1 August, 2016
Global stocks may struggle to maintain gains if optimism starts to wane over central banks intervening to stabilise the unstable financial landscape. Last week’s unexpected under delivery of monetary stimulus measures from the Bank of Japan follows a tradition of central bank caution which has weighed heavily on investor risk appetite. Asian markets have already displayed signs of weakness during trading on Monday as the lingering impacts of the BoJ’s decision coupled with soft China manufacturing data repelled investors from riskier assets. Although European equities were offered a welcome boost last week from the rallying banking stocks, declines could be expected this week if a combination of depressed oil prices and uncertainty offer a foundation for bears to pounce. While the gains in Wall Street have been quite impressive, a slowdown in Asian and European markets today could quell the rally.
Stock markets have been noticeably sensitive as of late with the cocktail of central bank inaction, persistent uncertainty, depressed oil prices and ongoing fears over global growth creating explosive levels of volatility. One of the dominant drivers behind the stock market rally has been speculations over central bank intervention, but with central bank inaction becoming a recurrent theme questions should be asked about the sustainability of the rally. Investors may direct their attention towards the Bank of England policy meeting this week which could punish global stocks further if it concludes without any action taken by the central bank.
Sterling pressured ahead of PMI
Sterling/Dollar spiked higher last week and this has nothing to do with an improved sentiment towards Sterling but Dollar weakness from soft data. Sentiment remains firmly bearish towards the pound and persistent post Brexit concerns have almost overshadowed any positive data coming from the UK. Speculations have skyrocketed over the Bank of England cutting interest rates this week in an effort to stabilise the economy and this continues to encourage bears to install rounds of selling at any given opportunity. Attention may be directed towards the UK manufacturing PMI which has displayed signs of deterioration post Brexit. If this misses expectations then concerns may elevate further over the health of the UK economy consequently leaving the pound vulnerable to further losses. From a technical standpoint, the GBPUSD has found a stubborn support above 1.3100. A breakdown below this level could open a path towards 1.2800.
Dollar pressured post Q2 GDP
The dollar bears were installed with inspiration during trading last week following the soft US second quarter GDP result of 1.2% which renewed some fears over the health of the US economy. Although the drop in inventories attributed to the decline in GDP growth, this has already eroded some optimism over the Federal Reserve raising US rates in 2016. With US economic data repeatedly exceeding expectations in July, there are still some hopes over this pattern potentially elevating GDP growth in Q3. Although the soft GDP was a slight blow to sentiment, optimism could be restored if Friday’s Non-Farm payrolls exceed expectation. On the data front today ISM manufacturing PMI for the States will be eyed and if such beats estimates, then bulls could make a comeback.
Commodity spotlight – WTI Oil
WTI bears were on the offensive last week Friday with the commodity plunging to the lows of $40.55 as the anxiety over the oversupply in the global markets haunted investor attraction towards oil. The painful combination of oversaturated supply and fears towards demand waning have made WTI fundamentally bearish. Since the bounce from $40.55 has little to do with an improved sentiment towards oil, technical traders could exploit this relief rally to install another heavy round of selling. A breakdown back below $41 may open a path towards $40 and potentially lower.
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