Watch oil for further gauge of risk appetite


  • If there have been any question marks over how my of a driver the oil price continues to be in financial markets it has been the reaction today to the rather disappointing outcome from the meeting between OPEC members (Saudi, Venezuela, Qatar) and Russia. Market sentiment had significantly picked up on Friday on the rumours about the meeting. The soaring strength of gold, the yen and US Treasuries had been reversed, but the disappointment seems to have driven the safe haven flows once more and cut back the exuberance of the gains on oil. So how does this set us up for the coming days now? Well, to put it simply, you should probably watch oil if you want a gauge of market sentiment and risk appetite.

oil vol

  • In agreeing to freeze production levels (no, not cut, just freeze) at January levels if other OPEC members also were in agreement, OPEC has acted. However the fact that such a major producer such as Iran was not involved in the talks (Iran has just come back to the international markets following years of being sanctioned) has been taken as a disappointment. Also only freezing at the record January 2016 levels of 33m barrels per day is hardly going to make a major impact on supplies. I see the oil market in a consistent bear market. Even though Brent Crude may have managed a downtrend break, the price of WTI remains firmly trending lower and rallies continue to be seen as a chance to sell.


  • The problem is that if this is true and oil is a major driver of market sentiment still, the risk rally will simply be seen as another chance to sell again. Equity markets will fall over again and safe haven plays such as Treasuries, the yen and gold will find support.
  • Central Banks will though always also have a part to play and after Mario Draghi’s testimony to the European Parliament yesterday it would appear that the ECB is set for further easing measures at the March meeting on 10th March. The yield on the German 2year Shatz is taken as something of a proxy for expectations of the ECB deposit rate now and at -0.5% this would suggest there could be at least 10 basis points, perhaps another 20 basis points cut by the ECB. Wind back a couple of months to the December meeting and this is exactly what the market was pricing in then, only to be significantly disappointed by Draghi clearly being unable to push through loose enough measures and we could be again setting up for disappointment. Furthermore, the Bank of Japan is unlikely to sit idly by if the yen remains at these levels. It is also interesting that the People’s Bank of China suggesting that there was no need to devalue the yuan further has supported the currency.
  • Sentiment on equity markets has improved in the past few days, but there is little to suggest that markets will be making a sustainable move to the upside now. The oil price rally needs to continue higher to drive a big improvement in equities. Perhaps Iran coming out in agreement with the Saudis could be a trigger, but is not something we should hold our breath for. Instead, with the fundamentals still not in place yet for a sustainable rally on oil I see this rebound on equities as a chance to sell once more.
  • In her testimony last week, Janet Yellen seemed to all but confirm that the conditions for 4 rates hikes in 2016 for the Fed were not in place. This should ensure that the dollar will struggle to continue to rally and is likely to still come up against corrective pressure in the coming months. The FOMC minutes this week will also add further meat to the bones for the outlook. In forex majors, unless Draghi throws the kitchen sink at easing ECB monetary policy (something that the Germans will fight tooth and nail to avoid), the euro is likely to hold a certain amount of value against the dollar (perhaps even strengthening if Draghi disappoints again). The yen is likely to sustain its position below the $115.50/116.50 major resistance unless the market trusts that the BoJ will also throw everything at easing monetary policy. Gold is unwinding its exuberant rally and is again determinant on market sentiment which is driven by oil.
  • The inflation data this week will also be a key factor as markets continue to see the easing measure from global central banks as being increasingly desperate. UK inflation has already been rather uninspiring with the core data drifting lower again. Countries are struggling to generate inflation as they import deflation from energy markets. The China data will again be a key driver tomorrow, with the US data on Friday also important. Sterling is also a big runner off the UK earnings growth which is announced in the employment report on Wednesday.
  • Watch for: FOMC meeting minutes, China CPI, US CPI



EUR/USD – Medium term support at $1.1050/$1.1100 is still key      

  • The dollar remains under pressure, so perception of the euro as a safe haven is key. Draghi’s dovish comments have so far not broken the positive outlook for the euro even though it is marginally corrective near term. The euro will be supported again if market appetite for risk takes another nose-dive.
  • The upside breakout above $1.1050/$1.1100 remains a key medium term technical move. The near term indicators are corrective and this could put the pivot band again under pressure, but I still see the euro as having room for upside if this support can develop further this week.
  • Watch for: FOMC meeting minutes, China CPI, US CPI

