A wave of risk aversion eclipsed the financial markets during trading last week following the unanticipated Brexit victory that weighed heavily on global sentiment. Stock markets entered a free fall, with over $2 trillion in value surrendered as unease encouraged investors to depart from riskier assets to safe-haven investments.
Asian equities were left depressed and could slide lower this trading week if the aftershock from the Brexit victory bolsters appetite for the yen, consequently pressuring the Nikkei. There could be a possibility that the bearish contagion from Asia trickles into European markets, which are already entangled in a fierce battle with declining banking stocks.
In America, equities stumbled and may follow this negative path, especially after U.S stock futures continue to signal more losses to come. With risk aversion becoming a central theme as financial markets search for stability amid the Brexit anxieties, global stocks could be set for more slippery declines.
Sterling under post Brexit pressure
The sterling was left extremely vulnerable last week, with the GBP/USD sinking to 31-year lows at 1.3227 as the shocking Brexit victory instantly haunted investor attraction towards the currency.
Markets participants are on edge, and with many questions unanswered post the Brexit victory adding to the uncertainty, investor risk appetite has diminished. Concerns are elevated over the impacts a Brexit could have on the UK economy, with speculations already mounting over the Bank of England (BoE) slashing interest rates amid a potential Brexit-fueled recession.
Although the first season of the Brexit saga has come to an end, the ongoing Brexit anxieties and the possible repercussions it may have on the UK economy could ensure that the sterling remains depressed moving forward.
The GBP/USD plunged to shocking levels on Friday and could trade lower if the bearish momentum holds. From a technical standpoint, prices are trading below the daily 20 SMA while the MACD has crossed to the downside. A breakdown below 1.3350 may encourage sellers to send the GBP/USD lower towards 1.3200.
BoJ holds emergency meeting
Yen bears were offered some inspiration in the early hours of Monday morning following the growing expectation over the Bank of Japan (BoJ) intervening after the Brexit shocker. Risk aversion from the mounting Brexit uncertainty has boosted appetite for the safe-haven yen, which continues to punish the Nikkei while pressuring the Japanese economy further.
It seems that the Brexit woes have added to the horrible mix that continues to expose Japan to downside risks while weak inflation levels pressure the BoJ to take action. With the likelihood that the ongoing risk aversion boosts appetite for the safe-haven yen, questions could be asked if the BoJ’s intervention may effectively weaken the yen.
The USD/JPY has pierced the tough 100.00 support and remains technically bearish on the daily timeframe. Previous support around 103.50 may become a dynamic resistance which offers an opportunity for sellers to send prices back toward 100.00.
Brexit fears pressure EUR
The euro experienced a hefty decline last week as the Brexit reality triggered concerns over a domino effect encouraging other countries to depart from the European Union. Before the Brexit woes, static GDP and faltering inflation levels pressured the European Central Bank (ECB) to take action while global uncertainties continued to expose the Eurozone to downside risks.
With Brexit adding to the horrible cocktail, expectations have risen over the ECB implementing further monetary policy in the future in an attempt to reclaim stability. Sentiment was already bearish towards the EUR, and the currency could be set for more losses when fears heighten over the other countries potentially leaving the EU.
Commodity spotlight – Gold
Gold displayed an incredible appreciation, with prices lurching to two-year highs at $1358 following the unexpected Brexit victory which created unease and encouraged investors to scatter from riskier assets. This metal remains fundamentally bullish and could be poised to trade higher as the lingering fears over a potential Brexit-fueled recession encourages buyers to pile on the longs.
Although the dollar has experienced a sharp appreciation, gold resiliently trades higher as the combination of fading US rate rise expectations and risk aversion provide a solid foundation for bulls to install a heavy round of buying.
From a technical standpoint, gold is heavily bullish and previous resistance at $1308 could act as a dynamic support which encourages an incline towards $1350.
China Yuan weakens
Yuan stumbled to heavy losses last week, with the Brexit victory sparking an emerging market selloff as concerns over the impacts of a Brexit to the global economy weighed on sentiment.
With the yuan weakening very suddenly and risk aversion likely to continue as a result of investors being shocked at the EU referendum outcome, the yuan could continue to follow further weakness. This might alert the People’s Bank of China (PBoC), because a sudden resumption of weakness in the local currency might renew concerns over possible capital outflow.
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