Yellen's caution sends jitters across the board

A sense of unease enveloped the financial markets during trading on Wednesday following Janet Yellen’s cautious tone in her testimony regarding future US rate rises amid the global turmoil. Although the economic environment has transformed for the worst since the start of the year with ongoing China woes and violent declines in oil prices exposing the US economy to downside risks, in defiance the Fed continues to hold the view of raising rates at a gradual pace. While Yellen also emphasized that financial conditions in the US have become less supportive of growth, this was counterbalanced with the impressive labor report which in the eyes of the Fed opened doors for a potential rate rise in March.

Janet Yellen was successful in diffusing any further alarm bells which somewhat dispelled the financial markets from another aggressive selloff, nevertheless, the visible lack of conviction in the global markets may return to haunt stock markets in the near term. The Federal Reserve may be commended on its optimism to raise US rates in such unstable economic conditions, but the Fed futures paint another picture with only a 17.3% chance US rates may be raised once more in December 2016. It must be understood that the persistent global economic weakness may likely sabotage any possibility that US rates will be hiked in 2016, while lackluster data from the States has already spurred speculations of negative interest rates in the future. The sentiment is clearly bearish towards the US economy and with any surviving expectations towards a rate rise erased; Dollar weakness may take center stage in the global currency markets.

WTI edges towards $25

WTI Oil descended to fresh 13-year lows at $27.25 during trading on Wednesday despite the EIA reporting that crude oil inventories decreased by 754,000 barrels last week which should have been price supportive. This irrefutable damage caused by the excessive oversupply in the saturated markets may have nullified any bullish reports concerning a decline in stock piles or rig counts. With the fundamentals of an unrelenting oversupply still in place and the conflict of interest between OPEC members pumping record high levels of production in the markets continuing, low oil prices may be here to stay for an extended period. From a technical standpoint, WTI is bearish as prices are trading below the daily 20 SMA while the MACD has crossed to the downside. Previous support at $29 may become a dynamic resistance which should encourage a further decline towards $25.

Commodity spotlight – Gold

The elevated fears over the slowdown in the global economy combined with Janet Yellen’s caution towards future US rates rises has sparked demand for Gold with the metal surging above $1200 during trading on Thursday. Gold has become very bullish and this renewed wave of risk aversion across the financial markets may provide bulls the inspiration to send prices much higher towards $1230 in the near future. With expectations towards a US rate rise in 2016 very low and Dollar weakness taking center stage, bullish investors have been gifted an opportunity to pile on longs with targets stretching towards $1230 and potentially higher.