Stocks and commodities take a fall

What a difference two days in the financial markets can make. On Friday, US economic sentiment soared following the unexpected news that the US economy added an impressive 321,000 jobs to its payroll during November. This news, led to various US Indices recording new milestone highs, and increased expectations that the Federal Reserve should begin raising US interest rates during 2015. It also represented the first time in two decades the US added over 200,000 jobs to its economy for ten successive months and boosted confidence in the global economic recovery.

By Monday morning though, optimism became far more downbeat. Economic data from Japan showed that the world’s third largest economy is in a deeper recession than previously estimated. This was shortly followed by data from China heightening fears over an economic slowdown. Concern arose after annualised exports during November were announced at 4.7%, far less than the 8% market expectation, alongside imports falling by 6.7% in the same period. The expectations for Chinese imports was a 3.9% increase, with the data showing further indications of domestic spending slipping.

What we have encountered in terms of economic data over the past couple of days is exactly what policy makers from major central banks have been pre-warning for months, and this is there being a huge divergence in progress between the major economies. Market participants will now turn to Thursday’s inflation data from China, where inflation levels are expected to remain flat at a near five-year low. Although low inflation will lead to further concerns over China’s economy losing momentum, there is a positive spin we can put on this. For example, low inflation levels provide the People’s Bank of China (PBoC) with more movement to reduce interest rates and, when you look at data continuing to point towards domestic spending slowing, further rate cuts could really reinvigorate economic growth.

The negative data from Asia over the weekend left quite an impact on the financial markets, with the majority of global indices pointing to the downside on Monday. Weakness was noticed throughout the FTSE 100, NASDAQ and S&P 500 while the recent suffering in commodities also resumed. The Japan GDP data further weakened the JPY and provided the USDJPY with enough momentum to jump to a new seven-year high of 121.838. Since then, the pair has encountered profit-taking with the USDJPY already looking to find support around 119.700 on Tuesday morning. The general consensus previously was that the USDJPY would conclude the year around 120. This has occurred sooner than expected and investors are now taking the opportunity to close trades.

Concerns regarding Chinese economic momentum slowing down inspired speculation there will be less demand for Oil, which resulted in further fears there is an oversupply of the commodity. As a result, bearish pressure resumed in the Oil markets, with both Brent and Crude tumbling to five-year lows yesterday. Brent dropped to $65.91, while Crude declined to $62.76. Unless investors close USD positions in the run up to Christmas, or the PBoC add further stimulus to its economy in the coming weeks, it appears unlikely the Oil markets will enter a correction period anytime soon.

As has become the norm when China data disappoints, the Aussie suffered. The AUDUSD dropped to a new four and a half year low overnight, with the Aussie valued at 0.8223 for the first time the 8^th June 2010. Last week’s GDP data from Australia confirmed the Reserve Bank of Australia’s (RBA) previous warnings that the Australian economy would enter a period of weaker economic growth and, when you combine this with concerns in China, investor appetite towards the AUD becomes very limited. Since extending below the 0.8420 support level a fortnight ago, the Aussie has fallen by over 200 pips. From a technical standpoint the pair looks very weak and as long as demand for the USD doesn’t unexpectedly decline, it appears more and more likely the Aussie will conclude the year around 0.80. Support on the Monthly timeframe can be seen at 0.8065.

The Kiwi also encountered bearish momentum, with the NZDUSD dropping to its lowest level in nearly two and a half years at 0.7607. The 0.76 price has previously been seen as a critical support level for the Kiwi and if the pair extends below this level in the coming days, it could drop towards 0.7520 support very suddenly. Whether the pair drops will also be dependent on the market reaction to the monetary statement from the Reserve Bank of New Zealand (RBNZ) later this week. If any indications are made that the decline in commodity prices will postpone any interest rates rises from the RBNZ, then the chances of the pair declining will accelerate. The RBA took its turn to suggest its currency should decline in line with commodity prices two weeks ago, and it wouldn’t surprise at all if the RBNZ follow the same pattern this week.

After both the Eurodollar and Cable commenced the week around milestone lows, both pairs appreciated by around 100 pips yesterday. This move was actually a reversal of Friday’s losses following the US Non-Farm Payroll, with the reversal being encouraged by there being a reduced volume of US economic releases in the days following the US NFP.

This quiet phase for US economic data releases alongside investors speculating the European Central Bank (ECB) will not increase monetary stimulus (which is encouraging Euro purchasing), it would not surprise if the Eurodollar continues to attempt a rally. With the longer term outlook still largely to the downside, this would only be a small correction of recent losses. Resistance can be found for the pair at 1.2340, with the pair needing to surpass here to approach further resistance at 1.2374.

Where the Cable trades today will be dependent on the market reaction to the Industrial and Manufacturing production data later this morning. The forecasts are for an annualised 1.8% and 3.2% gain respectively, which should provide a subtle reminder to investors that although the Bank of England’s (BoE) weak outlook on inflation is preventing the central bank from raising rates, the UK economy is still performing strongly. Confirmation of the data reaching expectations should provide the GBPUSD with an opportunity to attempt re-entry to 1.57, while the data disappointing should result in the GBPUSD surrendering a chunk of yesterday’s 100 pip gains. Recent support for the pair can be seen at 1.5618.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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