Tuesday was the worst day for US equities in a month, with Asian stocks were trading on the defensive on Wednesday, which opened the way to further losses in Europe. Investors have realized that the euphoria over US-China trade talks was overhyped and then proceeded to profit-taking. A flattening yield curve doesn’t add the optimism as well. Besides, there is a high degree of uncertainty ahead of OPEC+ meeting due Thursday. All this makes markets cautious and nervous.
As such, German DAX 30 declines by 0.78% to 12,246, Italy’s FTSE MIB gains 0.12 per cent to 19,377, Britain’s FTSE 100 declines by 1.14 per cent to 6,942, while France’s CAC 40 loses 0.82 per cent as well, to 4,971. US stock markets are closed today for George H.W. Bush's funeral, so the trading volumes are expected to be rather low for the rest of the day.
The greenback is trading mixed after the initial rally. The US Treasury market is closed today as well, so the buck doesn’t feel the pressure from this front so far. But rising pound derailed the USD demand partially, despite weak UK service PMI that came in at 50.4 versus 52.5 expected. Brexit-related headlines continue to set the direction for sterling. Earlier in the day, UK’s Fox said that there is a possibility of no Brexit if parliament rejects the deal next week.
Meanwhile, the UK government published the full legal advice on Brexit. According to the document, Brexit deal can't force the European Union to end the Irish backstop, the review mechanism does not provide a unilateral way to get out of the backstop, and there is a legal risk UK could become stuck in repeating rounds of negotiations. This legal advice will hardly help Theresa May to win over the crucial vote, and the pound’s bullish impetus has abated somehow after the release. Anyway, GBPUSD continues to trade higher on the day, with 1.28 is the immediate resistance now. The probability of a decisive break above this level is very low though, as traders will continue to behave cautiously at least until next Tuesday.
Brent crude struggles to hold above the $62 figure amid still contradictory signals from OPEC members. Kuwait said that OPEC+ countries haven’t yet discusses proposals to cut output. Oman oil minister highlighted that $50 is not a fair price for crude oil and added that the OPEC+ group discusses production cuts only for 3-6 month. In general, the market expects that the group of exporters will announce a fresh round of output cuts against the backdrop of recent plunge in prices due to the lingering concerns over a potential oversupply globally. But for the market, the exact volumes and timelines will be in focus. So should the verdict undershoot investor expectations, Brent will likely fall from the current levels. Anyway, the volatility is going to be high in the days to come, and OPEC+ should take quite painful steps to satisfy the market participants and allay the concerns that drive the prices lower.
Gold prices have settled below the $1240 figure after yesterday’s rally to five-week highs marginally below the $1242 handle. The short-term bullish impetus has abated now but the precious metal stays afloat amid mixed signals from the dollar. In the context of falling US Treasury yields, the longer-term prospects for gold seem to be improving, but the way north will hardly be easy and straightforward because the greenback remains relatively strong due to sound expectations for further Fed rate hikes next year. As long as these expectations are on the table, the metal’s bullish potential stays capped.
Nathan Lambert, Head of Global FX Analytical Department