Written by Lukman Otunuga, Research Analyst at FXTM
Global stocks demonstrated signs of exhaustion and vulnerability during trading on Tuesday following the barrage of lackluster economic data releases which diminished confidence towards the global economy consequently reinstating a fresh wave of risk aversion. Asian equities were under fire with most stocks in Japan concluding depressed, as a gloomy outlook for the Japanese economy combined with ongoing global woes encouraged investors to scatter away from riskier assets. This bearish domino effect punished the European markets and was aided by the sharp decline in oil prices which left most mining stocks open to further losses, and translated to the FTSE100 concluding -0.56% lower. American equities welcomed the losses from Asia and Europe which only complimented the headwinds from the unsavory retail sales report that re-established concerns over the spending power of US consumers.
A sense of anxiety continues to envelop the financial markets with ongoing uncertainties over the Federal Open Market Committee (FOMC) policy decision leaving market participants highly cautious and jittery. Stock markets may be poised to decline further as jittery investors receive encouragement to relinquish riskier assets for safe-haven instruments in a bid to attain protection from the explosive levels of market volatility.
FTSE100 – Spotlight
The heightened concerns over the health of the global economy complimented with sharp declines in oil prices have soured investor risk appetite, consequently leaving the FTSE100 vulnerable to further losses. Risk aversion remains rife and although the FTSE100 may attempt to claw back previous losses, bearish investors have received encouragement to attack this index at any given opportunity. With explosive levels of volatility expected this week ahead of the central bank meetings, bears may take advantage of a breakdown below 6100 for a potential decline towards 6000.
Sterling stumbles ahead of UK Budget
Sterling bears were installed with inspiration during trading on Tuesday following the recent polls showing almost 52% of people would vote to leave the European Union in June’s referendum and this sent the GBPUSD plunging to fresh weekly lows at 1.41. Sentiment remains extremely bearish towards the pound and more declines may be expected as concerns intensify towards the immeasurable possibilities and impacts a Brexit may have on the UK economy. Investors may direct their attention towards Chancellor George Osborne’s budget speech in which he is already under immense pressure to save money for the UK economy. With the Brexit development leaving many market participants anxious, George Osborne risks treading on thin ice if he seems out of touch or makes a bold decision that fosters risk amid the global turmoil. Today’s budget speech may be passive with fewer talks about cuts, but more on savings and education.
The GBPUSD is under pressure and the breakdown below 1.420 may have opened a path for a further decline towards 1.400. From a technical standpoint, prices are balancing above the daily 20 SMA while the MACD trades deep into the downside. Previous support around 1.420 should become a dynamic resistance which may encourage a further decline to 1.400 and potentially lower.
US CPI in focus
Sentiment towards the US economy received a lashing in Tuesday’s trading session following the disappointing retail sales report which suggested that US consumers were not spending despite the boost in job creations and declining oil prices. This heavily eroded any expectations left of US rates being raised in the FOMC meeting on Wednesday and further weakened the Dollar across the global currency markets. The expectations of US rates increased in 2016 are still live and a positive CPI reading should reinforce some optimism towards the possibility of the Federal Reserve taking action in the June meeting.
Commodity Spotlight – Gold
The ongoing China woes and mounting developments in Japan have reinforced a wave a risk aversion which continues to encourage investors to flock to safe haven assets such as Gold. Despite a few days of declines, this yellow metal is bullish on the daily timeframe and the heightened anxieties over the health of the global economy may offer a foundation for bullish investors to send prices higher once the correction has concluded. A highly volatile week lies ahead with major event risks such as central bank meetings leaving investors jittery and this has consequently encouraged them to scatter away from riskier assets. If Fed doves make an appearance and Dollar weakness persists, then Gold bulls may exploit this opportunity to send prices towards $1250 and potentially higher. From a technical standpoint, prices are trading below the daily 20 SMA while the MACD has crossed to the upside. Bulls remain in control as long as the $1200 support defends.
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