A volatile week ahead

24 October, 2016

Global stocks were resilient last week Friday with major arenas clawing back gains following the upbeat corporate earnings and stabilising oil prices which revived risk appetite. Asian shares floated into gains on Monday as the improving Japanese trade data propelled the Nikkei +0.29% higher. European markets have already commenced this week on a solid footing by borrowing Asia’s bullish momentum and this could influence Wall Street later today.

The looming event risk for stocks may be the upcoming US presidential election which may dish out extreme levels of volatility and uncertainty. Closer to the November 8th election date stocks may be vulnerable to heavy losses as the increasing uncertainty over who will claim the title of the 45th President of the United States encourages investors to scatter from riskier assets.

Dollar lurches to 8 months high

The Dollar sprung to fresh eight-month highs against a basket of currencies during early trading on Monday as expectations intensified over the Federal Reserve raising US interest rates this year. Hawkish comments from Fed President John Williams on how “it makes sense to get back to a pace of gradual rate increases” compounded to the basket of hawkish statements from Fed officials that heightened speculations of the central bank taking action in 2016. Investors may direct their attention towards key macro reports from the States this week such as consumer confidence and GDP which could offer further clarity on the health of the world’s largest economy. As of now, the sentiment is bullish towards the Dollar with bulls taking the front seat as speculators bolster bets over the Fed pulling the trigger in December.

Japan trade data displays resilience

Sentiment towards the Japanese economy was slightly uplifted during early trading on Monday following the stabilising trade data which quelled some concerns over slowing economic growth. It is common knowledge that Yen's resurgence amid risk aversion has heavily punished Japanese exports while soft global demand continues to add insult to injury. In September, Japanese exports tumbled 6.9% for the 12th consecutive month but the numbers were better than expected sparking discussions of a potential rebound in exports.

In light of this, Japanese manufacturing in October was an additional breath of fresh air as activity expanded at the fastest pace in almost nine months at 51.7 indicating that domestic demand could bolster economic growth. Although this flurry of economic data is somewhat encouraging, the major theme in Japan remains the lacklustre economic growth and tepid inflation levels which have pressured the Bank of Japan. The Yen could be poised for further gains as the looming presidential election sparks a risk of risk aversion consequently punishing Japan further.

Sterling under pressure

The toxic cocktail of political risk, persistent uncertainty and the lack of buying sentiment has made the Sterling a sellers dream. Economic data from the UK has become almost secondary with the major driver affecting the Pound revolving around hard Brexit talks. Sterling sensitivity to the downside remains a dominant theme with sellers exploiting the relief rally’s to send prices much lower. From a technical standpoint, the GBPUSD is bearish on the daily timeframe as there have been consistently lower lows and lower highs. A breakdown below 1.2200 could encourage a further decline lower towards 1.2000.

Commodity spotlight – Gold

Gold was pressured last week on Friday after hawkish comments from Fed President John Williams on how “it makes sense to get back to a pace of gradual rate increases” heightened optimism over a US interest rate increase in December. The zero yielding metal remains extremely sensitive to rate hike expectations with further losses expected if speculators boost bets over the Fed pulling the trigger this year. A resurgent Dollar could cap upside gains on Gold consequently providing an opportunity for bears to drag prices lower towards $1250.

From a technical standpoint, prices are trading below the daily 200 SMA. A daily close back below $1260 could encourage a steeper decline lower towards $1250.

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