Oil, Sterling, US Dollar And Gold In Focus
London (Oct 11) Global stocks staged a miraculous rebound during trading on Monday, with most arenas charging into gains following the sharp appreciation in oil prices which bolstered investor risk sentiment. Asian shares were uplifted on Tuesday, as oil's resurgence attracted bulls, while yen's weakness simply propelled Japans Nikkei +0.98% higher.
European markets received a welcome boost from rising bank stocks on Monday, and could edge higher today from Asia’s bullish contagion. Wall Street was boosted by energy shares while Hillary Clinton’s widening lead in the U.S presidential campaign kept prices buoyed. Although the gains repeatedly displayed in global stocks have been unquestionably impressive, market participants should be diligent as the attributes of a bear market linger in the background.
The persistent Brexit concerns have had a firm grip on sentiment while uncertainty ahead of November’s Presidential election continues to weather risk appetite. Oil's resurgence was triggered by optimism over OPEC securing a freeze deal in November, but could be exposed to downside risks if investors are left empty handed once again. When combining this toxic mixture of Brexit anxieties, unstable oil prices, and overall uncertainty, stock markets could be vulnerable to steep losses in the future with an unexpected catalyst triggering the selloff.
Are oil bulls back in town?
WTI bulls were unleashed on Monday with oil prices charging towards $51.57, as optimism rose over major oil producers reaching an agreement on production curbs this year. Russia seized the limelight by saying it would support the proposal by OPEC to freeze oil production, consequently reinforcing expectations over a potential deal in November.
Oil prices were uplifted further following positive comments from Saudi Arabia’s energy minister Khalid al-Falih, expressing his optimism over a deal by November. With oil sensitivity still a dominant theme, these encouraging comments from top officials swiftly sparked sharp speculative boosts in oil prices.
Oil's resurgence is undeniably impressive, but questions continue to linger over the sustainability of the current rally. A key point worth noting is that both Iraq's and Iran's oil ministers will not be attending November’s meeting, while Iraq has signalled its intent to increase oil output for the remainder of 2016 and 2017.
Major oil producers may still be on the quest to reclaim market shares and such can be seen with Russia’s oil output for September, which rose to record highs of 11.11 million barrels per day. While Russia and OPEC may be commended on their ability to exploit the sensitivity in oil prices, this could come at a heavy price if investors are left disappointed at November’s meeting.
Sterling gripped by Brexit jitters
As expected, the mounting concerns over the ramifications of a hard Brexit to the UK economy continues to leave sterling under extreme pressure with the GBP/USD sinking towards 1.2300, as of writing. The flash crash last week may have a damaging impact on most sterling pairs, with further declines expected as uncertainty haunts investor attraction towards the currency. In extreme cases, there could be a situation where positive economic data is discounted with the Brexit talks having a firm bearish grip on the pound.
Sterling/dollar is heavily bearish on the daily timeframe and could be exposed to further losses as expectations heighten over the Federal Reserve raising US rates in December. A decisive break down below 1.2300 could open a path towards 1.2200.
Dollar bulls unchained
The rising optimism over the Federal Reserve raising US interest rates in December has installed dollar bulls with enough inspiration to send the dollar index back above 97.00, as of writing. Markets were swift to discount Friday’s mixed NFP report with the CME’s FedWatch showing odds for a December rate hike standing at a healthy 70%.
Investors may pay close attention to the latest FOMC meeting minutes on Wednesday evening, with participants around the globe seeking further clarity on the future pace of US interest rate rises. The markets will particularly look for guidance on whether the Federal Reserve will commit to raising US interest rates in December.
From a technical standpoint, the dollar index remains bullish on the daily timeframe, as there have been consistently higher highs and higher lows. Prices are trading above the daily 20 SMA while the MACD has crossed to the upside. The breakout above 97.00 could encourage a further incline towards 97.50.
Commodity spotlight – Gold
Gold remains under pressure this week, with prices hovering above four-month lows at $1257 as speculations mount over the Fed raising US interest rates this year. The yellow metal could be destined for steeper declines if the combination of dollar strength and heightened US rate hike expectations entice sellers to install repeated rounds of selling.
Attention may be directed towards Wednesday’s FOMC meeting minutes which if tilted hawkish could expose gold to further losses. From a technical standpoint, prices are trading below the daily 20 SMA while the MACD has crossed to the downside. An intraday breakdown below $1255 could trigger a selloff towards $1240.