Market volatility returns in full force

February 17, 2017 09:52 AM

Stock markets were explosively volatile this week, with most areas sprinting into record levels as the mixture of stabilizing oil prices and improving economic data across the globe boosted risk appetite. Gains were surrendered on Friday with sellers back in action, as the return of uncertainty and rising anxiety from political risks exposed global stocks to downside losses. Asian shares concluded in the red today and the bearish domino effect has already sent European markets tumbling down like a house of cards. With risk aversion rippling across the board amid the ongoing uncertainty, the financial market may be vulnerable to further losses. Although global stocks have repeatedly hit record highs from the “Trump effect”, markets could find themselves under renewed selling pressure if the proposed fiscal stimulus and tax cuts fall below market expectations.

Dollar bulls exhausted
The visible fact that the Greenback was sold off this week despite the positive economic data from the U.S and hawkish Yellen comments continues to highlight how the currency has been “Trumped.” Political risks and the lingering Fed uncertainty have left the dollar vulnerable with investors thinking twice about dollar long bets amid the escalating Trump developments. Markets are still seeking the long-sought clarity on the fiscal stimulus and tax cuts while fears of protectionist policies impacting U.S growth have left participants edgy. While the improving economic fundamentals of the United States could ensure the Greenback remains buoyed in the longer term, the uncertainty gravitating around Trump may continue to limit upside gains. Technical traders will be observing how the dollar Index reacts to the 100.50 level with weakness potentially opening a path lower towards 100.00 and 99.00 respectively.

UK retail sales unexpectedly fall
Sterling bears were granted the permission to attack the GBP/USD on Friday following the unexpected decline in January’s retail sales which sparked concerns of a fall in consumer sentiment amid the Brexit developments. UK retail sales fell 0.3% in January as the rising inflation created from the sterling’s vulnerability encouraged consumers to cut back on spending. It must be kept in mind that consumer spending is one of the major drivers of the UK economy with today’s poor sales figure likely to add another layer of uncertainty on top of the Brexit woes. Although UK inflation continues to follow a positive trajectory post-vote to leaving the European Union, markets remain dissuaded over the current figures being enough to force the Bank of England to raise interest rates anytime soon.

The sterling/dollar was sold off following the soft retail sales report with a breakdown below 1.2400 triggering a further selloff lower towards 1.2300.

Commodity spotlight - Gold
Gold edged above $1,242 during trading on Friday as the cocktail of dollar weakness and ongoing Trump developments encouraged bullish investors to pounce. This metal remains bullish in the short term amid the rising political risks across the globe and could edge higher towards $1,250 if the revived Fed uncertainty bolsters the yellow metal’s attraction further. Although the strong likelihood of the Fed raising U.S. interest rates this year may pressure gold in the longer term, it will be the cocktail of events in Europe, Brexit woes and the Trump saga that may ensure gold remains buoyed in the short term.

About the Author

Lukman Otunuga is an FXTM research analyst