Stock markets displayed signs of stability on Wednesday as a mixture of easing Brexit anxieties and heightened expectations over the central banks intervening to quell the global woes bolstered investor risk sentiment.
Asian stocks found comfort near one-year highs, with the Nikkei charging into gains following reports that the Japanese government may unleash the bazooka stimulus in an effort to jumpstart the Japanese economy. In Europe, shares were elevated by solid earnings from both luxury and auto stocks while the ongoing optimism towards central bank intervention kept prices buoyed.
Although Wall Street was slightly erratic on Tuesday, American stocks could trade higher if the bullish contagion from Asian and Europe attracts investors to trade riskier assets.
The engine powering this stock market rally is the rising optimism towards central banks providing a safety net against the unstable financial landscape. While these market gains are impressive, it should be kept in mind that the threats of slowing global growth, depressed oil prices and low global confidence are still present.
The current overextended relief rally in stocks may be reaching a climax, with bears on the prowl simply waiting for the catalyst to install a heavy round of selling.
Sterling bears shrug positive UK GDP
Sterling stumbled across the board during trading on Wednesday despite the positive second quarter UK GDP of 0.6% which should have quelled concerns regarding slowing domestic growth. With the persistent post-Brexit uncertainty still present, investor attraction continues to be haunted towards the pound, consequently keeping prices depressed.
Expectations have heightened over the Bank of England cutting UK rates in 2016 which has obstructed most upside gains. Sentiment remains bearish towards Sterling and further declines could be expected if last week’s worrying PMI data fuel fears of a potential contraction in third quarter GDP.
From a technical standpoint, GBP/USD continues to trade above the stubborn 1.3100 support. Prices are trading below the daily 20 SMA while the MACD has also crossed to the downside. A decisive break and daily close below this level daily could encourage bearish investors to install a heavy round of selling.
Market participants may turn their attention towards the FOMC meeting this evening. Further clues of a potential divergence in monetary policy between the BoE and Federal Reserve could encourage bears to send the GBP/USD lower.
BoJ expected to take action
Investor sentiment was slightly elevated on Wednesday following the rising optimism over the Bank of Japan delivering additional monetary policy on Friday to stabilize its economy. Japanese Prime Minister Abe Shinzo stated on Wednesday that the government would deliver a stimulus package of Y28 trillion with speculations of a potential cut in deposited rates from -0.1 to -0.2.
For an extended period Japan has been engrossed in a fierce battle with static inflation, while ongoing global uncertainties continue to expose the nation to downside risks. Risk aversion from the global woes has empowered the yen in 2016, but Friday’s stimulus bazooka could promote yen weakness.
FOMC countdown begins
Investors may direct their focus towards Wednesdays FOMC meeting, which is widely expected to conclude without US rates being increased. Although rates may be left unchanged, market participants could seize this opportunity to focus on the tone of the statement, while discovering additional clues which could provide clarity on when the Fed may act.
Sentiment is still bullish towards the dollar, and the pattern of positive US economic data in July continues to provide a compelling reason for the central bank to take action before year end. As of now, the FedWatch CME tool displays a 42.8% probability of a rate hike in December, and this could increase if the Brexit anxieties continue to fade away.
The Dollar Index turned bullish on the daily timeframe and the breakout above 97.00 could open a path towards 98.00.
Commodity spotlight – WTI crude
WTI crude was left vulnerable to losses on Wednesday, with prices hovering around the three-month lows at $42.35 as the persistent oversupply concerns haunted investor attraction towards the commodity. Oil has been depressed for an extended period, with the ongoing excessive supply anxieties sabotaging any real recovery in value.
The fears over slowing global growth may have heightened speculations of a potential decline in demand for oil simply pressuring prices further. Investors may direct their attention towards the crude oil inventories report, and further signs of a build in supply could send WTI lower.
Prices are technically bearish on the daily timeframe and the breakdown below $43 could open a path towards $40.
Disclaimer: The content in this article comprises personal opinions and ideas and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability as to any loss arising from any investment based on the same.
Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose, it is possible that you may lose more than your initial investment. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice.