The cheap oil is taking its toll on the global equity markets.
The Dow Jones hit a fresh record level ($21’535) in New York yesterday, yet failed to hold on to its earlier gains and gradually declined to the negative territories before the session closed. The S&P500 energy stocks erased 1.25%.
The ASX 200 (-1.59%) joined the sell-off, as Australian energy producers and miners wrote off 2.59% and 2.57% in Sydney.
The FTSE opened downbeat, energy stocks (-1.00%) and financials (-0.62%) weighed on the sentiment in London.
The GBP/USD traded below the 1.26 mark for the first time since April.
The pound depreciation started yesterday, as the Bank of England (BoE) Governor Mark Carney said that the bank is not ready to increase the interest rates anytime soon. Weak wages growth and the Brexit uncertainties require a loose monetary policy according to Carney, as he is willing to see the reaction of the economy to the 'Brexit reality’. However, the rising inflationary pressures revived the hawks at the heart of the MPC at the June meeting. Three members voted in favour of a rate hike versus five.
The consolidation of the hawkish view should keep the BoE-hawks alert for dip-buying opportunities approaching 1.2577 (50% retrace on March – May rise) and 1.2540 (200-day moving average).
On the political front, there are different opinions on whether PM Theresa May’s Conservatives could conclude a deal with the Northern Ireland DUP.
Queen Elisabeth II will reveal the government’s legislative program at 11:30am in London. The focal point of the speech will be the Brexit, yet we do not expect a significant level of granularity in the content of this speech to move the UK markets and the pound meaningfully.
WTI crude trades at lowest since November
The WTI crude traded at $42.75 on Tuesday, its lowest level since November, and recovered past $43.00 after the API report showed 2.72 million barrel contraction in the US crude inventories last week.
The EIA’s weekly data is due today. Analysts expect 1.2 million barrel contraction in the US crude inventories over the last week, compared to 1.7 million fall a week earlier. Lower contraction or higher inventories could further weigh on the oil prices. The key support stands at $42.75 (November low) before $40.00/39.55 (August 1st support).
US yield curve flattens, gold rebounds
The US dollar is better bid against the G10 majors, except the yen. The US yield curve flattens; the U.S. 2-Year yields improve, as the 10-Year yields stagnate at the lowest levels since November.
Gold is better bid after rebounding from a month-low of $1’241. Soft US yields could limit the downside appetite in the yellow metal. Buyers are touted pre-200-day moving average ($1’237).
EUR/USD tests minor Fibonacci support
The EUR/USD tests 1.1117 (minor 23.6% retrace on April – June rise) for a further slide to 1.1100 (50-day moving average) and 1.1013 (major 38.2% retrace).
Option barriers stand at 1.1155, 1.1180 and 1.1205 at today’s expiry and will likely cap the upside potential.
Yen gains on risk-off, but the fundamentals remain bearish
The yen (+0.31%) has been the leading G10 gainer against the US dollar in Tokyo. The risk-off trading was mainly accountable for the capital inflows to the safe-haven yen.
Nikkei (-0.45%) and Topix (-0.35%) traded lower in Tokyo, as the USD/JPY declined to consolidate gains above the 100-day moving average (111.55).
Today’s downside move could be an interesting opportunity for the USD/JPY traders looking to consolidate their long positions.
From a technical point of view, the daily MACD (Moving Average Convergence Divergence) will likely step in the positive zone and underpin the recovery that started last week, after the pair hit 109.57. A bullish reversal could encourage a further rise to 112.13/112.15 (38.2% retracement on January – April decline & 200-day moving average).
The Bank of Japan (BoJ) reaffirmed its weak inflation expectations in its April 26/27 meeting minutes and said that the gap between output and exports could grow along with the spending.
The market gave no reaction to the minutes.
Chinese stocks become part of the MSCI global indices
China’s 222 A-shares are approved to join the MSCI global indices, which opened a big window of opportunities for the Chinese stocks. The outcome was greater than the 169 stocks in analysts’ focus prior to the announcement.
The selection of A-shares currently stands for 0.7% of the MSCI EM, yet the weighting is due to increase gradually over time. The internalisation of the Chinese stock markets is a significant milestone for the world’s biggest emerging market and will certainly impact the investor sentiment positively. Moreover, the inclusion of 222 onshore stocks will serve to balance the Chinese benchmark, which was overweight in Hong Kong’s financial stocks previously.
The yuan traded near its 100-day moving average (6.8401) against the US dollar. Shanghai and Shenzhen stocks edged higher with the prospects of increased volumes of capital inflows to the Chinese stocks in months and years to come.
Hong Kong stocks (-0.62%) remained on the back foot.
NZD weakens before the RBNZ decision
The Reserve Bank of New Zealand (RBNZ) is expected to maintain its cash rate unchanged at 1.75%.
The Kiwi gives signs of exhaustion following a month long rally against the US dollar, yet remains in a positive trend with technical support seen at 0.7200 (minor 23.6% retracement on May-June rise) and 0.7127 (major 38.2% retrace). Holding the ground above 0.7127 should reinforce the odds for a renewed mid-term bullish development toward the 0.7375 (February high), 0.7402 (November 2016 high) and 0.7485 (June 2016 high)