Bearish sentiment dominates global equity market

Wednesday, February 03, 2016

The bearish outlook continued to dominate investor sentiment as the sell-off in Asian equity markets extended overnight, prompted by crude oil futures posting fresh losses. Front month WTI futures sank back below $30/bbl during the US session yesterday amid a lack of significant economic data which saw the pessimistic outlook spill over to Asian trading. Japanese equity markets led the region lower with the Nikkei 225 and TOPIX indices both losing over 3% as equity markets continued to move in sync with global crude markets. Positive correlation between front month crude prices and the S&P 500 has increased over the past month after dipping towards the end of last year and equity investors seem to be reacting acutely to any changes in WTI prices. Today will see the release of weekly EIA crude oil stockpile data and with market participants polled by Bloomberg expecting a 3.7m barrel increase during the last week of January we could see near term crude futures come under additional pressure throughout the day.

Appetite for the USD remains firm with the dollar index trading confidently above 98.700, remaining well supported towards the 50 day MA against a basket of major currencies. Investors are hoping that testimonies by Fed Chair Janet Yellen to the House Financial Services Committee and Senate Banking Committee later on this month can offer further insight into the condition of the US economy while January’s FOMC meeting minutes, due for release later this month will hopefully offer some indication on when the next rates rise is planned. However, given the recent market volatility and protracted sell-off across almost all risk assets we remain doubtful that the Fed will push for a second rate hike at its next FOMC meeting in mid-March.  

Safe haven assets were buoyed by the extended sell-off in Asian equity markets as the Japanese yen strengthened for the third straight session against the dollar, trading towards 119.42 at one point before giving up some of these gains and settling just below 120.00 at the time of writing. With the resumed sell-off in crude triggering additional weakness across equity markets investors have increased yen exposure and after failing to breach the 200 day MA towards 121.50 late last week the yen has gained significant ground so far this week. Further strengthening of the yen will leave policymakers at the Bank of Japan with a difficult task ahead as efforts to weaken the currency in a bid to boost exports and liquidity are made that much harder.

Correlation between WTI and S&P 500 remains high

CL1 Comdty Generic 1St CL Fut 2016 02 03 07 56 22

Yen strengthens on haven buying

JPY Curncy Japanese Yen Spot 2016 02 03 08 22 26

Events for today

0145

CN

Jan

Caixin China Services PMI

0145

CN

Jan

Caixin China Composite PMI

0200

JP

Jan

Nikkei Japan Services PMI

0200

JP

Jan

Nikkei Japan Composite PMI

0855

DE

Jan

Markit Germany Services PMI

0900

EZ

Jan

Eurozone PMI Services

0900

EZ

Jan

Retail Sales

1315

US

Jan

ADP Employment Change

1530

US

w/e

EIA Crude Stocks

Topics: Crude oil, WTI, JPY
More from: Kash Kamal