Stock markets gripped by geopolitics

June 6, 2017 09:53 AM

Financial markets were caught unaware at the start of the trading week following the shocking reports of the Saudi-led alliance severing diplomatic ties with Qatar. This unexpected development created shockwaves across the region with Qatar’s stock market exposed to extreme downside shocks tumbling 7.3% on Monday. For those who were already bracing for extreme volatility ahead of the UK general election, ECB meeting and former FBI Director James Comey’s testimony, the escalating tensions in the Middle East are likely to leave many on high alert. A variety of geopolitical issues across the globe has clearly left investors on the edge which should translate to a drop in appetite for riskier assets.

World stocks were under pressure during Tuesday's trading session as investors adopted a cautious approach by observing the action from a safe distance. Asian shares concluded depressed, following the bearish cues from the financial market while European equities were gripped by investor anxiety. With the Gulf tensions, the drama surrounding President Trump and the pending UK general elections keeping investors cautious, the upside gains in the financial market may be limited this afternoon.

Sterling ruled by politics
The Sterling/dollar was showing early signs of volatility during Tuesday’s trading session as pre-election jitters left investors anxious ahead of Thursday’s General Election in the UK. With poll results varying from a narrowing lead for Conservatives over the Labour party to a nightmare “hung parliament” scenario, Thursday’s election result remains unclear. This uncertainty ahead of the General Election on Thursday should expose Sterling to further downside pressures.

Although a situation where UK Prime Minister Theresa May triumphs in the UK General Election is likely to support Sterling, the upside could still face some headwinds. It must be kept in mind that even after the elections are over, ongoing uncertainty revolving around Brexit and the exit negotiations may expose the Pound to downside risks. From a technical standpoint, Sterling remains driven by politics with Thursday’s election result playing a key role in where the currency concludes this week. Technical traders will be paying very close attention to how prices react to the 1.3000 resistance and 1.2775 support levels.

Dollar bears unstoppable
The Greenback was attacked by bearish investors on repeated occasions last week as the ongoing political turmoil in Washington weighed heavily on the currency. Sellers were swift to exploit May’s soft U.S. jobs report to initiate renewed rounds of selling during Monday’s trading session with prices descending towards 96.50.

In a week where major events across the globe are likely to spark volatility, the main event risk for the Dollar will be the testimony of former FBI Director James Comey before the Senate Intelligence Committee on Thursday. Comey’s testimony will come under heavy scrutiny with markets paying extra attention to see if anything new is brought to the table. Any new revelations or fresh information on whether President Trump wanted him to stop probing his connections to Russia could leave the Dollar vulnerable to heavy losses.

WTI crude wobbles above $47
The ongoing weakness seen in oil prices continues to highlight how oversupply woes in the markets have hindered investor attraction towards the commodity. In the headlines, the Saudi-led alliance cutting diplomatic ties with Qatar does not actually change the heavily bearish outlook for the oil markets. With oversupply concerns still a recurrent theme, and OPEC’s efforts to re-balance the markets repeatedly sabotaged by U.S. shale production, WTI crude remains vulnerable to downside risks.

There are suspicions that the decision by the Saudi-led alliance to cut diplomatic ties with Qatar could spark discussions over whether Qatar adheres to its production quota. The potential threat of Qatar going against the production quota could entice other OPEC members to also defy the conditions of the agreement consequently pressuring oil markets further. From a technical standpoint, WTI crude is heavily bearish on the daily charts. A breakdown below $47 should encourage a further decline towards $46.   

South Africa enters technical recession
Sentiment towards the South African economy took a hit on Tuesday following reports of the nation falling into a technical recession for the first time since 2009. The latest GDP data released by Stats SA showed that the economy declined by 0.7% in the first quarter of 2017 with all industries excluding agriculture and mining contracting. Despite this decline, there remains some optimism over GDP growth finding some ground and rebounding to 0.7% in the second quarter of 2017 amid the stabilizing economic data seen in recent months.

The South African Rand weakened following this news with the U.S. dollar/South African Rand (USD/ZAR) currency pair edging towards 12.9000. Repeated weakness from the Rand should encourage a further incline towards 13.0000 on the USD/ZAR.

About the Author

Lukman Otunuga is an FXTM research analyst