Financial market research and analysis

Saudi continues pumping oil at record high levels in a world inundated by millions of barrels of excess oil per day, despite its squeezing finances. The barrel of WTI retreated to $41.40, near its 200-hour moving average and is set to extend losses on fading hopes that OPEC countries would fix a production cap at their next meeting. A second consecutive week of a break below the $40 level could pave the way for a further sell-off towards the $37 - $35 area.

Cheaper oil has driven the sentiment lower in the Asian trading session. Also, trading volumes were thin as Japan was closed for its Mountain Day holiday.

Following a sleepy Thursday in Asia, the FTSE opened softer in London. Soft oil and commodity prices are weighing on the UK’s energy and mining stocks.

From a technical perspective, the FTSE hit the overbought market recently, suggesting that it could be a relevant time for a pullback. Hence a valid reason, as soft oil and commodity prices, weak economic data or flight to fixed income markets, could dent the recent rally in UK stocks and encourage a downside correction in the FTSE towards 6595p, minor 23.6% retracement on June 23rd – August 8th rally, then to 6490p, the 100-day moving average.

The equities sell-off, combined with the rising appetite in UK bonds, could drive even more volume into the UK sovereign and corporate bonds markets, which have become increasingly popular among the riskless-yield seekers after the Bank of England announced to buy an additional £60 billion in UK sovereigns and £10 billion in UK corporate bonds.


Fed rate hike expectations soften

As expected, the Reserve Bank of New Zealand (RBNZ) cut its official cash rate to 2%, warning that further monetary easing could be needed in the future. The Kiwi surged to 0.7341 against the US dollar as the 25 basis points cut fell short of the market’s expectancies.

The craving for cheap liquidity has become a leading global theme in the financial markets. Investors are playing with and against the central banks. The game became somewhat dangerous as the cheap liquidity stuck in the financial markets, narrows the monetary policies’ efficiencies across the globe. Hence, the central bank actions offer an excellent playground for speculators, yet remain short of the real economies’ needs.

Unfortunately, the global dovish shift could interfere with the Federal Reserve's (Fed) plans to normalise its monetary policy. Should the Fed decide to take a chance and hike its rates sooner than it should, it could get trapped by a reversal in the US’ inflation dynamics, not because the US’ economic fundamentals are weak, yet because the side effects of a relatively stronger US dollar could prevent the Fed from achieving its policy targets in terms of inflation, and possibly in terms of growth.

Indeed, US yields remain at relatively depressed levels for a country preparing to hike its interest rates. The US 10-year sovereigns yield 1.51% as the probability of a September rate hike is given a meagre 20% chance. The market assess no more than a 40 % probability for a Fed rate hike by the end of the year.