A strong sense of relief elevated the global markets during trading on Monday with major stocks showing stability as expectations mounted over central banks intervening to quell the post-Brexit chaos.
Asian shares dismissed earlier losses and ventured higher following the renewed risk appetite, while yen weakness propelled the Nikkei +0.60% as of writing. In Europe, shares received inspiration from the impressive Eurozone employment that fell to a near five year low in May, and could stroll into the green territory if the positivity from Asia encourages investors to dabble into riskier assets.
The FTSE100 displayed an incredible rebound lurching by +7.2% last week as persistent sterling vulnerability ensured the index remained buoyed. Wall Street is closed on Monday in celebration of Independence Day, but it could borrow the upside momentum from Asia and Europe to clasp further gains on Tuesday.
Although short term stock market gains may be realized as expectations inflate over central bank intervention, the key fundamentals and ongoing concerns which have punished global stocks still remain intact in the background.
It should be kept in mind that fears over the global economy have elevated while the persistent financial market instability has created an era of central bank caution. Optimism remains strikingly low over any interest rate hikes from central banks and speculations are growing of a wave of future rate cuts to stabilize the global markets.
With this horrible cocktail of concerns, uncertainty and caution potentially punishing investor risk appetite questions should be asked how sustainable this stock market rally really is. Global stocks could be poised for deeper declines and the question is more of when rather than if.
Sterling seeks clarity
The sterling relief rally displayed noticeable signs of exhaustion last week as the uncertainty over the future of the UK economy post-Brexit haunted investor attraction towards the currency. Investors are actively seeking clarity and the mounting unknowns radiating from the questions about the current political uncertainty in the United Kingdom should ensure the sterling remains depressed.
For an extended, soft data from the UK has rekindled concerns over a potential slowdown in economic momentum and with construction PMI hitting its weakest level in seven years at 46.00, central bank intervention may be around the corner. Sentiment is clearly bearish towards the pound and the growing speculations of potential UK interest cut in the future should encourage bearish investors to install a round of selling.
There have been ongoing talks about the activation of Article 50 as the first step towards actively leaving the European Union and if invoked, this could act as a catalyst to sending the Sterling lower.
From a technical standpoint, a decisive break down below 1.3200 on the GBP/USD could open a path towards 1.3100 and potentially lower.
Dollar Index dips below 96.00
The dollar bulls were weakened last week as the ongoing Brexit concerns reduced optimism over the Federal Reserve raising US rates in 2016. For an extended period, the persistent fears over the global economy and negative financial landscape have obstructed the Fed’s efforts in raising interest rates.
Although US data continues to display signs of improvement, the recent Brexit scenario which has heightened global risk, should keep the cautious central bank on the fence. With expectations fading over the Fed taking any action amid the global uncertainty, the Dollar could be left vulnerable to further losses.
From a technical standpoint, the weekly double top at 96.70 and weekly close below 96.00 could encourage bearish investors to send the Dollar Index lower towards 94.00.
Commodity spotlight – Gold
Gold bulls were on a rampage during trading on Monday with prices surging towards the two year highs at $1358.20 as the flight to safety amid the Brexit concerns encouraged bullish investors to install a fresh round of buying. This yellow metal has recovered its safe-haven allure following the horrible combination of global growth concern, Brexit woes and central bank caution that has left investors on edge.
With expectations already fading over the Fed raising US rates in 2016 amid the heightened global risk, gold could be destined to trade much higher in the future. Persistent dollar weakness may keep prices elevated and if NFP on Friday fails to hit expectations then gold could lurch to fresh two year highs.
From a technical standpoint, prices are trading above the daily 20 SMA while the MACD has crossed to the upside. With $1308 acting as a potential higher low, a daily close above $1350 could open a path towards $1385.
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