Investors around the globe will closely monitor how the stock markets perform throughout trading today, following the rollercoaster ride that the financial markets experienced last week.
Although it would not be an understatement to suggest that volatility in global stock markets has reached intense levels, I don’t think there is a reason to be overly concerned by the recent market fluctuations. Similar levels of volatility were not seen in other asset classes such as the currency markets, suggesting that this is a stock market story and not a sign of concern over global economic health.
It has been warned for quite some time that stock market valuations were over-stretched, therefore the sell-off was quite likely just a market correction.
USD looking at risk to slipping lower
The U.S. dollar is appearing at risk to withdrawing some of its gains over the past week, as investors eagerly await the upcoming inflation data release due from the United States on Wednesday.
Investors are already expecting a probable U.S. interest rate increase from the Federal Reserve over the next couple of months, meaning that a positive inflation reading on Wednesday would likely provide investors with assurances that another increase in U.S. interest rates is around the corner.
Whether more assurances that the Federal Reserve will resume its commitment towards higher U.S. interest rates is enough to convince investors to re-purchase the dollar at these lower levels remains to be seen, because I feel that investors will be paying more attention towards whether a possible rise in global inflation expectations accelerates the motives of other developed central banks to raise their own interest rates.
Increased U.S. interest rates were priced into the dollar a very long time ago, and I feel that investors are instead more enthusiastic about the prospect of higher interest rates from the Bank of England and European Central Bank.
Gold attempting to recover momentum
One of the main reasons why I am not concerned that the stock market sell-off from last week was a sign of mass panic from investors is because of the limited buying interest in gold, in spite of the heightened stock market volatility. Gold usually benefits from an increase in interest as a safe haven instrument during uncertain times in the market, but the lack of interest in gold over the past week has surprised a few in the market.
I personally think that the losses in gold last week can be seen as a positive factor because it provides more confidence to investors that the sell-off in the markets was a correction and not a sign of panic over the global economy.
WTI Oil finding support at $60
With the global financial market headlines over the past week focusing on stock market volatility, it has slipped under the radar that increased volatility in oil saw the commodity suffer its worst decline in two years. Rising concerns over an increase in U.S. production and a recovering dollar have weighed heavily on the price of oil.
The anxiety that OPEC members might soon announce an intention to consider increasing production output following optimism that the market oversupply has rebalanced could now come under question, following the recent indications of increased production from the United States. This could leave to the price of oil finding support somewhere around $60 per barrel for the time being.