Stocks resume sell-off as optimism fades

Tuesday, January 26, 2016

The brief glimmer of optimism faded overnight as the rally in risk assets that had seen last week’s bullish activity spill over to the start of this week lost steam. Asian equity benchmark indices reversed yesterday’s tentative gains with mainland Chinese stocks leading the declines as the Shanghai Composite and CSI 300 both close over 6% lower. The risk averse mood was largely triggered by a fresh slide in crude oil futures which, after an encouraging end to the previous week as front month Brent contracts rallied to a close above $32/bbl, reversed direction and headed back towards $30/bbl yesterday. Activity early this morning has seen the global benchmark trade back below $30/bbl early on with crude oil and stocks now moving in tandem with each other.

Spot gold prices managed to post a close above key resistance at the 100 day MA yesterday as nervous investors saw haven demand for the precious metal improve. Prices hit a high of $1,109/oz and activity early on this morning has seen firm support around yesterday’s close as the yellow metal remains well supported above $1,115/oz. With last week’s optimism quickly dissipating at the start of this week, we may see a resumption of the protracted selling that has dominated much of January’s trading. Increased risk aversion would likely prompt additional gold buying with prices on track to hit a fresh three month high as investment demand improves.

Following on from last week’s ECB meeting, President Mario Draghi offered markets additional insight into the central bank’s outlook for the year ahead. Speaking in Germany Mr Draghi promised to increase inflation, staunchly defending the ECB’s utilisation of loose monetary policy and stating that the €1.5tn asset purchase programme initiated last year was having the desired impact. With inflation in the eurozone hovering around zero it’s hard to see the impact such loose policies have had, confidence in the bloc has slowly been eroded and given the likely persistence of low energy prices over the coming year the inflation outlook remains lacklustre. The euro continues to trade rangebound against the USD, flipping either side of the 50 day MA throughout January and we expect this sideways pattern to continue over the coming week.   

Brent slips back below $30/bbl

CO1 Comdty Generic 1St CO Fut 2016 01 26 07 59 14

Haven demand supports gold towards $1,115/oz

XAU Curncy Gold Spot Oz D 2016 01 26 08 01 26

Events for today

1445

US

Jan

Markit Services PMI

1500

US

Jan

Consumer Confidence Index

1500

US

Jan

Richmond Fed Manufacturing Index

OE:

Mar Brent Crude (ICE) 

Topics: Gold, Crude oil, ECB, Brent, EUR
More from: Kash Kamal