Fed hike optimism triggers risk-on rally

Investor sentiment was elevated during trading last week following the blockbuster non-farm payroll report of 255k which rekindled expectations over the Federal Reserve raising US rates before year end.

Stock markets were propelled to near 12-month highs as the renewed risk appetite from rate hike expectations and optimism over central banks intervening encouraged investors to seek riskier assets.

In Asia, equities opened on a solid footing with the Nikkei concluding in gains following the Bank of Japan’s recent decision to increase purchases of exchange trade funds. European stocks were lifted by the resurgence in banking shares and could remain buoyed by borrowing the bullish momentum from Asia. Wall Street strolled into the green territory on Friday and may to trade higher today as the combination of recovering oil prices, mounting US rate hike hopes and improved confidence attract investors to riskier assets.

The stock market gains are unquestionably impressive but investors should keep diligent as the ingredients for a bear market still linger in the background. Although the fundamentals are in favour of more downside, it is becoming increasingly clear that sentiment is the engine behind the resurgence in stocks. It must be kept in mind that concerns over the global economy are still present while the post- Brexit pain progressively spreads across the board. Although oil prices have slightly rebounded from the three-month lows which improved sentiment, the oversupply woes remain a recurrent theme which should ultimately sabotage any real recovery in value. Global stocks continue to display signs of resilience but it may take an unexpected catalyst to trigger a selloff which could snap this overextended market rally.

Positive NFP strengthens Dollar

Dollar bulls were installed with vigour during trading last week after the impressive NFP report of 255k bolstered speculations over the Federal Reserve raising US rates in 2016. This impressive report acted as a lifeline which quelled the damage from the soft second quarter GDP of 1.2% that created a cloud of uncertainty over the central bank taking action. With US labour repeatedly displaying signs of resilience in a period of global uncertainty and overall US domestic data following a positive path, the Fed may have been provided a compelling reason to take action. Sentiment remains bullish towards the Dollar and further gains could be expected if US data continues to exceed expectations ahead of the next monetary policy meeting. Although there are still concerns over the Brexit uncertainty sabotaging all efforts taken by the Fed to raise US rates, the easing uncertainty with the flow of time may provide the leeway needed for the central bank to act swiftly.

The Dollar Index has been on a wild rollercoaster ride but continues to display signs of recovery as Dollar bulls charge ahead. From a technical standpoint, previous resistance at 96.00 could act as a dynamic support which encourages an incline towards 97.00.

Sterling vulnerability becomes a theme

Sterling was dealt a thrashing last week following the Bank of England’s unanimous decision to cutting UK interest rates to record lows of 0.25% in an effort to promote economic stability post-Brexit. The bearish sentiment towards the UK was already at shocking levels pre-Brexit while the post-Brexit uncertainty created negative shocks which weighed heavily on the economy. Sterling weakness could become a recurrent theme as expectations heighten over the BoE taking further action in the future to jumpstart the UK economy.

Earlier on Monday, the soft regional PMI figures were released which displayed a severe slowdown at the start of the third quarter consequently pressuring the Sterling. England’s PMI declined from 52.5 in June to 47.4 in July while business activity contracted to 44.4 simply renewing concerns of a deceleration in economic momentum. Sterling weakness is a theme in the currency markets and repeatedly disappointing domestic data could encourage sellers to install a heavy round of selling across the board. From a technical standpoint, the GBPUSD is bearish and the breakdown below 1.3100 could encourage a steeper decline towards 1.2800.

WTI Crude rebounds

WTI Crude staged an incredible rebound from the three-month lows at $39.23 following reports of renewed talks by some OPEC members over a potential freeze on output. These same production freeze talks offered speculative boosts in oil prices throughout 2016 which bears simply exploited to install repeated heavy rounds of selling. Sentiment remains bearish towards oil and bulls could be in store for further punishment as the persistent oversupply concerns haunt investor attraction. With the horrible cocktail of Brexit woes and concerns over the global economy potentially eroding demand, the current relief rally could open a path to fresh lows. WTI remains fundamentally bearish and the ongoing talks by OPEC on potential output freezes may have little impact on quelling this heavy downtrend. From a technical standpoint, previous support around $44 could act as a dynamic resistance which encourages sellers to send WTI lower towards $38.

Commodity spotlight – Gold

Gold was open to extreme losses during trading on Friday following the firm US employment report which heightened hopes over the Fed raising US interest rates in 2016. This zero yielding metal remains heavily influenced by rate hike expectations and could be poised for further declines if optimism continues to grow over a probable rate hike. Although risk aversion may keep Gold slightly buoyed, the combination of Dollars resurgence and mounting Fed hike hopes could attract sellers to attack incessantly. Bulls still have some breathing room above $1315, but a breakdown could signal imminent danger with prices tumbling towards $1305.