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Markets wary of oil and bond yield highs

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By Lukman Otunuga, Senior Research Analyst at FXTM

Asian shares were a mixed bag on Tuesday due to the absence of cues from Wall Street, following a national holiday in the United States. But European and U.S. equity futures are flashing red amid a jump in Treasury yields, as investors brace for the Federal Reserve to raise interest rates four times this year to tame inflation.

Brent crude ventured to its highest level since 2014 due to geopolitical tensions in the Middle East, while gold struggled for direction above $1810. In the currency arena, king dollar pushed higher while the yen weakened Tuesday morning after the Bank of Japan concluded a two-day policy meeting with no major changes.

This will be a major week for markets as investors juggle the various themes influencing sentiment.

Equity markets will look to company results for some direction as the fourth-quarter earnings season gets into full swing.

Results from the US banks that have so far reported, paint a mixed picture with JP Morgan Chase, a financial bellwether, closing down more than 6% on Friday after the bank said rising costs would curtail profits in 2022 even as it posted record full-year earnings.

Heavyweights such as Goldman Sachs and Bank of America, as well as Netflix among many others, will be under the spotlight this week.

The burning question on the minds of investors could be what impact rising inflation and the emergence of the Omicron variant will have on final quarter earnings.

Should we witness another mixed or disappointing week of results, this could sap more confidence from stock market bulls, especially when considering that the broader S&P500 index is already down over 2% so far this year.

A wild week ahead for the Pound?

The British pound could be injected with volatility this week due to the series of key economic reports and potential political drama at Westminster.

Market expectations already remain elevated over the Bank of England raising interest rates next month, with traders pricing in a 91% chance of a 25bp rate hike. The argument for higher rates may be reinforced this week if the pending data meets or exceeds forecasts.

On the political front, Prime Minister Boris Johnson remains under pressure to resign over ‘partygate’. Given how it has been reported that as many as 30 letters of no confidence in Boris Johnson have been submitted by Tory MPs, things are bound to get heated.

A total of 54 letters of no confidence would have to be submitted to Sir Graham Brady, chairman of the 1922 Committee of backbench MPs, for a vote to be held.

Looking at the technical picture, GBPUSD remains bullish on the daily charts.

However, there seems to be resistance around the 200-day Simple Moving Average at 1.3734. A decline towards 1.3600 could be on the cards after such a strong run since the December lows, before bulls snatch back momentum for a push towards 1.3700 and 1.3830.

Oil climbs on ME tensions

Brent crude marched into Tuesday’s session, with prices climbing to fresh seven-year highs as geopolitical tensions bubbled in the Middle East.

Iran-backed Yemeni fighters claimed to have launched drone strikes on the United Arab Emirates, the third-biggest OPEC producer.

Brent is up almost 2% this week and has appreciated close to 13% since the start of 2022. Prices are above $87.70 Tuesday morning, with bulls eyeing $88 and $90, as upside targets.

Gold in for bumpy ride

Gold could be flung into the firing line this week if the dollar regains its mojo and Treasury yields rally. The precious metal has displayed resilience in recent sessions and even took advantage of a softer dollar to push back above $1810.

However, given gold’s zero-yielding nature, the path ahead could be bumpy and perilous for the precious metal as interest rate rises become a reality. Although other factors such as inflation risks and Omicron uncertainty may support gold bugs, the pressure is piling up on gold.

Looking at the technical picture, prices remain within a choppy range.

A break below $1810 could open the doors towards $1800, 1786, and $1770. Should $1810 prove to be reliable support, bulls may eye $1831 and $1845.

 

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