Volatile Volatility

Daily Analysis - 09/02/2018

Volatile Volatility

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The markets wild ride and the oil oversupply spur some fear. Though Super Thursday’s comments were hawkish and the sterling is gaining momentum.

Another Bloody Day for the Markets


The sell-off in global stocks has come back, disturbing markets from the U.S. to Asia. Declines have exceeded more than 10% since January’s highs. China, where retail investors dominate, got hit particularly hard Friday. Volatility has returned. After lying asleep for months, the VIX, Wall Street's volatility index, has roared back to life. Equity traders have yet to get comfortable with a jump up in benchmark U.S. 10-year yields to their highest in four years, and worries over the unwinding of bets against volatility in stocks which continue to cast a shadow over markets. The biggest hit was seen on the technology sector even with positive earnings reported for the past quarter. The top five tech companies in the US have lost $437 billion in market cap during yesterday’s selloff. The combined market value of Apple, Alphabet, Microsoft, Amazon and Facebook is down $437 billion, as measured by the decline from each of the stock's respective 52-week highs — all of which occurred on or after January 18 of this year — from closing to closing, according to FactSet. Now, the stock market is not the economy. The economy is doing well. But investors are in fact adjusting to very real changes in economic conditions. It’s a world that’s growing faster but with more risk.

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Commodity Currencies near 7-Weeks Lows


Commodity Currencies have suffered the dip in oil prices. The Canadian loony and the Australian aussie are trading near 7-week lows against the US Dollar. Oil prices fell for a sixth day on Friday after Iran announced plans to boost production and U.S. crude output hit record highs, adding to concerns about a sharp rise in global supplies. OPEC member Iran on Thursday announced plans to increase production within the next four years by at least 700,000 barrels a day. The U.S. Energy Information Administration (EIA) this week said crude production last week rose to a record high of 10.25 million barrels per day (bpd). The falls come amid a rout in global share markets as inflation fears grip investors. Brent futures were down near the lowest level since Dec. 20th. U.S. West Texas Intermediate (WTI) crude has settled down at its lowest level since Jan. 2nd. Both contracts have fallen more than 9% from this year’s high point in late January. OPEC and other producers, including Russia, have cut production since January 2017 to force down global inventories, but these cuts have been offset by rising U.S. oil production. China’s demand on oil though has been increased and is highly anticipated to grow further following the global economic recovery.

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Hawkish Super Thursday


Britain’s slow-moving economy is getting a boost from the global recovery, thanks largely to a strong rebound in the United States, Germany and other key trading partners. Bank of England said on Thursday it is likely to raise interest rates sooner and by higher rates than thought three months ago. The BoE’s rate-setters gave themselves time to assess how Britain is managing the final steps of Brexit by voting unanimously to hold Bank Rate at 0.5 percent, as expected. But Governor Mark Carney and his colleagues said they saw a growing need to keep a control on inflation, echoing other central banks which are moving toward tighter monetary policy a decade after the financial crisis. Rate futures showed investors now saw a nearly 70% chance of a BoE rate hike in May, up from under 50% before Thursday’s announcement. The BoE wanted inflation to return back to 2% target over “a more conventional horizon”, which would mean tightening price growth within two years rather than three. Sterling jumped by more than a cent against the U.S. dollar reaching a strong resistance at 1.4060, although it later reversed most of that increase. The BoE expects the world economy to grow by 4 percent in 2018, one of its best performances in years. The chances of an interest rate hike by BoE in May mainly depends on whether wages pick up and whether a 2-year transition period after Brexit deal could soon be secured by Prime Minister Theresa May.

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