Global markets attempt to sober from Brexit hangover

An air of caution swept across the financial markets during trading on Monday with the Brexit hangover thoroughly punishing global stocks and eroding investor risk appetite. Although global sentiment displayed signs of improvement on Tuesday with most major markets clawing back previous losses, more downside could be expected when market participants digest the painful Brexit reality.

Asian stocks were resilient this week following the growing expectations over the Bank of Japan (BoJ) intervening amid a strengthening Yen, but could be poised for declines if risk aversion strengthens the Yen consequently punishing the Nikkei. The resilience from Asia elevated European equities with the FTSE100 lurching 2.4% higher as the slightly easing pressures from the Brexit rout encouraged some investors to dabble in riskier assets.

Wall Street sang the Brexit blues on Monday, but could trade higher today if the positivity from Asia and Europe provide a lifeline for bulls to install another round of buying. Although equities have regained some footing despite the Brexit tussles, global stocks could be exposed to more losses in the future if fears of a Brexit fueled recession encourage investors to scatter from riskier assets.

Brexit: A messy divorce

Sterling bears received encouragement on Monday with the GBPUSD stumbling to fresh 31 year lows at 1.312 as uncertainty and anxiety haunted investor attraction towards the currency. The pound remains vulnerable as concerns mount over the implications a Brexit may have on the UK economy and with many questions still unanswered post-Brexit, upside gains could be limited. It should be kept in mind that fears continue to linger over the future of the UK and with speculations growing over the Bank of England (BoE) cutting interest rates in the event of a Brexit fueled recession; bearish investors have been provided a foundation to install another round of selling. With the Brexit woes potentially stretching deep into Q3, the Sterling, Euro and global stocks may be exposed to an extended period of pain. The world has already acknowledged the United Kingdom’s desire to leave the European Union and the UK’s disappointing loss against Iceland in the European championship has inadvertently reinforced the intent.

From a technical standpoint, the GBPUSD is bearish and the breakdown below 1.3350 has opened a path towards 1.3200. If bears can conquer the 1.3200 support, then sellers may be encouraged to send the GBPUSD towards 1.3100.

EU Economic summit kicks off

The Brexit could be one of the biggest crises in the European Union’s history with fears rapidly growing over other countries in the Eurozone leaving the E.U. Mario Draghi has expressed sadness over the Brexit vote that could pressure the European economy, which is already engrossed in a losing battle against feeble GDP growth and tepid inflation levels. European leaders will be discussing a range of global and economic issues in the summit on Tuesday and although informal Brexit talks have been ruled out, this will be on the mind of many leaders. With the Brexit adding to the toxic cocktail of events which continue to enforce downside pressures on the Eurozone, the European Central Bank may implement further monetary policy in a bid to renew stability. Sentiment is quite bearish towards the Euro and more declines could be expected as the growing Brexit concerns encourage investors to depart from the Euro to safer currencies such as the Yen and Dollar.

Although the EURUSD has recovered since the Brexit shocker, this pair is bearish and the correction could offer an opportunity for sellers to send prices lower. From a technical standpoint, previous support around 1.1100 could transform into a dynamic resistance that encourages another decline towards 1.090.

Commodity spotlight – Gold

Gold experienced a reasonable decline during trading on Tuesday as a mixture of renewed risk appetite and profit taking encouraged bears to install a round of selling. Regardless of the short term losses, this metal remains fundamentally bullish and could be poised to appreciate higher when the ongoing Brexit anxieties renew a wave of risk aversion consequently boosting safe-haven appetite. Market participants remain on edge and the many unanswered questions post-Brexit should encourage investors to pile on the Gold longs. For an extended period, Gold and US rate rise expectations have had a firm relationship, and with optimism rapidly fading over the Fed taking any action in 2016 amid the Brexit woes, Gold could be destined to trade much higher. From a technical standpoint, Gold is bullish and previous resistance around $1308-$1300 could act as a dynamic support which promotes an incline towards $1305.

WTI slides on Brexit threat

WTI Crude oil entered a slippery decline during trading this week with prices piercing below $46 as a mixture of Dollar strength and uncertainty over the shocking Brexit victory haunted investor attraction towards the commodity. The lingering oversupply concerns were already capping upside gains, but with fears mounting that a Brexit fueled recession may diminish global demand, WTI could be poised to trade lower. Although oil production in some major oil export nation such as Nigeria has risen to about 1.9 million barrels per day from 1.6 million, overall sentiment towards oil is bearish and the relief rally could open a path towards $45. From a technical standpoint, prices are trading below the daily 20 SMA while the MACD has crossed to downside. A solid break below the double bottom $46 support could open a path towards $45 and potentially lower.

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Otunuga is a research analyst at FXTM