Written by Lukman Otunuga, Research Analyst at FXTM
Global stocks swiftly erased earlier gains during trading on Tuesday following the dismal Chinese trade data which dampened sentiment towards the global economy and consequently soured investor risk appetite. Asian equities surrendered to the bears with the Shanghai Composite Index snapping a six day winning streak as concerns heightened over Beijing’s inability to revive growth in the Chinese economy. The anxieties from Asia trickled into the European arena exacerbating the painful earnings season which European companies experienced and this punished Euro stocks sending them deeper into the red. Wall Street was poised to open and close lower as mounting fears over slowing global growth triggered a selloff in energy shares which dragged the S&P 500 to levels not seen in almost two weeks.
With risk aversion rife across the board there is a likelihood that the stock market relief rally may come to an abrupt end as jittery investors digest the reality of the current unfavorable global economic conditions.
The FTSE100 enjoyed a period of gains last week and this had nothing to do with an improved sentiment towards the global economy but the exaggerated bounces in oil prices that triggered risk appetite. Concerns over slowing global growth remain elevated, while a fresh batch of China woes has reinstated a wave of risk aversion which has encouraged investors to scatter away from riskier assets. The FTSE100 may be vulnerable and open to further losses in the near term when both mining stocks and oil prices continue their painful declines lower. From a technical standpoint, an intraday breakdown below 6100 should encourage bears to attack prices lower towards the next relevant support at 6000.
UK Manufacturing in focus
Bank of England’s Mark Carney succeeded in maintaining neutrality during his testimony on Tuesday when the highly sensitive Brexit topic was discussed and this capped volatility in the Sterling pairs. It was highlighted that the UK leaving the EU may pose the biggest domestic risk to the economy with uncertainty over investment and household spending exposing the economy to further downside pressures. Despite Carney’s neutral tone Conservative MP, Jacob Rees-Mogg lashed out at the governor calling the comments speculative and beneath the BoE’s dignity to be making pro-EU comments. While the overall market reaction was muted, explosive levels of volatility may be pending as the referendum looms and debates over the impact of a Brexit intensify which should leave the Sterling depressed.
Investors may direct their focus towards the UK Manufacturing report today which has followed a negative trajectory for an extended period. If the report shows further weakness in the UK manufacturing sector then the Sterling may be left vulnerable and open to open to further losses as fears intensify over an economic slowdown in the UK economy.
The GBPUSD still remains bearish on the daily timeframe and a breakdown below 1.42 should open a path towards 1.40 and potentially lower.
WTI capped below $38
WTI Oil bears received a burst of inspiration on Tuesday as concerns over the excessive oversupply oil in the saturated markets overshadowed the speculative price boosts from ongoing talks of emergency meetings. It must be remembered that despite these talks of production freezes and meetings, Iran remains on a quest to reclaim lost market share regardless of the implications and this should limit how high prices can appreciate. The crude oil inventory report will be released today and further signs of oversupply may offer oil bears the momentum needed to install another round of selling moving forward. This commodity has always been bearish and the current bearish engulfment candlestick formation on the daily timeframe suggests that bears may send prices back towards $35.
Commodity spotlight – Gold
The renewed wave of risk aversion from China’s painful trade data complimented with ongoing concerns over slowing global growth continues to boost appetite for safe haven instruments such as Gold. This precious metal has entered a bull market and the risk-off trading environment should provide enough momentum for prices to surge to levels not seen since January 2015 above $1300. Although expectations are live that US rates may be increased again in 2016 following the positive NFP report, the negative central bank interest rate environment has provided some inspiration for Gold bulls. Moving forward, Dollar weakness should act as a trigger for Gold to lurch back towards $1300 and potentially higher. From a technical standpoint, prices are trading above the daily 20 SMA while the MACD has crossed to the upside. A breakout above $1280 may invite an incline towards $1300.
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