European markets are ready to recover some of the losses after being battered badly throughout this week. Traders are thinking enough is enough and let’s bag some bargain and this is despite the fact that we had a heavy sell off over in Asia. The Nikkei index plunged nearly over 4.8% as the Japanese continued to strengthen against the dollar. Strong Yen is an adverse affair for the Japanese export and it weaken’s the corporate profits.
However, if the downward spiral for the global equity market is coming to an end, it is way too early to say. The bounce which we may experience may not last for long, as investors are apprehensive about the banking sector due to the low interest rate environment and feeble growth. Although, it is not something brand new which developed overnight as we have been in the environment of low interest rate for some long long time and the frailty in the global growth has been there for sometime. So, why this has come into the spotlight so much and why investors are immensely anxious about this?
The fact is investors have started to lose their confidence in the central bank’s medicine and this is the chief reason for the current sell off. Traders used to love the news when central banks used to announce negative rates and it has been dubbed for years that a low interest rate environment is commendable for growth. However, now the situation has changed and negative rate is the most used word on media which is scaring investors. It is an uncharted territory and no-one know what are the repercussions of this. It is this fear which is giving a birth that perhaps we are going to face the worst market turmoil of all times.
Central banks need to reassure the market that they have enough tools to handle any kind of situation and negative rates is just not the only one. Markets need assurance that the central bank’s do have the ability to spur growth and negative rates will not impact banking sector’s earning or growth.
Miss Yellen was on the stage once again last night and she has said in so many words that they can follow the footsteps of the European Central Bank. They are clearly not ruling out the possibility of negative rate despite that they have no research if it will work or not.
The dollar will continue to weaken in the face of market turmoil we are facing as it will keep the fed on the side with respect to any rate hike if not firing the very same bullet of lowering the interest rate which itself will bring more dissenting moves for the currency. The precious metal is enjoying its upward trend as traders are pulling up their bullish bets and looking to make more profit by going long. Given the uncertainty we have in the market, it will be not long enough before we break another critical level of 1300 for gold and a solid close above that resistance will provide another prodigious bullish signal for the metal.
OPEC production cut is the talk of the town and more and more rumors are emerging every day that perhaps the cartel is reading to squeeze some of the supply with a cooperation of non OPEC members. But, what traders need to make sure is that they benchmark the source for such rumors and if we do hear anything coming out of Saudi Arabia, that can only be considered as a valid one. The country is the biggest producer in the OPEC nation and if they are not willing to curb this supply glut, we may not see much of an impact.
But, the next big question is how much of a cut do we need to see a stable price. In the past 10 years, these emergency meetings have reduced their supply by nearly 1.5 mb/d and a similar outcome could be the final outcome of this production cut. That will be enough to push the price of oil easily towards the $40 if not $50.
Recovery in the oil market will also provide much of hope for the equity market and we could see the major indices showing signs of stabilising, as it was the rout in the energy prices which initially started this turmoil.
In terms of economic data, we have received the German GDP data which mates the forecast of 0.3%. Later in the day, we have the US core retail sales and prelim Uom consumer sentiment data due and the forecast are 0.0% and 92.6 respectively.
Disclosure & Disclaimer: The above is for informational purposes only and NOT to be construed as specific trading advice. responsibility for trade decisions is solely with the reader.
by Naeem Aslam