GBP/USD – The support band $1.4350/$1.4450 remains pivotal medium term

  • UK inflation has just driven a slight correction on sterling, but the outlook will be driven by earnings growth data for the UK tomorrow. Wages are expected to dip back to +1.8% and this would not be all that supportive for sterling as real wages continue to fall and reduces the likelihood of a rate hike further.
  • Cable has been consolidating and and above the support band $1.4350/$1.4450 and this remains a key medium term pivot for sterling. A support breach would open further weakness back towards the $1.4080 January lows again. Fibonacci retracements of $1.5238/$1.4079 are key turning points now.
  • Watch for: FOMC meeting minutes, UK earnings growth, UK Retail Sales, US CPI

USD/JPY – The resistance band 115.50/116.50 is crucial overhead supply now   

  • Will the BoJ act further to prevent yen strength? If it did, would it do any good, perhaps only serving to panic markets, especially if they do further negative rates. Safe haven flows are still potentially also going to drive the pair lower.
  • There is now a massive ceiling of overhead supply 1115.50/116.50 to contain any rallies. Technicals suggest an unwinding of oversold momentum but also that unless the momentum in a recovery is sustained then the downside pressure could resume quickly.
  • Watch for: FOMC meeting minutes, China CPI, US CPI

Gold – Support in the band $1181/$1200 is key

  • The sentiment is still being driven through oil, if the rally on Tuesday morning to the disappointment of the OPEC meeting is anything to go by. Watch oil to drive market sentiment in the coming days and this should also impact on demand for the safe haven of gold.
  • A technical correction is still threatening an unwind but there is a support band $1181/$1200 which is key for the direction now. This band has supported the price on Tuesday and now the Fibonacci retracements of the big $1070/$1261 rally should be watched for potential key turning points.
  • Watch for: FOMC meeting minutes, China CPI, US CPI

Oil – Holding the support above $29.25/30 is important but the downtrend is also an issue on WTI

  • Developments over any OPEC agreement and Iran’s opinion could be crucial for near term direction
  • The improvement above the technical breakdown levels $29.25/$30 has been a positive but the 3 month downtrend on WTI is a selling opportunity currently around $32. The $29.25/$30 range is now a key barometer for the outlook near term.
  • Watch for: FOMC meeting minutes, China CPI, US CPI

Indices – Watch oil and this will drive sentiment on equities   

  • S&P 500 – There is a pivot around 1880 which needs to be watched, but the outlook will remain under pressure until a rally above the February high at 1947. Despite this, the fact that support around 1815 has held again (1810 was a recent intraday low) is actually fairly encouraging.
  • DAX Xetra – The old 76.4% Fibonacci retracement at 9308 could now become the basis of resistance and this is a concern. This level needs to be taken out by the bulls and soon as the momentum indicators are quickly unwinding back to levels where the sellers have tended to return once more. I remain a seller into strength.
  • FTSE 100 – The downtrend channel on FTSE 100 is still dragging the market lower with lower highs and lower lows. Momenutm indicators are also quickly unwinding back to levels where the bears will eye an opportunity again. Near term resistance comes in at 5945 but the key February high needs to be breached at 6115 for a material technical improvement.



Tuesday 16th February

  • US – Empire State Manufacturing
  • US – NAHB Housing Market Index

Wednesday 17th February

  • UK – Unemployment & Average Weekly Earnings
  • US – Building Permits & Housing Starts
  • US – Industrial Production & Capacity Utilization
  • US – FOMC Meeting Minutes

Thursday 18th February

  • Australia – Unemployment
  • China – CPI & PPI
  • US – Philly Fed Manufacturing Index
  • US – Weekly Jobless Claims
  • US – Crude Oil inventories

Friday 19th February

  • UK – Retail Sales
  • US – CPI
  • Canada – CPI
  • Eurozone – Consumer Confidence



Monday 22nd February

  • Eurozone – Flash Manufacturing PMIs
  • US – Flash Manufacturing PMI

Tuesday 23rd February

  • Eurozone – German Ifo Business Climate
  • UK – BoE Inflation Report hearings
  • US – S&P/Case-Shiller House Price Index
  • US – Existing Home Sales
  • US – Consumer Confidence
  • US – Richmond Fed Manufacturing

Wednesday 24th February

  • US – New Home Sales
  • US – Crude Oil inventories

Thursday 25th February

  • UK – GDP Q4 2015 (2nd reading)
  • Eurozone – CPI (final)
  • US – Durable Goods
  • US – Weekly Jobless Claims
  • Japan – CPI

Friday 26th February

  • US – GDP Q4 2015 (Prelim reading)
  • US – Personal Consumption Expenditure
  • US – University of Michigan Consumer Sentiment (revised)