The stock markets were open more punishment during trading on Tuesday as the violent declines in oil prices and elevated concerns over China’s deceleration heightened risk aversion, consequently soured risk appetite.
Asian stocks descended into the red territory this morning with the Shanghai Composite Index trading -0.69% lower despite the positive China Caixin Services PMI showing activity expanded considerably in January. European stocks were dragged down by major oil producers who had suffered from the incessant declines in oil prices which rapidly erased their earnings for 2015.
This gloom and doom found its way into the American equity arena with the Dow Jones concluding more than 300 points lower as jittery market participants acknowledged the risk-off environment and flocked to safe haven assets. Equity markets may continue to slide in the near term and the sharp selloffs should be of no surprise, as confidence towards the global economy is still low while ongoing global woes and plummeting oil prices have made risk aversion rife.
WTI bears here to stay
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WTI Oil prices collapsed during trading on Tuesday breaking through the psychological $30 support as expectations rapidly diminished over OPEC amicably cooperating with Russia to slash the record high productions in the heavily saturated markets. While the fading hopes of any emergency meeting forthcoming have kept prices depressed, the elevated concerns over China’s slowdown which has signaled a decline in demand continues to haunt investor attraction towards oil.
Despite oil prices trading at painfully low levels, the visible conflict of interest between OPEC members may ensure that these low prices may be here to stay for an extended period. Investors may turn their focus towards the crude oil inventory report today with most expecting a buildup in inventories. A buildup would likely exacerbate the heightened concerns over the excessive oversupply consequently providing an opportunity for sellers to attack crude oil prices lower.
From a technical standpoint, WTI Oil is heavily bearish on the daily timeframe and the breakdown below $30 should encourage sellers to send prices towards $28. Prices are trading below the daily 20 SMA while the MACD has also crossed to the downside. Previous support at $30 may act as a dynamic resistance which should encourage a further selloff towards $28 and possibly lower.
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Kuroda will do what he must
It was only on Friday that the Bank of Japan (BoJ) shocked the global markets by adopting a negative interest rate policy in a bid to jumpstart its ailing economy, but this morning Governor of the central bank, Haruhiko Kuroda, has suggested that the BoJ will ease more and create new tools to boost inflation. While the BoJ may be commended on their eagerness to hit the medium 2% inflation target, the continual decline in commodity prices and current unsettled economic landscape may sabotage any future plans the central bank has yet to implement. Domestically deflation is still an issue in Japan and consumers are not spending while exports have tumbled the most in three years on the back of China’s deceleration. It seems negative interest rates in Japan may be here to stay and Friday’s symbolic move simply opened doors to further interest rate cuts in the future as a tool to force banks to loan and consumers to spend.
US ADP in focus
Friday’s abrupt negative rate policy by the BoJ managed to siphon some negative attention away from the US GDP report which showed a tepid growth of 0.7% for Q4. This GDP report dealt a sharp blow to sentiment towards the US economy and rapidly reduced any surviving expectations that US rates could be increased this current quarter. Since the rate hike in December, data from the States has been soft, while the current economic landscape continues to make the idea of the implementation of another rate hike quite optimistic. ADP will be released today and if it exceeds expectations then USD bulls may be provided a lifeline ahead of the anticipated NFP report this Friday.
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GOLD breaks above $1125
The ongoing fears over China’s deceleration complimented with the violent swings in the oil markets have soured risk appetite and this has consequently boosted appetite for safe-haven assets such as Gold. This precious metal has turned bullish and the fading expectations that US interest rates may be increased this current quarter may provide a foundation for a further appreciation in prices. If ADP and NFP fail to meet expectations this trading week, then USD weakness should act as a catalyst which may open a path towards $1140. From a technical standpoint, prices are trading above the daily 20 SMA while the MACD has also crossed to the upside. Previous resistance at $1125 should act as a dynamic support which may encourage buyers to send prices towards $1140.
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Otunuga is a research analyst at FXTM
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