Markets rev ahead of data packed week

Stock markets displayed some stability on Monday as the growing optimism over central banks intervening to mitigate the global woes bolstered investor risk appetite. Asian shares levitated to near nine-month highs following the rising expectations over the Bank of Japan implementing further stimulus measures to stabilise the Japanese economy. In Europe, equities were propelled higher by the positive German Ifo business climate report which slightly alleviated some concerns towards the Eurozone. Wall Street concluded Friday on a solid footing and could venture into gains on Monday by borrowing the positive momentum from Europe.

It is becoming increasingly clear that the ongoing hopes over central bank intervention have propelled stocks for an extended period. Although the market rallies are impressive in the short term, questions should be raised over its maintainability before the firm fundamentals begin to cap upside gains. While it is visible that the Brexit anxieties have eased, the recurrent uncertainty still lingers in the background potentially souring risk appetite. Financial markets still remain negatively morphed, consequently creating a tradition of central bank caution while fears towards slowing global growth linger in the background. When mixing these alarming cocktail of factors, investors must be alert when handling this overextended stock market rally.

 

Dollar bulls enter the scene

Dollar bulls were installed with ample inspiration in July as expectations mounted over the Federal Reserve raising US rates before year end. July has been a month where US data repeatedly exceeded expectations consequently proving a compelling reason for the central bank to take action. Employment in the States continues to display resilience in a period of global instability while manufacturing and retail sales point to economic growth. With the persistent Brexit anxieties diminishing with the flow of time, a critical barrier which has kept the Fed from taking action could fade away.

Investors may direct their attention towards Wednesday’s FOMC meeting that is widely expected to conclude without US interest rates being increased. Although rates may be left unchanged, the statement could provide additional clues on when the Fed may take action in 2016. If hawks make an appearance, then the already bullish Dollar could lurch higher across the global currency markets.

 

Bank of Japan under pressure to act

The Japanese Yen was left on a turbulent ride last week as speculations fluctuated over the Bank of Japan implementing further stimulus measures to jumpstarting its ailing economy. Although it was ruled out that “helicopter money” was out of the question, it is widely expected that the central bank will ramp up stimulus measures while potentially cutting rates deeper into negative territory to bolster economic growth. Sentiment is currently bearish towards the Yen and the USDJPY could be poised to appreciate towards 110 if the central bank takes action on Friday. From a technical standpoint, USDJPPY bulls need a decisive breakout above 106.50 to open a path toward 107.50 and potentially higher.

 

Commodity spotlight – WTI Oil

WTI Crude oil tumbled during trading on Monday with prices cutting below $44.00 as the persistent oversupply concerns repelled investor attraction towards the commodity. Oil has been fundamentally bearish for an extended period and could be poised to decline lower when the awful mix of both supply and demand fears encourages bears to install a heavy round of selling. Sentiment is clearly turning bearish towards WTI and the appreciating Dollar could ensure prices trade lower towards $40. From a technical standpoint, prices are trading below the daily 20 SMA while the MACD has crossed to the downside. A decisive breakdown and daily close below $44 could encourage sellers to drag prices lower towards $40.