Global Markets Analysis June 17, 2016 – Weekly Outlook
Jody Samuels, FX Trader’s EDGE
It was a wild week in the financial markets, as investors embraced a series of central bank decisions with majority of the focus on Janet Yellen and the Fed. After a strong selloff to start the week, the S&P 500 cut the majority of its losses to settle the week down roughly 13 points at $2,076.90. Similarly, crude oil prices declined $1.46/barrel from the open on Monday, but also reversed towards the end of the week remaining well below the critical $50 level at $47.10. The US dollar on the other hand traded flat for the week, with Gold gaining about $4/ounce, and 10-year Treasury Yields finishing the week down 3bp to 1.61%.
The biggest news item came out of the much anticipated FOMC meeting where the Federal Reserve left rates unchanged at a target range of 0.25% – 0.50%. Although, the statement showed an acknowledgement of a slower labour market, the Fed also noted that economic activity was progressing well. More importantly, the “dot plot” suggests that officials still expect to increase rates twice over the next six months. In addition, a significant factor for Janet Yellen was the UK referendum that is set to take place next week on June 23rd, where a Brexit would surely have a negative global impact. The US dollar had initially sold-off following the rate announcement, but managed to rally strongly into Thursday morning. In terms of economic data, retail sales for the month of May increased by 0.5% compared to expectations for a 0.3% rise, indicating that household spending remains strong. On the other hand, consumer prices in May rose 0.2% missing expectations for a 0.3% increase, but still providing hope that the Fed will be able to reach their inflation goals.
The chart below shows how well the EUR/USD, Oil, S&P and Gold have continued to correlate since January 2016. Intermarket analysis is key to understanding what is driving markets and at any point in time, there are different drivers. Currently, the key drivers are US economic activity and when the Fed will raise rates. The relationships to observe are the inverse relationship between Gold and the Dollar, and the positive correlation between Oil and the S&P. The key is to follow these relationships during the trading week to get clues about your traded market.
Ongoing concerns continued this week with regards to a potential Brexit which led to an awful lot of volatility across global markets. The most recent survey showed that 55% were in favor of leaving the EU, compared to 45% who wanted to stay. As a result of the uncertainty surrounding the referendum, investors have been pouring money into safe havens such as the German Bund, while European stocks reached a four-month low. Global markets saw a huge reversal Thursday morning following the tragic death of UK Labour Party Lawmaker Jo Cox, which caused all referendum campaigns to be suspended giving hope of a possible disruption to the June 23rd voting. GBP/USD rallied from a low of 1.4012 to end the week at 1.4289 and the EUR/USD saw a sharp reversal at 1.1132, trading higher to close the week at 1.1258.
From an Elliott Wave perspective, the EUR/USD has been trading in a broad trading range since March 2015 between the high of 1.1716 to a low of 1.0470. This consolidation is called a complex sideways correction in Elliott Wave lingo. In the more immediate term since March 2016, the EUR/USD has traded between 1.1616 and 1.0820. In the shorter term since May 2016, the support has moved up to 1.1098. For this week, expect the EUR/USD to test higher levels if 1.1303 is taken out; otherwise, trade this week’s range.
The price of oil once again failed to settle above $50/barrel this week as some downward pressure was seen to refrain more producers from entering the market. This comes after oil rigs for the prior two weeks managed to rise by 12 to 328 that may provide a sign that US output could stage a comeback. On a similar note, the International Energy Agency on Tuesday stated the surplus has been shrinking faster than expected due to increased demand, and is therefore predicting a balance by next year. Furthermore, news that Iran is expected to increase output by 600k-700k bpd over five years, and the reemergence of Canadian output this month also prevented prices from rallying. With that said, the EIA showed that crude stockpiles fell by 933,000 last week which caused prices to trade higher near $49 before tanking to a weekly low of $45.89.
From our Elliott wave perspective, look for a retracement of this strong close of the week and a subsequent move higher.
The price of gold bounced slightly for the week as capital inflows persisted once again given the uncertainty regarding Brexit. The potential for the Fed to maintain interest rates lower for a longer period than initially expected has been bullish for the non-yielding precious metal. Gold had spiked higher following the Fed’s decision to an 18-month high of $1,315.7, before tumbling almost $40/ounce following the UK shooting to trade near the lows for the week.
The S&P for the second straight week saw a strong move down after breaching the significant $2,100 level. Although prices initially saw a bounce as the Fed kept rates unchanged, the index started dropping throughout Yellen’s post press-conference. Investors recognized the dovishness of the Fed statement due to slower growth, and how a Brexit would only worsen the global economic situation. Equities continued to decline overnight following the BOJ’s decision to maintain their current monetary policy stance and measure the impact of their negative interest-rate policy. Nonetheless, the S&P saw a huge bounce back following the unfortunate shooting of UK MP Jo Cox as prices traded 40 points higher from a low of $2,050.
From a Fibonacci perspective, the S&P retraced almost 78.6% of the last swing move and unless the S&P breaks down through 2,050 next week, expect consolidation and a retest of 2,100.