By Naeem Aslam
US and European markets are set for a mixed open Wednesday as traders pay close attention to weak economic numbers out of China and another surprise interest rate hike by the RBA.
In Europe, what matters most in terms of sentiment is the German Industrial Productions m/m. The data brought more weakness for the sentiment among traders who believe that weakness in the number gives a clear indication that things are heading downhill for the most important and strongest economy of the Eurozone.
There is still a lot of strength in the tech sector, and more and more stocks continue to trade above their 200-day SMA on the daily time frame. Tech has been the sector where the rally, strength, and confidence have been for traders, and it is likely that the momentum fired up by Apple with its VR glasses is more than likely to bring more flow to the sector.
The energy sector is still lagging; traders continue to worry about the demand for oil prices as the world economy continues to slow down and central banks try to tackle inflation. Oil prices started the day on the back foot again, and they have traded in negative territory for the third day in a row.
Crude oil continues to flirt with the $70 handle which means extreme weakness as Saudi Arabia’s recent cut in oil supply failed to revive the rally. Many do think, however, that had Saudi Arabia not intervened, we could be looking at much more weakness in oil prices.
Gold awaits Fed, central banks
The precious metal remains at an interesting point as traders continue to focus on two things.
Firstly, they are looking at the risk-on rally that pushed the S&P 500 index to its highest level this year. Obviously, when we do have a risk-on rally, it keeps a lid on the gold price.
Secondly, they are focused on the Fed and what they are going to do in the coming weeks when the spotlight will come on them.
The question is whether central banks like Australia are still surprising the markets with an expected rate hike, while the Fed, on the other hand, is carefully managing expectations. Will it stick to its guns or try to shoot down inflation further?
The dollar index suggests that there is a large possibility for this, and the strength in the dollar index is keeping old traders somewhat worried.
Overall, the price action for gold remains positive, and traders don’t seem to be in the mood to leave any ground.
The level that puts the bulls on the higher ground is $2,000, and currently the price is trading below this mark. This means that there is some hallucination among gold traders who think that the odds are stacked in their favour.
Forex
In the currency markets, traders are looking at the monetary policy action by the Bank of Canada, which isn’t expected to hike interest rates further, but the risk remains to the upside.
There is a strong possibility that we could see another surprise interest rate hike by the BOC as inflation is still sticky and the bank wants to use every opportunity to hike rates to slow down inflation and bring readings lower.
The forecast for the Bank of England overnight rate is 4.50%, which is the same as last time, but we could see another interest rate hike of 25 basis points. This means that the overnight rate could jump to 4.75%.
The Canadian dollar will be an interesting currency to watch and speculators have positioned themselves to go higher. This also means that if the BOC doesn’t increase the rate and keeps it unchanged, there could be some pressure on the currency to the downside.
In terms of the Aussie dollar, clearly the RBA has its goals defined very clearly, and it is less concerned about anything else as the GDP data has confirmed further weakness. Traders are disappointed with the number, as the data has fallen massively from its previous reading of 0.6% to its current reading of 0.2%.
More weakness is in store for the Australian economy, especially as the RBA is determined to bring inflation lower at the cost of economic growth.
Bitcoin
There was a tremendous comeback for bitcoin on Tuesday despite heavy regulatory pressure. Traders and investors know this is possibly the last bad news for the industry, as they have been expecting this outcome for a long time.
Yes, crypto companies will pay some fine—something that we have seen many times in the banking space when they do what they shouldn’t have done. But then things do move on and become normal.
Basically, traders need to keep one thing in mind: bitcoin is safe and untouchable by the SEC. It is not a security, and the SEC sees it as a commodity.
Traders and investors who believe in bitcoin have nothing to worry about; industry players will evolve and adopt according to the law, which they should have done in the first place.
Naeem Aslam is Chief Investment Officer at Zaye Capital Markets.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Zaye Capital Markets.
