Risk aversion sweeps across the board

September 12, 2016

A wave of risk aversion engulfed the financial markets last week following the instances of central bank caution which weighed heavily on investor risk sentiment. Asian shares were depressed on Monday with most stocks suffering their largest losses since June as fears over central banks adopting an inactive stance sparked market jitters. European markets were dragged into bear territory on Friday and could descend lower this week if the ongoing concerns over the effectiveness of central bank intervention repel investors from riskier assets. With expectations fluctuating over the Federal Reserve taking action this year, Wall Street may be flung on a chaotic roller coaster ride as investors systematically offload and reload positions.

Global stocks may be poised for steeper losses if the combination of central bank caution and fading optimism towards the effectiveness of stimulus measures forces investors to scatter from riskier assets. With concerns still elevated over the health of the global economy and the oversupply woes ensuring oil prices remain depressed, stock markets could be set for a heavy selloff. The attributes for a bear rally are already in place with an unexpected catalyst needed for bears to be provided a foundation to install repeated rounds of selling.

Dollar stuck in tug of war

The Dollar has been on a wild ride with prices erratically swinging between losses and gains as expectations over the Fed raising US interest rates fluctuate. Although Janet Yellen gifted investors the clarity long sought in the Jackson Hole meeting a few weeks back, the conflicting domestic data continues to leave most wondering if anything will be done this year. The recent soft US labour report combined with the string of disappointing US data has thoroughly discounted any hopes of September being a live meeting to raise US interest rates. Although there is only a 24% probability that the Fed breaks the tradition of central bank caution in September, the element of surprise has noticeably left investors on edge. Investors may direct their attention towards FOMC Member Lael Brainard’s speech for additional clarity on when the Fed plans to act. If by any chance hawks come out to play then the Dollar bulls could be installed with some inspiration ahead of next week’s FOMC meeting.

Sterling bears make an appearance

Sterling bears were unleashed last week with the GBPUSD sinking towards 1.3250 as the renewed Brexit fears haunted investor attraction towards the currency. Prices were dragged lower following Dollars resurgence which provided a solid foundation for investors to install repeated rounds of selling. Although the string of positive PMI releases in recent weeks provided Sterling somewhat of a lifeline, investors have started to realise that it may be too early to gauge the impacts of Brexit consequently leaving the pound pressured. With the economic news calendar light today, price action could prevail and such may leave the GBPUSD open to further losses. From a technical standpoint, a decisive breakdown below 1.3250 could open a path lower towards 1.3150.

Commodity spotlight – WTI Oil

WTI Oil stumbled below $45 on Monday after U.S oil drillers added rigs in a quest for new production as participants adjusted to prolonged periods of low oil. It is becoming increasingly clear that the oversupply concerns have gripped oil prices with the previous speculative boosts swiftly surrendering their gains. Bears may be back in town with steeper losses expected if OPEC’s informal meeting in September concludes without a solution to quell the excessive oversupply. From a technical standpoint, WTI is turning bearish on the daily timeframe as prices are trading below the daily 20 SMA while the MACD has crossed to the downside. A strong breakdown and daily close below $45 could entice sellers to send prices lower towards $44.

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