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Equity rally continues as crude oil prices recover, European yields continue to decline

- In the equity market, the rally is in full swing and shows no sign of stopping as money is almost free now and will certainly get even cheaper as central banks across the globe continue to ease their monetary policies

- We are doubtful that the current oil rally will last as the fundamentals simply don’t add up to further strength in crude oil prices

- USD/CAD is moving towards the next support at 1.2862 while on the upside the closest resistance area lies at around 1.32

- GBPUSD should continue to trade with a downside bias (1.28 next support) as the negative effects of the UK’s decision to leave the European Union starts to progressively unveil

 

Commodity currencies traded on a firmer footing yesterday as crude oil prices rallied sharply amid rumours that informal OPEC talks at a conference in Algiers next month could result in an output freeze. The West Texas Intermediate posted some solids during the European and US session, rising as much as 6.70% to $43.86 a barrel - the highest level since July 25th - and continued to climb as fresh buyers joined the ongoing rally. We are however, doubtful that the current rally will last as the fundamentals simply do not add up to further strength in crude oil prices. The Canadian dollar jumped roughly 1% yesterday against the US dollar and consolidated those gains in Tokyo. USD/CAD is now moving towards the next support at 1.2862 (low from July 15th), while on the upside, the closest resistance area lies at around 1.32 (previous high and psychological level). The Norwegian krone performed similarly and rose sharply against the greenback with USD/NOK falling as low as 8.2080 in Wall Street yesterday.

 

Yann Quelenn, market analyst: “European yields continue to decline: Yesterday was a great day for bonds investors. At European market closing yesterday, German, Italian Spain and Portuguese bonds all closed way higher but yields also lowered on most of their maturities, as was the case with Italian and Spanish 10-year maturity yields with both finishing at record lows.

 

Contrary to the colossal debt of most European countries, financial markets are actually flocking towards bonds looking for capital appreciation despite the negative yield of return on these govies and this complete economical nonsense shows no signs of stopping. Massive ECB QE is lowering the cost of borrowing and at the same time European institutions are backing up the debt of European countries. The road towards negative interest rates continues with no end in sight.

 

The BoE’s asset-purchase program increase is a perfect example of investors being given an incentive to go towards fixed income instruments and riskier assets. Markets are upside down right now, bonds and stocks are positively correlated and economies’ fundamentals are not correctly reflected into asset prices.” ---

 

After sliding continuously since the BoE’s decision to cut interest rate and to expand its quantitative asset purchase programme, the pound sterling stabilised during the Asian session at around $1.2955. In our opinion, the pair should continue to trade with a downside bias as the negative effect of the UK’s decision to leave the European Union starts to unveil progressively. GBP/USD has fallen almost 3% since Mark Carney’s speech and we have not seen the end yet. The currency pair should soon re-test the 1.28 key support area. If broken, the door will be wide open toward the 1.20 level.

 

In the equity market, the rally is in full swing and shows no signs of stopping. After all, money is almost free now and will certainly get even cheaper as central banks across the globe continue to ease their monetary policy. In Japan, the Nikkei and Topix indices were up 1.10% and 0.64% respectively. In mainland China, the Shanghai and Shenzhen Composites rose 1.14% and 0.86% respectively. Offshore, the Taiex was up 0.20%, while in Hong Kong, the Hang Seng surged 0.86%. In Europe, equity futures are rather mixed this morning as traders hesitate to take profit ahead of the week-end.

 

Today traders will be watching CPI from Spain; GDP from Italy and the euro zone; industrial production from the euro zone and India; retail sales, PPI and Michigan sentiment index from the US.

Friday, 12 Aug, 2016 / 8:16

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Source : http://en.swissquote.com/fx/news

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