Global stocks uplifted by oil rally

Stock markets were offered a welcome boost during trading on Tuesday following the sharp appreciation in oil prices that temporarily elevated confidence towards the global economy, consequently heightening investor risk appetite. In Europe, stocks displayed resilience ahead of the looming ECB press conference despite expectations fading over the central bank unleashing further stimulus measures. The optimism from rising oil prices dispersed into the US market with the S&P 500 surging to fresh 2016 highs above 2100 and this positive contagion could provide a short term lifeline for Asian equities, especially the Nikkei that was previously depressed from a strengthening Japanese Yen. While these ongoing short-term gains in the stock markets show some improvement in investor risk appetite, market participants should remain alert because concerns over slowing global growth and incessant declines in commodity prices continue to lurk in the background.

With the resurgence in global stocks ignoring the firm fundamentals and evidently low confidence towards the global economy, it seems that the financial markets have become so sensitive that oil prices are now controlling global sentiment and subsequently dictating stock market movements. Such a scenario simply spells more pain for stocks in the future, especially when investors digest the reality of the excessive oversupply in the oil markets which inevitably may send oil prices lower.

 

Euro braces ahead of ECB meeting

The Eurozone saga continues with the nation engrossed in a losing battle with tepid inflation, while deteriorating economic growth in Europe has left the ECB under immense pressure to act again. Despite the painful declines in commodity prices and failing global growth obstructing the ECB’s 2% inflation goals, Mario Draghi may decide to remain on standby this week amid discussions of central banks running out of ammunition to stabilize the financial turmoil. Investors should keep in mind that the last time the ECB embarked on aggressive stimulus measures in March, the market reaction was inverse with the Euro appreciating as fears intensified over the central banks inability to jumpstart Eurozone growth. Mario Draghi may likely repeat his dovish mantra in a bid to devalue the Euro while also hinting of possible measures in the future if inflation fails to pick up.

The EURUSD is bullish on the daily timeframe and the new higher low at 1.1250 could provide a foundation for another an upsurge towards 1.1400. Prices are trading above the daily 20 SMA while the MACD has also crossed to the upside. Previous light resistance at 1.1350 could transform into a dynamic support for an incline towards 1.1400.

 

Sterling surges across the board

A combination of renewed risk appetite, partially alleviated concerns of a Brexit following a lead in the stay campaign, and potential profit taking offered a foundation for Sterling bulls to surge sharply against the Dollar during trading on Tuesday. This move felt highly exaggerated and with the ongoing debate over the impact of a Brexit punishing investor attraction towards the currency, further declines in prices should be expected in the future. Investors should keep in mind that this appreciation in the Sterling had nothing to do with an improved sentiment towards the currency and with expectations fading towards the BoE raising UK rates in 2016, any upsurge may be capped. Focus may be directed on the average earnings and claimant count reports today with potential signs of weakness offering bearish investors an opportunity to install another round of heavy selling across the board.

The GBPUSD rallied above 1.4400 and while bulls may be commended for their valiant efforts, this relief rally could provide a platform for bears to send prices lower on the condition that 1.4500 defends.

 

Crude oil rattles markets

WTI bulls were offered short-term encouragement this week following the Kuwait strike which trimmed the nation’s oil output from 2.86 to 1.1mbdp and encouraged buyers to send crude oil prices to the highs of $42.80. It should be kept in mind that strikes do not last forever and when Kuwait resumes oil production as normal, oil prices may be poised to decline back down towards $40. The noise of strikes and ongoing talks of production freezes does not however drown out the disappointment from the OPEC meeting in Doha, and with the cartel’s credibility balancing on a thin line, investors may have become skeptical of anything the group has to say regarding freezes and output cuts. Nothing has changed and sentiment remains bearish towards WTI oil, it only remains a matter of time until something triggers a steep and memorable decline. From a technical standpoint, bears need to break back below $40 for a path towards $38.