Global markets are stuck in the topsy-turvey phase and the sell-off is mainly led by the tech and energy sectors. At least this was the theme over in the U.S yesterday and traders over in Europe are picking up the momentum where they left off yesterday. The economic data released over in China hasn't helped the market sentiment either. This is because we have seen the retail sales number missing the estimates but the industrial sector is holding up its strength.
In terms of sectors, the Energy sector is feeling the burnt because it appears there is no support for the oil price.
Yesterday, the crude price dropped by nearly 7 percent. This was the biggest one-day percentage drop since 2015 and of course, the question today is if the momentum would continue at this phase. There is no doubt that investors got carried away with the Iranian situation and the extra supply has become terrifying. Well, the portrait isn’t as horrible as it was a few years ago but unquestionably, the grousing phase isn’t that much different. We think the price of oil at its current level represents more stability.
Having said this, investors should keep a close tab on the ongoing situation between the US and Saudi Arabia. If the US decides to go ahead with sanctions on Saudi Arabia, this would really transform the game. The young crown prince, MBS, would not hesitate to retaliate and this would topple the present balance between the supply and demand equation.
As for the silver lining, the US and China are still in process of carrying out the conversation at all levels but no solution is in sight for now. China’s Vice Premier Liu He is hopeful in setting up a meeting between the two leaders. We have also seen a softer stance from the Trump administration. This is because the administration is holding off to trigger the new tariffs on China's automobile parts. This surely shows that the change of hearts is taking place.
In the currency market, the dollar index has created anxiety among investors and the majority think that the Fed is getting ahead of themselves. The strength in the dollar index is unbearable for investors because it has started to eat up their profits. It is in this context that the upcoming speech by the Fed chairman, Jerome Powell is very important today. We expect him to cool off the market and provide some support. This is going to be arduous because one thing is for sure that the Fed isn’t going to change its current sailing path. So what can you really say to tranquil the market qualms? Well, Draghi did say "whatever it takes" and only this phrase was sufficient to bring the confidence back in the market and Mr Powell would have to drink from the same water well from where Draghi did - to restore confidence.
Closer to home, in the U.K, it is more of "make it or break it" moment. U.K and EU have agreed on Brexit text and Theresa May would have to convenience the Cabinet that it is the best deal that the UK can get not that this is the best deal she can get. The fact is that these two are very different things, if the idea is that this is the best deal she can get, then the slogans of "a dead woman walking" would come back to hunt her. This is by far the toughest test that she will be facing and she will need to use every tool which she may have.
Sterling Overnight Volatility Spiked
What this means for the market, well the overnight pound-dollar volatility has touched a level which has not been seen since Jun 2017. This means that sterling is on the verge on a major move and depending on the outcome of today's event, we could easily see 2-3 percent for the currency in either direction. Of course, speculators have already reduced their short positions and they are leaning towards a bullish move