Risk Factors Driving Haven Flows

Daily Analysis - 31/03/2015

Risk Aversion Benefiting From a Slew of Global Risk Factors as Important Deadlines Loom

With Syriza struggling to receive parliamentary support for a new expanded set of reforms and Iranian negotiations hours from ending, safe haven assets are benefiting from the uncertainty. The dollar continues to make strides against peers as investors seek the relative safety of US assets amid the turmoil.

Greece and Iran Drive Risk Factors

The Euro has reversed lower from a recent technical bounce as expanded fears of a Greek exit and the ECB’s quantitative easing program sees the EURUSD pair resume the longer-term trend in the common currency. Greece is desperately trying to scrape the funds together for upcoming repayments, but more important is the approaching dialogue with Russia as Greece finds itself pivoting from traditional partners. Today marks the deadline for Iran reaching a framework solution with the West, with the sides still remaining at odds over several points. If a deal is reached today, Iran has already highlighted its ability to bring an additional million barrels per day of oil production online within mere months as crude sits offshore in tankers waiting for sanctions to be lifted. Any failure to form a compromise could see hostilities in the Middle East reach new heights as a power struggle between nations ensues.

Pending Home Sales Rise

US housing figures continue to prove to have no discernable trend as contradictory data are released pointing to gains and losses which were each blamed on the weather conditions. Pending home sales released yesterday rose to 3.10% on expectations of a modest 0.40% gain. This comes as the prior figure was revised lower to 1.20% from a previous 1.70% print. Today’s Case-Shiller home price index out at 13:00 GMT might confirm that housing prices are rising and not declining as some data has already indicated. Expectations are for home prices to have appreciated 4.50% year over year. More relevant is the weakness in consumer spending growth which grew a modest 0.10% even though personal income rose 0.40%. Without spending to bolster economic expansion, GDP growth might prove lacking in the coming quarters, impacting earnings growth for US stocks further.

Asia Weak Overnight

The Asian session shrugged off the optimism of American markets with regional benchmarks trending mostly lower. The losses were led by Japan which saw the Nikkei 225 Index give up -1.05%, followed by the -0.74% loss in the Shanghai Composite. This comes amid rumors that the People’s Bank of China is set to ease policy further with another rate cut. Although it was unfounded, it is likely around the corner as Chinese policymakers continued with a broad slowdown in economic activity. The Australian dollar has been notably weaker as traders prepare for next week’s Reserve Bank of Australia interest rate decision which might see the Central Bank reduce the key rate by another 25 basis points. With tumbling commodity prices and weaker Chinese imports threatening key local industries, the pressure to reverse the situation sits squarely on the Reserve Bank of Australia.

Crude Oil Descending Triangle Technical Pattern

Since fading downwards after the tremendous rally late last week, crude oil is again retesting the downside as the energy markets are reminded of fundamentals. Supply still outstrips demand by a wide margin adding to the downward pressure on oil prices. If today’s API number sees further gains, renewed selling could take crude below $47 per barrel. Since rebounding above $50 per barrel on the potential for expanded conflict in the Gulf, oil has been steadily trending lower on a shorter-term basis. The downtrend line meets support sitting steady at $47.62, forming a descending triangle technical pattern. The optimal strategy is to wait for a breakout below resistance which will be accompanied by volume and momentum. Any shift above the downtrend line should be viewed as a breakdown in the pattern and possible reversal.