2 September, 2016
A sense of anticipation has firmly gripped the financial markets on Friday as investors await the Non-Farm payrolls report for August which could provide clarity on when the Federal Reserve plans to raise US rates in 2016. Global stocks remain mixed with most major markets on standby as anxious investors observe from a distance ahead the market shaking employment report. Asian equities have already drifted lower on Friday and this caution could trickle into Europe consequently leaving European stocks vulnerable to losses. Wall Street was punished on Thursday by the downbeat U.S manufacturing data that rekindled concerns over the US economy with further losses expected as investor jitters intensify ahead the NFP.
The over-extended stock market rally may be displaying signs of exhaustion with September being a potential month where bears emerge from hibernation. Although the heightened expectations of the Fed raising US interest rates has somewhat elevated global sentiment, the persistent concerns over the health of the global economy are still lingering in the background. Prolonged periods of depressed oil prices have eroded investor risk appetite while uncertainty is still a recurrent theme which has left market participants on edge. With volatility making a comeback it could take an unexpected catalyst to trigger a steep stock market selloff. Conventional wisdom holds that a strong Dollar is problematic for stocks which should keep investors alert as hopes heighten over the Fed taking action this year.
UK Construction PMI in focus
Sterling bulls were gifted a lifeline on Thursday with the GBPUSD lurching towards four-week highs above 1.3300 following August’s solid manufacturing PMI of 53.3 which alleviated the Brexit fuelled fears. Sterling weakness from the persistent Brexit uncertainty helped uplift export orders and input costs consequently propelling the UK manufacturing to fresh 10 month highs. While this data was quite impressive, it still remains too early to come to a conclusion with more time needed to weigh the impacts of Brexit to the UK economy.
Investors may direct their attention towards the UK construction PMI which if also exceeds expectations could provide the Sterling another welcome boost. Sterling could accumulate further gains in the short term as the positive data diminishes expectations over the BoE easing further. In the longer term, upside gains could be capped as the Brexit uncertainty persistently haunts investor attraction towards the currency.
From a technical standpoint, Sterling bulls were unchained on Thursday with the GBPUSD rising over 170 pips in a single trading day. Prices are trading above the daily 20 SMA while the MACD has crossed to the upside. Although bulls may be currently in control, a positive NFP figure which bolsters hopes over the Fed raising US rates could cause the GBPUSD to tumble back down towards 1.3100.
Soft US Manufacturing pressures Dollar
The Dollar was left pressured on Thursday following the unexpected contraction in U.S manufacturing which rekindled concerns over the health of the US economy. Manufacturing slipped into contractionary territory at 49.4 for the first time since February consequently dimming hopes over the Fed raising US interest rates in September. Although the manufacturing report was somewhat disappointing, overall data from the US has displayed signs of economic stability which has kept hopes alive for the Fed to act this year. Investors may direct their attention towards Fridays heavily anticipated NFP report which if exceeds expectations could renew optimism towards the Federal Reserve breaking the trend of central bank caution.
It may take an extreme anomaly in Friday’s NFP report to abruptly cool the heated expectations over the Fed raising rates at least once this year. A healthy figure above 180k which displays some stability in the US labour force may be enough to keep hopes buoyed over the central bank pulling the trigger in 2016. A figure below 150K could renew concerns over the health of the US economy and potentially erode optimism towards September being a “live” meeting to act. In extreme cases, a repeat of May’s dismal employment report figure of 38k could temporarily sabotage all efforts taken by the Fed to act.
Dollar bulls are still in control and the Dollar Index is still bullish on the daily timeframe. Prices are trading above the daily 20 SMA while the MACD has also crossed to the upside. A decisive breakout above 96.00 could open a path towards 96.50.
WTI Oil breaks below $44
WTI Oil was left vulnerable to extreme losses during trading on Thursday with prices breaking below $44 as investors discounted the possibility of OPEC securing a freeze in September’s informal meeting. Although OPEC may be commended on their ability to exploit the oil price sensitivity by creating speculative boosts in oil prices, it has come at a very heavy cost. Fears over the excessive oversupply in the markets continue to haunt investor attraction towards the commodity while concerns over slowing demand have capped upside gains. Crude oil stocks piles continue to rise while OPEC members incessantly pump to reclaim market share. The ingredients of a bear trend are present and September’s informal meeting could be the catalyst needed to send WTI lower towards $40.
Commodity spotlight – Gold
Gold was elevated slightly on Thursday following the soft US manufacturing data which eroded some expectations over the Fed raising US interest rates this year. Despite the lifeline provided, the metal has been under pressure today with prices trading towards $1310 as anticipation mounted ahead of the NFP. Gold has been very attractive in times of uncertainty and unease but the metal is zero yielding and also priced in Dollars which make it quite vulnerable to rate hike speculations.
Friday’s NFP could be a critical catalyst which will decide where Gold trades towards in September with a firm employment report leaving the metal open to steep losses.From a technical standpoint, prices are trading below the daily 20 SMA while the MACD has crossed to the downside. Previous support at $1315 could transform into a dynamic resistance that encourages a further decline towards $1285.
While the technicals on the daily are currently firmly bearish, an abysmal NFP that diminishes expectations of the Fed raising rates could propel Gold higher.
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