Wednesday, 23 March 2016

Risk aversion quells stock market rally


Written by Lukman Otunuga, Research Analyst at FXTM
The financial markets were shaken by extreme levels of volatility during trading on Tuesday following the attacks in Brussels which renewed a wave of risk aversion that encouraged anxious investors to flee from riskier assets. Global stocks entered a free fall with European equities relinquishing previous gains as the events in Brussels weighed heavily on airline stocks. This bearish domino punished American markets which had previously showed signs of recovery, as expectations mounted over central banks mitigating the financial turmoil. Although Asian shares have started Wednesday mostly mixed, the increased appetite for the safe haven Japanese Yen amid this risk averse climate should drag Japanese stocks lower.

FTSE100 Spotlight

The FTSE100 has displayed signs of exhaustion and may be set for a steep decline as risk aversion encourages investors to offload riskier assets for safe-havens such as Gold. Concerns over slowing global growth continue to linger in the background while overall uncertainty over the unstable economic landscape has made risk aversion rife. With investor risk appetite soured it may only be a matter of time till the bears pounce on the opportunity to send the FTSE100 lower. From a technical standpoint, a breakdown below 6100 should open a path towards the 6006 support.

Sterling descends

The Sterling plunged during Tuesday’s trading session as the risk aversion and heightened expectations of a possible Brexit following the attacks in Brussels encouraged bearish investors to attack the currency. The sharp decline was complimented by a tepid CPI reading of 0.3% which was well below the Bank of England’s 2% target and offered another compelling reason for the central bank to keep UK rates at the record 0.5% low.

Pound bears continue to receive ample encouragement from the political rifts within the Conservative Party while fears over the impacts of a Brexit to the UK economy have haunted investor attraction towards the currency. This may be the start of something greater and with uncertainties set to intensify as the Brexit vote looms, the pound may be left vulnerable and open to further losses.

The GBPUSD crashed further this morning with prices breaking through the 1.42 support. This pair is bearish on the daily timeframe as the candlesticks are trading below the daily 20 SMA while the MACD has crossed to the downside. Previous support at 1.42 may act as a dynamic resistance which should encourage a further decline towards 1.40.


WTI Oil finds comfort above $40

Against all odds, WTI bulls have retained control above the psychological $40 level despite recent reports from the American Petroleum Institute showing that U.S crude stock piles rose almost 9 million barrels last week. There may be a possibility that the effects of the incessant buildup in stock piles have been nullified ahead of the heavily anticipated meeting in April in which Saudi Arabia has agreed to freeze output without Iran. The mounting optimism over the likelihood of a positive meeting in April could be the main driving force behind oil prices comfortably trading above the $40 level. Although the heightened expectations of a deal have produced speculative boosts in oil prices, the fundamentals of an unrelenting oversupply continue to linger in the background and as such should provide some headwinds in the near term.

Commodity spotlight – Gold

Gold bulls exploited the heightened levels of risk aversion during trading on Tuesday which offered an opportunity for bullish investors to send prices to the highs of $1260. This precious metal is fundamentally bullish and the ongoing global uncertainty should boost its attraction as risk aversion takes center stage. The diminishing expectations towards the possibility of the Fed raising US rates anytime soon should complement the global uncertainty and provide a foundation for bulls to send prices towards $1300 and potentially higher. From a technical standpoint, prices are trading marginally below the daily 20 SMA while the MACD still trades to the upside. A weakening Dollar may be the final ingredient which should open a path back above $1250 for a rise towards $1300.

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