MARKETS: Trading continues to stare at steep losses

 
Markets are only just beginning to digest the realisation that depressed commodity prices are here to stay, and the sentiment towards riskier assets like stocks was hit by a further blow when the price of oil concluded the week below $30 for the first time in 12 years. Even over the weekend, share prices across the Gulf suffered huge losses in reaction to yet further lows in the price of oil and following reports that Iran sanctions are now lifted with this causing concerns that the price of oil could dive even further.

WTI Oil
The price of oil concluding trading for the week below $30 is a huge psychological move and opens the doors for the commodity to continue sliding to the lower $20s which would, of course, encourage further shockwaves and anxiety among investors. There is simply an aggressive oversupply and demand equation in the markets with ongoing concerns that demand for the commodity is also slipping due to weak global growth, which in many ways adds to the excess supply before investors even begin to take into account that Iran will soon begin unleashing its own potential reserves.
There are simply no buyers for oil right now, and investor attraction for the commodity is horrendously low. While we all understand that stronger commodity prices are beneficial for the global economy when you consider that so many economies are reliant on commodity exports, the current economic conditions are heavily against a meaningful comeback. I expect that reports will soon begin to circulate from different oil ministers regarding the need for an emergency meeting to discuss such depressed prices, but getting different oil ministers to combine together and agree for a meeting will be difficult enough, let alone to agree on a possible production cut for the commodity.

Gold and the Fed
Gold saw a rebound and gained close to $20 on Friday after the sentiment towards the USD suffered a blow following an unexpectedly weak US retail sales report for December. Sales declined by 0.1% despite December being the month of Christmas, and despite consumers supposedly saving on gas expenditure from falling oil prices and further strong gains in job creation.
Although it is becoming clear that falling oil prices are not proving to be the catalyst that people hoped it would to encourage more spending across consumers, it is unusual that US consumers are still not spending after the economy experienced such impressive job creation for more than a year. Weak consumer spending habits might prevent members of the Federal Reserve from speaking so confidently in public about a possible four US interest rates rises at a later date.
It is doubtful that the recent downturn economic data from the US will prevent the Fed from raising interest rates towards the end of Q1, however, we still believe that the public statement of intent to raise interest rates four times this year looks ambitious.

Punishing the Pound
The British Pound continues to face abrupt punishment and it is still difficult to envisage a floor in the weakness for a currency that has seen its losses accelerate rapidly in recent weeks. Investor attraction towards the Sterling is horribly weak, with this being extended by further signs of a downturn in economic momentum following recent data and markets pricing in that there is currently a minimal chance of a UK rate rise this year. These factors combined, plus others including ongoing uncertainty over a potential UK referendum to vote on EU membership, possibly later in the year, are driving the GBPUSD to dive to levels not seen since May 2010 at 1.42.
Despite the rapid acceleration of Pound losses over recent weeks, we still do not think there is a floor to weakness for the UK currency. One factor that investors needs to take into consideration is that the relentless pressure in the commodity markets is encouraging a risk-off attitude from investors, which is basically stating a clear message to stay away from the UK currency. From an economic standpoint, the relentless pressure in commodity prices will drive inflation to fall to further dangerous levels and this is also probably weighing on investor sentiment.
Inflation data is out from the UK economy early in the week with the chances being high that the data will continue to outline persistent headline inflation weakness, which is exactly why the door to continuously push back UK interest expectations is being left wide open.

Changing dynamics lift Euro – JPY
The same risk-off attitude from investors that is hurting the Pound is inadvertently leading to Euro strength across the currency markets. There is a changing dynamic at present and as investors continue to digest to prolonged weakness in the commodity markets, they are focusing their attention to watching declines in equities and removing selling options on the Euro.
The same declines in the equity markets will also encourage further safe-haven attention towards the Japanese Yen. With a high-risk China GDP report being scheduled for the early hours of Tuesday morning, any additional anxiety over the global economy can continue to encourage attraction towards the Japanese currency.

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