6 December, 2016
Risk aversion intensified during early trading on Monday following reports of Italian Prime Minister Matteo Renzi experiencing a crushing defeat in the referendum on constitutional reforms which sparked concerns of renewed political instability in Europe. The shocking “No” outcome was seen as negative for the Eurozone economy with Matteo Renzi’s resignation opening a path to an early general election in Italy next year. With fears mounting over the “No” camp creating further turmoil for Italian banks, the rising uncertainty could rapidly erode risk sentiments towards the Euro. Investor’s anxiety continues to rise over Sunday’s referendum results negatively impacting Italy’s membership of the European Union with Euro weakness potentially becoming a dominant theme till year end. The questionable unknowns concerning Italy’s future have already sparked discussions of the European Central Bank extending its bond-buying program at December’s policy meeting in a bid to reclaim some stability.
Euro bears swiftly exploited the Italian post-referendum uncertainty to send the EURUSD to fresh 21 month lows at 1.050 during Monday’s trading session. From a technical perspective, this pair is heavily bearish on the daily timeframe as there have been consistently lower lows and lower highs. Previous support around 1.065 could transform into a dynamic resistance which encourages a further decline back towards 1.050.
Sterling edges higher
Sterling bulls were slightly inspired ahead of Monday’s heavily anticipated Supreme Court hearing which could determine if Parliament's approval is required before article 50 is invoked. 2016 has been a chaotic year for Sterling with the ongoing Brexit saga haunting investor attraction towards the currency. Although the decision for the four-day hearing is due in January, the Pound could be exposed to extreme levels of volatility as market participants systematically offload and reload positions to be on the right side of the winning Brexit trade. Investors may pay extra attention towards the tone of the hearing with any additional signs of Theresa May invoking the article 50 in March empowering Sterling bears.
Monday’s lacklustre market reaction to the positive services data from the UK continues to highlight how the Brexit woes have seized the spotlight. U.K services rose to 55.2, growing at the fastest pace in 10 months in November but this did little to negate the Brexit fears. Sentiment is slowly improving towards the UK economy but the ongoing Brexit dilemma that continues to install fear and uncertainty could ensure Sterling remains depressed moving forward. Although the odds of the Bank of England adding more stimulus continues to diminish amid the improving data, Sterling still remains vulnerable against the resurgent Dollar.
From a technical standpoint, the current technical bounce on the GBPUSD could be capped around the 1.2850 resistance before bears take front once again.
Stock markets under pressure
Global stocks were vulnerable to losses on Monday as the post-Italian Referendum jitters sparked a wave of risk aversion. Asian shares struggled to maintain gains amid the risk-off with the negative momentum pressuring European markets. With the events in Italy creating further uncertainty, risk-off remains the name of the game this week. Wall Street may be open to losses if risk aversion encourages investors to flee from riskier assets to safe-haven investments.
Oil bulls are back in town
The lingering impacts of OPEC’s unanticipated market shaking production cut agreement can still be felt across the board with WTI Crude charging to fresh 17 month highs above $52 as of writing. Sentiment towards Oil has experienced a miraculous turn around overnight with the prospects of a cap in production easing the persistent oversupply concerns. OPEC’s smart decision to cooperate in the most critical of times may have saved the cartel its credibility with further inclines in oil expected as optimism rises over the oversupply woes being solved. Investors may direct their attention towards the meeting on the 10th of December where OPEC will meet non-OPEC countries to finalise the global production cut agreement. The success of the pending meeting could propel WTI crude towards $55 in the medium term.
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