Global stock markets continued their recent run of weak form all the way towards the end of last week with financial markets concluding trading once again by staring at steep and heavy losses. Continual concerns over the pace of global growth and more particularly, further milestone lows in the oil markets and a general acceptance that prolonged weakness in the commodity markets is going to remain were contributing behind the widespread losses seen across the financial markets.
Markets are only just beginning to digest to a realization that depressed commodity prices are here to stay, and the sentiment towards riskier assets like stocks was hit by a further blow when the price of oil concluded the week below $30 for the first time in around twelve years. Even over the weekend, share prices across the Gulf suffered huge losses in reaction to yet further milestone low in the price of oil and following reports that Iran sanctions are now lifted with this causing concerns that the price of oil could dive even further in the future.
The price of oil concluding trading for the week below $30 is a huge psychological move and potentially opens the doors for the commodity to continue sliding into the lower $20’s which would of course encourage further shockwaves for the markets and anxiety among investors. There is quite simply an aggressive oversupply and demand equation in the markets with ongoing concerns that demand for the commodity is also slipping lower due to weak global growth, which in many ways adds to the excess supply before investors even begin to take into account that Iran will soon begin unleashing its own potential.
There is quite simply no buyers for oil right now, and investor attraction for the commodity is horrendously low. While we all understand that stronger commodity prices are beneficial for the global economy when you consider that so many economies are reliant on commodity exports, the current economic conditions are heavily against a meaningful comeback. I do expect that reports will soon begin to circulate from different oil ministers regarding the need for an emergency meeting to discuss such depressed prices, but getting different oil ministers to combine together and agree for a meeting will be difficult enough, let alone agree on a possible production cut for the commodity.
Gold and the Federal Reserve
Gold managed to rebound and gained close to $20 during trading on Friday after the sentiment towards the USD suffered a blow following an unexpectedly weak US retail sales report for December. Sales declined by 0.1% despite December being the month of Christmas, and also in spite of consumers supposedly saving on gas expenditure from falling oil prices and further strong gains in job creation.
Although it is becoming clear across different economies that falling oil prices is not proving to be the subsidiary that people hoped it would be to encourage more spending across consumers, it is very unusual that consumers in the US are still not spending after the economy experienced such impressive job creation for more than a year. Weak consumer spending habits might prevent members of the Federal Reserve from speaking so confidently in public about a possible four US interest rates rises at a later date.
It is doubtful that the recent downturn economic data from the United States will prevent the Federal Reserve from raising interest rates towards the end of Q1, however we still believe that the public statement of intent to raise interest rates four times this year looks ambitious.
Punishment for the Pound extends
The British Pound is continuing to face abrupt punishment and it is still difficult to envisage a floor in weakness for a currency that has seen its losses accelerate rapidly in recent weeks. Investor attraction towards the UK Sterling is horribly weak, with this being extended by further signs of a downturn in economic momentum following recent data and markets pricing in that there is currently a minimal chance of a UK interest rate rise occurring this year. These factors combined, plus others including ongoing uncertainty over a potential UK referendum to vote on EU membership as soon as possibly later in the year are all driving the GBPUSD to dive to levels not seen since May 2010 at 1.42.
Despite the rapid acceleration of Pound losses over recent weeks, we still do not think there is a floor to weakness for the UK currency. One factor that investors needs to take into consideration is that the relentless pressure in the commodity markets is encouraging a risk-off attitude from investors, which is basically stating a clear message to stay away from the UK currency. From an economic standpoint, the relentless pressure in commodity prices will drive inflation to fall to further dangerous levels and this is also probably weighing on investor sentiment.
Inflation data is out from the UK economy early in the week with the chances being high that the data will continue to outline persistent headline inflation weakness, which is exactly why the door to continuously push back UK interest expectations is being left wide open.
Changing market dynamics lift the Euro & JPY
The same risk-off attitude from investors that is hurting the Pound is inadvertently leading to Euro strength across the currency markets. We believe there is a changing dynamic in the markets at present and as investors continue to digest to prolonged weakness in the commodity markets, they are focusing their attention towards watching declines in the equity markets and removing selling options on the Euro for now.
The same declines in the equity markets will also encourage further safe-haven attention towards the Japanese Yen. With a high-risk China GDP report being scheduled for the early hours of Tuesday morning, any additional anxiety over the global economy can continue to encourage attraction towards the Japanese currency.
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