A sense of caution seems to be the theme for the financial markets as trading gets underway for the week, with investors braced and preparing for an incredibly busy week packed with both crucial economic reports and major risk events.
Asian stocks set the tone in early trade by trading mixed with European markets following a similar pattern ahead of the outcome of the ongoing OPEC meeting. With low oil prices still weighing on sentiment and increasing political uncertainty from the U.S. denting appetite for riskier assets, Wall Street is at threat of coming under further pressure this afternoon.
It would likely take an unexpected surprise from the OPEC meeting to inspire some risk appetite back into the market, while any further concerns over political instability in Washington is seen as the likely catalyst to inspiring further demand from investors for safe-havens.
IMF downgrades US growth forecast for 2017 and 2018
Uncertainty over President Trump’s administration policies has prompted the International Monetary Fund (IMF) to revise down its US growth outlook from 2.3% to 2.1% this year and to 2.1% from 2.5% in 2018. Sentiment towards the dollar was already turning increasingly bearish amid the political drama in Washington, as well as concerns over low inflation weighing on US interest rate expectations and the fresh IMF downgrade bombshell is seen as a risk to pressuring prices further.
Investors will direct their attention towards the pending FOMC rate decision this week which markets widely expect to conclude with rates left unchanged. With no press conference scheduled after the meeting, market players will closely scrutinize the policy statement for additional clues on when the central bank plans to normalize its $4.5 trillion balance sheet.
Sterling inches higher as IMF downgrades UK growth
Sterling edged higher on Monday despite the IMF lowering its UK GDP growth forecast from 2% to 1.7% in 2017 due to weaker than expected economic activity. I believe that the appreciation observed in the British Pound/U.S. dollar (GBP/USD) currency pair early Monday has nothing to do with a change of bias towards the Sterling, but rather the ongoing sour sentiment towards the dollar. The market expectations still appear to be short on the British pound, especially considering how the deteriorating economic fundamentals at homes, political risk and Brexit uncertainty continue to weigh heavily on the currency.
Market players will direct their attention towards the preliminary second-quarter gross-domestic-product figures for the UK due to be released on Wednesday, which should offer further insight into the health of the nation as it tackles Brexit. A figure below the market consensus of 0.3% is likely to entice bears to attack the British Pound as Brexit concerns sour attraction towards the currency.
OPEC meeting in focus
Monday’s main course and potential market shaker will be the OPEC committee meeting in the Russian city of St Petersburg, where the cartel is expected to discuss compliance with the production cut deal. With the oversupply fears still a major theme that continues to punish oil markets, investors will be paying very close attention to see if anything is discussed about the rising output in Nigeria and Libya. Russia has already called on OPEC to cap output from Nigeria and Libya in the near future and it will be interesting to see if any new agreements are proposed for both nations to join the oil production cut agreement. Oil prices are at risks of trading lower if the OPEC meeting concludes with nothing new brought to the table. From a technical standpoint, WTI Crude remains under pressure on the daily charts and a breakdown below $45.50 should encourage a further depreciation towards $44.
Commodity Spotlight – gold
Gold edged to a near four-week high at $1,257 during Monday’s trading session on the back of dollar weakness. With investors adopting a cautious approach ahead of an explosively data-packed and event-filled week, safe-haven assets such as gold could come back into fashion. Although the rising prospects of tighter global monetary policy still have a grip on the zero-yielding metal in the longer term, short term bulls are currently in control. Technical traders may observe how gold prices react to the $1,260 resistance level this week. A break above $1,260 should open a path higher towards $1,268.