MARKETS: WTI selling momentum accelerates

Investor sentiment is continually plagued by oversupply concerns and bearing in mind that these remain at the same elevated levels as they have always been, oil markets were always vulnerable to a sudden reversal of previous gains. Aside from oversupply concerns, contributing to this sudden selling pressure is anxiety that demand for WTI is declining. One of the issues with the ongoing situation in Greece is that the wider implications of a country leaving the Eurozone or at least defaulting on their loan repayments is largely unknown, meaning this could have a knock-on effect outside Europe that would lead to reduced demand for WTI. In addition, declining economic momentum is continuing to be the running theme of the China economic story in 2015 and with China being among the largest importers of crude anyway, a slowdown in growth would lead to less demand for WTI.
The downside pressure on WTI is also inspiring selling momentum in currencies with economies linked to crude exports, such as the Canadian Dollar, Mexican Peso, Malaysian Ringgit and Russian Rouble. Emerging market currencies are going to feel the most pain over the selling pressure on WTI and I will be keeping an eye on both the Malaysian Ringgit and Indonesian Rupiah over the coming days. The problem for the emerging markets is that the resumption of WTI selling comes at the same time as USD appetite is picking up with the Federal Reserve interest rate rise expected in the next couple of months. This is the same combination that led to the emerging market currencies declining at a rapid rate in early 2015, and it looks like recent history is repeating itself. Don’t be surprised if the lower price of oil weighs on investor sentiment towards futures, which are already at risk to vulnerabilities over the continual uncertainty in Greece.

GOLD:
Despite the uncertainty in Greece and the risks of a Grexit intensifying, there is no sign for increased appetite towards Gold. The metal dropped to a near four-month low at $1147 on Tuesday and if we see a fall of another $5, we will record another year low.
There is simply no buying interest towards the metal as we approach the timing of a US interest rate rise. Rather than seeing the decline in Gold as being inspired by Finance Minister Varoufakis’ resignation and increasing optimism that a deal over Greece might be easier to conclude, I prefer to think that the losses in Gold are linked to the possibility that Wednesday evening’s FOMC Minutes might contain an unexpected hawkish comment about US interest rates.

GBPUSD:
In line with expectations, the GBPUSD continued to decline since rallying to a 2015 high above 1.59 late last month. The previous rally was a complete over-extension and although GBPUSD has since dropped as low as 1.5413, there is some selling momentum left to push this pair a little lower down the charts. There are a variety of reasons why investor sentiment towards the Pound has become very weak, but the main is Bank of England (BoE) Governor Mark Carney admitting that UK financial stability is exposed to pressures over the Greece situation. With the Greece uncertainty continuing and even reaching new levels, investor sentiment towards the Pound has weakened.
If the BoE Governor admits his concerns over how the Greece situation could impact UK financial stability, just imagine what his views would be if an EU referendum was announced. While the UK’s direct exposure to the Greece situation might be “minimal”, the fact that Prime Minister David Cameron, Chancellor George Osborne and Governor Carney are meeting suggests more than enough to validate that there are risks to the UK economy over Greece. If an EU referendum was later announced, we can expect further downbeat comments because the UK economy is highly reliant on its trade with Europe. Not only would this inspire further downside pressures on the GBPUSD, it would also have interest rate repercussions and further push back any expectations for the BoE to begin raising rates next year.
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