Stock markets were swift to relinquishing their gains during trading on Monday following the very steep depreciation in oil prices which chipped away at confidence in the global economy and soured risk appetite. The expectations around central banks unleashing stimulus measures to curtail the turmoil in the financial markets provided false hopes for bullish investors, who have fallen victim to the sharp declines led by the intensifying concerns around the excessive oversupply of oil.
A re-established wave of risk aversion gripped Asian equities sending most into red territory, while elevated fears that China capital outflows may accelerate as the economy decelerates has sent the Shanghai Composite Index diving -6.3% lower, to levels not seen in 13 months. With days like today continuing to come back to haunt the Shanghai Composite Index, the Chinese New Year period and the trading break couldn’t come soon enough.
This bearish domino effect and risk aversion may encourage further selloffs and trickle down into the European and American equity arena which also closed negative on Monday. It must be understood that the sharp appreciations experienced in the stocks markets during the final two days of trading last week may have been a relief rally fueled by high expectations around central bank stimulus measures while momentarily brushing away the fundamentals. Overall confidence in the global economy remains low and the incessant declines in oil prices complimented with ongoing fears around slowing global growth should encourage investors to scatter away from riskier assets.
WTI Oil plunges
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WTI Oil plunged to fresh daily lows at $29.50 during trading on Tuesday as ongoing oversupply woes and extreme profit taking shaved most of the hefty gains which were acquired last week. The pain of an excessive oversupply continues to pressure prices as even Iraq announced record high oil productions for December, pumping more supply into the saturated international oil markets, while crude oil stock piles have perpetually risen, sabotaging any opportunity for a recovery in value. Some OPEC ministers are feeling the pressure and have requested for an emergency meeting but these have been swiftly disregarded as it remains very clear the cartel is willing to leave production unchanged to regaining more market share.
WTI is heavily depressed and the horrible combination of an aggressive oversupply combined with dwindling demand should encourage bearish investors to attack prices towards $28. From a technical standpoint, prices are trading below the daily 20 SMA while the MACD has also crossed to the downside. The solid daily close below $30 may encourage a further decline towards $28.
Sterling pressured ahead of Carney
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The risk-off trading environment continues to punish the Sterling while dwindling expectations around the Bank of England raising UK interest rates in the near term has encouraged bearish investors to consistently attack the single currency. Bank of England Governor Mark Carney has made it very clear that now is not the time to raise UK rates and soft domestic economic data, such as slowing wage growth and tepid inflation levels, provide a compelling reason why the BoE may not act until early 2017. BoE Governor Mark Carney will be testifying today and if he reiterates his dovish rhetoric towards the health of the UK economy then the Sterling may be left vulnerable once again.
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