Stock markets depressed amid Fed rate cut fears

The mounting concerns around the possibility of the Federal Reserve pushing short term interest rates into negative territory amid the global turmoil continues to dispatch jitters across the board, with global stocks under immense pressure. Federal Reserve Chair Janet Yellen’s cautionary stance on Thursday towards future US rate hikes in 2016 rapidly eroded any surviving expectations over the Fed taking action, which has consequently left investors noticeably dissatisfied.

With global stocks on the brink of a bear market following the symbolic US rate hike last year December, Yellen took the opportunity to educate market participants that this was not the Fed’s fault. While it may be easy to point fingers over who’s to blame for this pain in the markets, we must remember that the central bank decided to raise US rates when the global economy was weakening and GDP growth in the US faltering.

Stock markets near bear territory

This heightened sense of gloom and crumbling confidence towards the global economy continues to leave the stock markets vulnerable to steep declines as risk appetite sours. Asian equities were painted in red during trading on Friday with the Nikkei concluding -4.48% lower as the strengthening JPY exacerbated fears about corporate earnings for major players in Japan. Although European equities started off on a balanced footing on Friday, further declines are inevitable in the near term as risk aversion remains rife across the markets. American stocks, which were hammered during trading on Thursday, should follow the same negative pattern as weakness from Asian and Europe trickles down to the US open in the later part of today.

US retail sales in focus

Investors may turn their focus towards the US retail sales report this afternoon which may provide some clarity on the health of the US economy as personal consumption is a big chunk of US GDP. Wages and job creation in 2016 have followed a positive trajectory while declining oil prices, which have helped energy savings, should translate to higher consumer spending. While these factors may point to retail sales rising in January, ongoing global woes have opened the US to downside risks and this may have a negative impact on consumption. If retail sales fail to meet expectations then concerns over the state of the US economy may be amplified consequently exposing the USD to steeper losses.

WTI bears eye $25

The pain over the unrelenting oversupply of oil in the markets has incessantly punished oil prices with WTI oil sinking to fresh 12 year lows at $26 during trading on Thursday. Empty speculations of a potential deal amid the oversupply glut has had a minimal impact and prices remain heavily depressed with $25 dollars just a leap away. Russia has already started the blame game regarding the excess supply in the markets, while Iran undercuts other OPEC members in a bid to reclaim lost market share and this conflict of interests suggest low oil prices are here to stay. With two million excess barrels of oil produced on a daily basis despite the chatter over OPEC deals, investor attraction remains deeply affected. This commodity is extremely bearish and a weekly close below $30 may attract another selloff towards $25.

Commodity spotlight – Gold

Gold bulls have exploited the heightened pessimism and lack of conviction towards the global economy, while the rapidly diminishing expectations over a US rate hike in 2016 has provided a platform for the precious metal to surge to 8 month highs at $1263. This yellow metal is fundamentally bullish and Dollar weakness may encourage buyers to propel prices to levels stretching as far as $1300. Risk aversion remains rife across the global markets and as such should invite an opportunity for investors to pile on the longs in a bid to attain protection against the volatile markets. From a technical standpoint prices are trading above the daily 20 SMA while the MACD has also crossed to the upside. Previous resistance around $1230 may transform into a dynamic support which may encourage an incline towards $1260 and potentially higher.

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Otunuga is a research analyst at FXTM