The equity markets are currently looking positive and attempting to continue building momentum into the second trading day of the week after suffering from a prolonged period of heavy and aggressive selling over the past couple of weeks. The stronger oil prices are being seen as the major driver for the more positive momentum that is being seen across the equity markets, but I do also think that the resumption in expectations that central banks will continue to ease monetary policy is also contributing towards the gains being seen. European Central Bank (ECB) President Mario Draghi hinted once again yesterday that more stimulus measures could be on their way to Europe next month, while the pressure on the Bank of Japan (BoJ) to do more to reinvigorate the Japanese economy is a continuous trend. Additionally nobody ever really knows what is truly coming next from the People’s Bank of China (PBoC), and the sudden emergence in expectations that the Federal Reserve will postpone its commitment towards normalizing monetary policy could also be encouraging investors to look towards the equity markets once again.
All eyes remain on WTI oil
The major focus of the market headlines on Tuesday has been the reaction to the oil markets after the oil ministers from three separate OPEC committee members agreed to freeze oil output at January levels, as long as others follow suit. The markets are very undecided on how to take this news and if I am being honest with output from most oil producers being at a record level anyway, this basically means that producers are content for the aggressive oversupply in the markets to continue. What we have really seen though is an extension of the unexpected comments from the Saudi Arabian Oil Minister, Ali al-Naimi, from back in December last year when he expressed that any possible change in production level would have to be agreed between both OPEC and non-OPEC committee members.
Saudi Arabia in itself made headlines after a report filtered through the media that low oil prices apparently have no impact on the Saudi Arabian economy, which I think most onlookers must have read with amusement because such an idea is just ridiculous. The bottom line is that we know such depressed oil prices must be having a negative impact on all the economies that are reliant on exporting the commodity, especially when you also take into account that the price of oil has crashed by around 80% since its peak in the middle of 2014. We do believe that for the price of oil to significantly rebound a change in production cut would have to be met and respected by all global producers of the commodity.
Gold moves back towards $1200
In line with expectations, Gold found support at $1200 yesterday after benefitting from one of the most dramatic periods of USD weakness that we have witnessed for a significant amount of time. The metal is likely to fall below $1200 later in trading, but $1200 is now being seen as a major psychological level for traders and will likely be used as a pivot point for investors to then decide what direction they want to drag the metal next. There are ongoing anxieties over a decline in US economic momentum, which might force the Federal Reserve to completely backtrack away from their previous confident commitment to continue normalizing monetary policy into 2016 and this is why some will likely still be positive on Gold in both the mid and possibly longer-term.
GBPUSD still appears at risk to further selling
The Pound/Dollar is currently performing in line with expectations and has commenced the new week under pressure after failing to close trading above 1.4550 last week. There are still many different factors that are going to impact investor attraction towards the British Pound on an ongoing basis, with this including concerns about a likely decline in economic growth, interest rate expectations that are continuing to be pushed back and also questions remaining unanswered around whether a possible “Brexit” referendum could still take place for later this year. Headline inflation for the UK economy is also notoriously low, which is why the 0.3% rebound over the past 12 months has not been met with huge enthusiasm from investors. We are still a dramatic distance away from the Bank of England’s (BoE) 2% target and depressed inflation readings are here to stay in the UK economy for a significant period of time.
EURUSD finds support at 1.11
The EURUSD encountered heavy selling after ECB President Mario Draghi repeated the possibility around the central bank easing monetary policy once again in March during a public conference yesterday. The only reason for the bounce higher in the EURUSD is due to ongoing Dollar fragility, therefore I don’t think many are surprised to hear that the ECB President seized his change to send the Euro currency lower yesterday. The major issue that he faces though is that if the sudden Dollar fragility intensifies once again, there will be little he can do to prevent the EURUSD from moving higher and this is exactly why investors will want another aggressive round of QE to be encouraged to send the Euro where the central bank would likely prefer it to be.
Yuan weakens despite recent PBoC action
Just one day after the PBoC provided confidence to investors by strengthening the Yuan’s reference rate fixing by the most in around three months, the currency is looking at reserving gains after suffering losses on Tuesday. Despite the PBoC possibly attempting to prevent a further decline in the currency over the short-term and PBoC Governor, Zhan Xiaochuan expressing confidence over currency stability and capital outflows during an interviews over the weekend, many are still adamant that the trend of the Yuan will remain weak. This is simply because economic data in 2016 will continue to outline that GDP growth is still slowing towards what is likely to be 6% for this year and also because the markets are alert over the risk of increasing capital outflows.
Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.