Disappointed investors sent Asian equities lower across the board early Wednesday after Japan’s approval of the 28 trillion yen in fiscal stimulus failed to revive hopes that Prime Minister Shinzo Abe’s fiscal arrow will hit its target. The shift from monetary to fiscal actions was perceived as central banks no longer being effective in boosting economies, and this could lead to further pessimism in financial markets.
The risk off mood was elevated as oil prices entered into a bearish territory this week, falling by more than 20% from their June peaks. Although equities ignored oil price movements most recently, the strong correlation is likely to come back as oil trades below $40.
U.S. oil inventories dropped by 1.34 million and gasoline inventories fell by 0.45 million according to the American Petroleum institute. This helped stabilize prices somehow, but focus today will turn to the Energy Information Administration release after showing stockpiles fell by 1.9 million barrels in the week ended July 29.
Gold remains to be one of the preferred asset classes in current jittery markets, and I believe further upside is to be seen in the next couple of weeks. The yellow metal, which surged by 28.5% so far in 2016 still has the potential for further gains, and a break above $1,374 could lead to test the psychological level of $1,400.
The U.S. dollar was sold heavily following Friday’s weak Q2 GDP release and the disappointing inflation figures on Tuesday, with the index falling by 1.5% in four trading days, taking the overall drop to 2.5% from July highs. The 1.2% economic growth in the second quarter fueled expectations that the Federal Reserve won’t hike rates in the foreseeable future.
According to CME’s fedwatch, markets are pricing only a 50% chance for a rate increase in June 2017. However, these expectations could reverse if the non-farm payrolls report on Friday come close to 200K. Meanwhile, traders today will focus on the ADP report and ISM non-manufacturing PMI for some hints.
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