Financial market research and analysis

Equity traders have hard time clearing their thoughts as the North Korean nuclear threat occupy the global headlines. Safe haven assets remain in demand as Asia Business Daily based in Seoul reported that North Korea could launch a new missile before Saturday. So far, there hasn’t been any concrete plans from the US, Russia and China to respond to the nuclear threat.

The FTSE 100 stocks opened downbeat, except the IT stocks (+1.65%).

Energy sector (-0.45%) remains under the pressure of topping oil prices on Hurricane Irma.

Hurricane Irma, which has become the most powerful hurricane on record in Atlantic history, may threaten Florida by the end of the week. Natural gas futures are down. The WTI crude loses momentum after Tuesday's positive attempt above $49/barrel. Downside risks prevail.

Cable rallied to 1.3044 on the back of the aggressive USD sell-off. The Fibonacci resistance at 1.3020 (major 61.8% retrace on August decline) has been taken out. Technically, the pound stepped in the bullish consolidation zone against the USD. However, the selling pressures on pound remain intact due to Brexit shenanigans. The pound’s rally could remain short-lived and rapidly fade as soon as the US dollar finds support.

The 10-year gilt yield is heading lower as money flows in to the safer bond markets.


Low rates, high risk environment favourable for gold

Gold rectified Tuesday’s gains after the ounce traded at $1’344 on the back of a solid safe-haven rally. Gains could extend toward $1’350 despite the overbought market conditions (30-day RSI stands at 77%). Low rate environment enhances safety allocations as well, given that the opportunity cost of holding non-interest-rate-bearing gold is interesting in times of tense geopolitical landscape.


US yields fade on dovish Fed talks, VIX jumps 20%

The US stocks fell on Tuesday as US traders returned from Labour Day holiday. The Dow Jones (-1.07%) was dominated by decent sales, as mining stocks (-3.27%) and financials (-2.63%) sold off aggressively. The S&P500 (-0.75%) and Nasdaq composite (-0.93%) pared a part of the daily losses but the rebound remained short of the initial slide. The VIX index jumped by more than 20% as traders needed immediate hedge for their equity holdings.

The US dollar was hit hard by dovish comments from the Federal Reserve (Fed) members. Fed’s Lael Brainard reminded that the US inflation remained steadily below the Fed’s 2% inflation target over the past five years and that the Fed should remain vigilant before raising the interest rates again, while Neel Kashkari warned that the interest rate hikes may have harmed the economy by causing slower jobs growth and low inflation.

Fed members’ speeches enhanced the already active safety rush into the US sovereigns.

The US 10-year yields nose-dived to 2.05%, lowest since November, on the combination of risk-off bond purchases and dovish Fed expectations. The probability of a December rate hike is down to 27%.

The four-week T-bill auction yield demand stood at the highest since September 2008 on rising US default risks.


Euro stagnates pre-ECB decision

The euro stagnates. The EURUSD is marginally higher due to the broad-based USD sell-off. Top sellers are touted at 1.1950 and 1.1980/1.2000 before tomorrow’s European Central Bank (ECB) decision. Call options trail from 1.1900/1.2000. Buyers are touted above 1.1850.

The ECB is expected to reschedule the Quantitative Easing (QE) tapering to at least next month. Although the strong euro may not have a significant impact on the ECB’s inflation forecast, the actual geopolitical tensions and rising global risks could encourage the ECB to hold fire at Thursday’s meeting.


AUD softened post-GDP data

The AUDUSD pulled out the 0.80 offers and rallied to 0.8027 on Tuesday. The pair traded below 0.80 following the 2Q GDP print in Sydney. Australian GDP expanded by 0.8% in the second quarter versus 0.3% previously, slightly lower than 0.9% expected by analysts. The bullish trend could extend to 0.8065/0.8080 area on widening AU-US rate differential, yet carry traders are currently on the sidelines due to the limited global risk appetite.


BoC to maintain status quo

The Bank of Canada (BoC) is expected to maintain the overnight rate unchanged at 0.75% at today’s meeting and contain the BoC hawks in regard to the future of its rate policy. The fading Fed hike expectations should give the BoC enough time to stay pat before considering another rate hike in the foreseeable future.

The USDCAD hit 1.2335, the lowest since June 2015. Trend and momentum indicators remain comfortably negative. Resistance is eyed at 1.2445 (June support) and 1.2577 (50-day moving average).


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