The global markets were noticeably indifferent during trading on Wednesday evening despite the dovish slant to the FOMC meeting minutes which put an end to any remaining expectations of a US interest rate rise in March. Although the minutes echoed a tone of caution similar to Yellen’s testimony last week, the visible contradiction and divide within the Fed officials on how to handle the current unstable economic conditions questions the central bank's credibility. While some officials continued to expect gradual policy tightening amid the global turmoil, this was contradicted by others who were clearly fearful and saw increased downside risks from ongoing China woes. Since the start of 2016 the painful declines in both stock markets and oil prices have manufactured an environment unfit for a rate rise and it seems the Federal Reserve is coming to grips with this.
This fear and confusion radiating from the Fed has rapidly diminished the previous expectations of four possible rate rises in 2016 while reinforcing the anxieties towards the current state of the global economy. In the eyes of most FOMC members, the current data was too unclear to gauge the risk outlook and this provided an opportunity for the data dependency mantra to be repeated, but economic data from the U.S economy has followed a negative trajectory which only fortifies the growing concerns that US rates may not be raised again in 2016. The sentiment is turning increasingly bearish towards the US economy and with hopes of a hike dashed Dollar weakness may take center stage in the global currency markets.
Stock markets propelled by oil
The stock markets received an unexpected welcome boost during trading on Wednesday and this had little to do with the dovish FOMC minutes, but was linked to the sharp rebound in global oil prices. With oil markets exhibiting explosively volatile tendencies, any speculations of a production cut has translated to an irrational boost in oil prices which consequently boosts investor risk appetite. Although gains may be viewed across Asia, Europe and American equity markets on the back of rising oil prices, the medium term direction still points to the downside and gains may be relinquished once risk-off returns. Investors must remember that oil prices are still painfully low, while concerns over the global economy remain elevated which should weigh heavily on sentiment. The Federal Reserve’s visible fear and caution towards the current economic landscape has added to the woes and should act as an early signal for more downside in the future.
WTI rallies on Iran support
WTI bulls were offered a lifeline during Wednesday’s trading session following the news of Iran’s support for a production freeze which renewed some expectations around OPEC and non-OPEC members striking a deal to battle the excessive oversupply. Although Iran supported the agreement for a production freeze, it must be understood that the nation did not explicitly state that it will freeze production of its own oil output, and as such this should weigh heavily on investor attraction. These major oil producers are clearly taking advantage of the sensitive and a volatile oil market which reacts erratically to empty promises of production cuts and this can be viewed within WTI which has broken above $30. Oil prices are set to decline again as Iran remains on a quest to reclaim lost market share post sanction relief while ongoing tensions with Saudi Arabia has provided an obstacle to an amicable deal to be struck.
Regardless of recent short-term gains WTI oil is bearish and sellers need to break back below $30 to take control once again. From a technical standpoint, the MACD trades to the downside while current candlesticks are within the bearish channel. A breakdown below $30 should encourage a further decline to $25.
Commodity spotlight – Gold
The visible confusion in the global economy combined with rapidly fading expectations over the Fed raising US rates anytime soon has provided a foundation for Gold to find support above the $1190 dynamic support. This precious metal is bullish on the daily timeframe and elevated anxieties over slowing global growth, erratic swings in the oil markets and ongoing China woes should install a wave of buying momentum with targets stretching towards $1263. With Wednesday’s FOMC meeting minutes showing a fearful central bank, USD weakness may take center stage and such should encourage bullish investors to send Gold prices higher moving forward. From a technical standpoint, prices are trading above the daily 20 SMA while the MACD has also crossed to the upside. A breakout above $1215 should invite a further incline towards $1263.
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