
Dollar bulls received a lifeline during trading on Friday following the impressive US GDP report for Q4 which reinforced expectations that the Fed will potentially raise US rates again in April. For an extended period, data from the States has followed a positive pattern and if the NFP results this Friday exceed estimates then the Fed may be handed a compelling reason to raise US rates again. Although domestic data may warrant another rate hike, concerns over the state of the global economy still remain elevated while the decline in oil prices continues to punish overall sentiment. An appreciating Dollar could take center stage ahead of the NFP on Friday and this may likely punish commodities further.
Gold under pressure
Gold bulls were under extreme pressure as the rising expectations of a potential US rate rise in April and appreciating Dollar encouraged investors to offload the zero yielding metal. Although this metal is still fundamentally bullish, the tug of war between US rate rise expectations and ongoing fears over slowing global growth have created violent swings in favour of the bears. The NFP report this week has the potential to send Gold prices surging back up or simply crashing down and this will leave most investors on standby. Initially, a weaker Dollar was the sought-after tool needed to encourage buyers to push prices towards $1250, but with the way prices are heading a breakdown below $1200 signals bullish weakness and suggests the bears are back in the picture.
Commodity spotlight – WTI Oil
The ongoing concerns over the excessive oversupply of oil have kept oil prices from securing a weekly close above the psychological $40 resistance. This commodity is bearish and recent reports from the EIA showing a 9.36 million build-up in inventories should encourage bearish investors to attack prices lower. With the meeting in April drawing closer, volatility may intensify as investors attempt to be on the right side of the market with growing optimism of a positive outcome keeping prices buoyed. The major event risk is that the meeting concluded with no logical outcome and such may trigger a heavy selloff in oil prices as fears over the oversupply haunts investor attraction further. From a technical standpoint, a breakdown back below $40 should encourage a steeper decline towards $38 and $35 respectively.