Global Financial Markets -And Why Europe Is Running Out of Puff

Asian, European and FX Markets

Asian Pacific stock indices were mostly firmer on Thursday, with investors taking encouragement from a positive session across Wall Street on Wednesday. Chinese markets remained closed for the Lunar New Year break, so there was no trade in Hong Kong or Shanghai. But South Korea’s Kospi reopened and surged over 3% to a fresh record high. Heavyweight tech names, Samsung Electronics and SK Hynix were at the vanguard of the move, with the former adding around 4% on the day. Meanwhile, Australia’s ASX 200 climbed 0.9% and the Japanese Nikkei 225 gained 0.6%. But India’s Nifty 50 was down over 1.6% going into the close on a generalised selloff. This looks like a bout of profit-taking following recent gains and linked to higher oil prices on rising geopolitical tensions across the Middle East, and as India acts against the ‘shadow fleet’ of tankers transporting Russian oil.
In moves which mirror those of their US counterparts, European stock indices peaked early yesterday afternoon and have since retreated. The German DAX, French CAC, Spanish IBEX and Euro Stoxx 50 were all down just under 1% midway through this morning’s session, and the selling accelerated as US stock index futures turned down. The UK’s FTSE 100 was also down, but more modestly, as it pulled back from yesterday’s record closing high. Oil majors, Shell and BP, were both lower in early trade, unable to capitalise on recent gains in the price of crude oil.

The US dollar was steady this morning. This followed a strong session on Wednesday which saw the Dollar Index retest an area of modest resistance between 97.50-97.70 on the cash. Once again, the dollar was negatively correlated to movements across US equities. The greenback bottomed out as US stock indices peaked early yesterday afternoon. The dollar then rallied to close near the day’s highs, while US stock indices pulled back from their best levels. Some strong US data helped. Industrial Production rose 0.7% in January, beating expectations, while core Durable Goods Orders and Housing Starts both surprised to the upside. Further support was provided by the minutes of the Fed’s last FOMC meeting. These were more hawkish than anticipated, with some members suggesting that the Fed’s next interest rate move may be a hike, rather than a cut. Despite this, there was barely any shift in the CME’s FedWatch Tool which continues to price in two 25bp cuts this year, with the first likely to come in June.

US Markets

After a flat and uneventful overnight session, US stock index futures suddenly dipped as European markets opened this morning. The losses weren’t confined to one sector but were broad-based, with all the majors experiencing a modest, but noteworthy, pullback. A scan of equities of major US corporations also suggested that the selloff was general and comes after Wednesday’s positive session. Yesterday, all the US majors posted gains. The tech-heavy NASDAQ rose 0.8%, with the S&P 500, Dow and Russell 2000 up 0.6%, 0.3% and 0.5% respectively. But it’s worth noting that all the majors hit their best levels early in the afternoon and then pulled back later in the day. The Federal Reserve released the minutes of its last FOMC meeting which took place at the end of January. These were viewed as more hawkish than expected, and this added some downward pressure on equities. Some FOMC members indicated a preference for a pause in interest rate cuts, to give more time to see evidence showing that inflation was on a downward trend. Some members had even considered that the next move could be a hike in rates. Meanwhile, Kevin Warsh, President Trump’s preferred choice to replace Jerome Powell as Fed Chair in May, has made it clear he supports further monetary easing. Christopher Waller and Stephen Miran are also supporters of additional rate cuts. Despite the hawkish tinge to the minutes, the CME’s FedWatch Tool was little changed, and continues to show that investors believe there will be two 25-basis point cuts this year, with a strong preference for the first cut coming at the June meeting. Tomorrow sees the latest update for the Fed’s preferred inflation measure, Core PCE. Ahead of this, today sees the release of weekly Unemployment Claims. Retail giant Walmart also reports today, and its results provide an insight into the health of the US consumer.

As far as the major US stock indices are concerned, the bulls may be starting to sweat a bit now, given the S&P 500’s failure to retest and break above resistance at 7,000. The Dow has also retreated from its own record-breaking milestone, as it last traded above 50,000 this time last week. Recent rally attempts have quickly faded as upside momentum ebbs. It may be too early to ‘sell the rips’, but there appears to be a slight reluctance to ‘buy the dips’.

 Commodities and Metals

Crude Oil – Crude oil was firmer in early trade this morning, adding to yesterday’s 4% rally. Front-month WTI managed to push back above $66 per barrel, retesting an area of resistance which held at the end of January. This could be a big test for the bulls. If WTI can make additional gains from here, pushing further above $66 and holding this level on any pullback, then they really will be back in control. This could signal the start of a major breakout and the possibility of a swift move back up to $70 per barrel. The current geopolitical situation certainly appears to support higher oil prices. The fourth anniversary of Russia’s invasion of Ukraine is approaching, with no end to the war in sight. Meanwhile, talks between the US and Iran concerning the latter’s nuclear ambitions are ongoing. Yesterday US Vice-President JD Vance said that President Trump has the right to use force should diplomatic efforts fail to curb Iran’s nuclear ambitions. The US has moved a stack of military assets into the region, and this is unnerving investors. From a bearish perspective, there have been numerous failed upside breakouts over the past four years, and this could simply be another. It’s worth noting that WTI’s daily MACD, while far from being overbought, is certainly at elevated levels. A bit of positive news concerning US-Iranian talks could see any risk premium in the oil price quickly evaporate.

Gold and Silver – Gold had a strongly positive session on Wednesday, bouncing back from Tuesday’s low of $4,850 to edge above $5,000 yesterday afternoon. But it dipped back below here last night, before finding a bid during the overnight Asian Pacific session. This saw it push up above $5,020 this morning before it lost its grip as sellers came back in. Overall, gold continues to consolidate following its parabolic blow-off top, and subsequent plunge. This consolidation is helping the daily MACD to pull back to more reasonable levels, having been very overbought. This looks like a positive development from a bullish perspective. However, the bulls should be concerned that gold has struggled to hold above $5,000 per ounce. While it can certainly bounce from here, there’s also the possibility of another sharp move to the downside.

Silver also had a strong recovery yesterday. It found some modest support around $72 per ounce, and from here it was able to launch a rally which saw it trade up to $79.50 this morning. But it was unable to stage a proper retest of $80, and profit-taking quickly drove it back down to $78. Silver looks vulnerable to further selling, although its daily MACD has dropped sharply into negative territory from extremely overbought levels. It has also started to curl up. This suggests that some upside momentum may be starting to build, which is certainly constructive from a bullish perspective. However, the upside remains vulnerable to any additional dollar strength, which raises the opportunity cost of holding non-yielding assets. Talks between Ukraine and Russia ended without progress, while uncertainty around US–Iran relations remain elevated. David Morrison, Senior Market Analyst at FCA regulated fintech and financial services provider Trade Nation.