Commodity sell-off

5 May, 2017

Commodity sell-off

The sharp depreciation in commodity prices overnight has weighed on risk sentiment, with global stocks poised to remain depressed on Friday as questions are raised over the health of the global economy. Asian shares have struggled to maintain gains and the lack of appetite for risk should expose European equities to further losses. Wall Street was mostly lower on Thursday after the sell-off in energy stocks, and may be positioned for steeper losses this afternoon as investors adopt a cautious approach ahead of the US Non-Farm Payroll data. With depressed oil prices, lingering geopolitical tensions, Brexit developments, and Trump uncertainties still weighing on sentiment, a pending stock market correction may be on the table.

Dollar static ahead of NFP

The Greenback was on standby during Friday’s trading session ahead of a crucial US Non-Farm Payroll data that may approve or dismiss the heated market speculations of a June interest rate increase. A solid US labour market data for April may compliment the Fed hawks and confirm expectations of a rate hike in June. However, if job growth fails to meet market forecasts and wage growth softens, the Dollar will find itself exposed to heavy losses as optimism over a June rate hike fades. From a technical standpoint, the Dollar Index remains on the back foot on the daily charts. Sellers have exploited the technical bounce to drag the Greenback lower. The pending NFP report will heavily impact where the Dollar Index concludes this week, with traders carefully observing the 98.80 support and 99.40 resistance.

Euro bulls make an early appearance

The increasing expectation that Emmanuel Macron will be the next French President has installed Euro bulls with enough confidence to send the EURUSD to a fresh six-month high at 1.099. With the current polls showing Macron holding a solid 20 point lead over Marine Le Pen, I may not be the only one saying that a Macron victory has already been “baked in” to the markets. Since markets are widely expecting Macron to be declared victorious, we would see some additional support for the EU currency, but further gains could be limited after the rally seen in the Euro since the first round of voting. I still feel markets should remain diligent and investors cautious as the threat of a Trump-style victory for Marine Le Pen would create tremors across the financial markets. From a technical standpoint, the EURUSD is heavily bullish on the daily charts and a breakout above 1.1000 should open a path towards 1.1100.

WTI Crude under renewed selling pressure

WTI Crude received a pummelling this week with prices sinking deeper into the abyss during early trading on Friday due to heightened concerns over the oversupply of oil in global markets. The bearish price action on WTI clearly questions the market confidence over OPEC’s ability to stabilize the saturated markets, with discussions being raised of whether the supply extension may have any positive impact on oil prices. With the aggressive pumping of US Shale contributing to oversupply woes, WTI Crude remains fundamentally bearish moving forward. From a technical standpoint, WTI Crude remains under intense selling pressure, with the next level of interest at $43. In an alternative scenario, previous support at $47 could transform into a dynamic resistance that encourages a decline back towards $44 and $43 respectively.

Commodity spotlight – Gold

The prospect of higher US interest rates continues to pressure Gold with the zero-yielding metal hovering around $1232 as of writing. A touch of optimism over Emmanuel Macron winning the second round of the French Presidential election has complimented the downside, as the risk-on trading mood limited the attraction for safe-haven investments. Although geopolitical tensions and uncertainty over Brexit and Trump may support the metal in the medium to longer term, short term bears remain in firm control. With Gold potentially finding itself dictated by US rate hike expectations, further downside should be expected as the Federal Reserve maintains a hawkish stance. The yellow metal is at risk of depreciating further if a solid Non-Farm Payroll report this evening confirms expectations of a June interest rate hike.


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