Mild Risk Aversion Seen in Early Trade

• Gold and yen gain in slightly risk averse start to trading on Wednesday;

• Oil stabilises but still looks vulnerable to further downside;

• Sterling finds temporary support after Tuesday’s sell-off.

US indices are seen pulling a little further away from record high levels on Wednesday, as we appear to see a slight shift in risk appetite although there are no signs at this stage of a broader trend developing.

We’re not in a particularly risk averse environment right now, by any extent, with numerous stock indices trading around record highs, but we do appear to be seeing some today. Gold is making small gains on the back of this today, having suffered over the last couple of weeks since falling just short of $1,300 for the second time in the last couple of months. Another move towards $1,300 again would be a very good sign for the bulls, with the dip having once again been bought at higher levels.

Oil has stabilised on Wednesday but may remain under pressure in the coming days, having fallen sharply on Tuesday despite there being no clear fundamental trigger for the move. Brent and WTI did find some support around $45.50 and $43, respectively, levels that have prompted similar reactions over the course of the last year. With bearish sentiment only appearing to grow though, you have to wonder whether these levels can hold on this occasion or whether $40 could be hit or even breached, in both cases.

For the latter to happen, we may need to see clear evidence that the production cut is either insufficient in clearing the excessive stocks or that compliance with the deal is in doubt. Inventory data from EIA will offer some insight into the success of the cut, with another small drawdown expected. API reported a similar number on Tuesday, claiming inventories fell by 2.72 million last week and while this has been a relatively good guide in the past, we did see last week that it isn’t always reliable.

Sterling is trading a little lower once again on Wednesday, adding to losses made on the back of dovish comments from Bank of England Governor Mark Carney on Tuesday. The pound is trading a little lower against the dollar after finding some support around 1.26, a break of which could open up a move back towards April’s lows just above 1.2350. Larger losses are being seen against the yen, which is seeing some safe haven flows today, along with Gold, although the key test here falls just above 138.50, a break of which could signal further downside ahead.