Another major sell-off on Wall Street on Tuesday is dragging on markets across the globe on Wednesday, as traders continue to fret about the meaning behind the inverted US yield curve.
The week got off to such a positive start, with Trump and Xi agreeing to work towards ending the trade war that has seen a total of $360 billion of tariffs imposed ($250bn by the US and $110bn by China) and more threatened. While optimism faded over the ability of the two sides to bridge such a significant divide in 90 days, the cause of Tuesday’s sell-off was more likely driven by two other factors.
The inversion in the US yield curve between two and five years has got people talking about recession risks which understandably weighed on stock markets. The timing of the inversion - coming the day before the US market closure as a national day of mourning takes place following the death of President George H.W Bush – likely exacerbated the move as investors worry about the risk of holding long positions.
This has now spread across Asia and Europe, understandably as a recession in the US would have negative consequences across the globe, although the sell-off has been much less significant. Still, more negativity at a time when markets have shown signs of recovery threatens the prospect of a Santa rally which, on Monday, was looking promising.
The UK is unlikely to provide much reason for optimism over the next week or so, with the government being locked in debates over Theresa May’s Brexit deal before probably voting it down next Tuesday. This leaves us with numerous possible avenues over the coming weeks which could see this drag on through the festive period and into January, oh joy!
This level of uncertainty at such a crucial time for the Brexit process has put the pound under severe pressure and leaves it at risk of breaking below 1.27 against the US dollar, which could in turn send it into a downward spiral.
This level is currently holding up on the increasingly questionable belief that something will happen to get a deal back on track. As ever though, it’s more a question of when rather than if and the longer this plays out, the more risk there is of a plunge. We may have avoided an 11th hour deal initially but once again, this may go right down to the wire.
Oil prices are once again under pressure ahead of OPEC+ meeting on Thursday, led by overall risk aversion in the markets and the prospect of Russia and Saudi Arabia failing to agree on an adequate cut to support prices.
The two countries are due to meet on the side-lines of the meeting today to have further discussions, the details of which could be leaked throughout the day and offer some insight into the outcome of tomorrow’s meeting.
As it stands, traders are clearly sceptical that the countries will deliver given Russia’s opposition and Trump’s pressure on the Saudi’s, particularly in the aftermath of the Khashoggi murder.
Gold prices are a little lower on Wednesday, weighed down slightly by the US dollar, as the yellow metal pushes against $1,240 and eyes levels not reached since July.
The momentum certainly appears to be with the bulls at the moment, especially if the dollar remains under pressure in the aftermath of the trade war truce. I think a move back towards $1,260 and even $1,280 is perfectly feasible in the coming weeks.
Disclaimer: This article is for general information purposes only. It is not investment advice, an inducement to trade, or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Ensure you fully understand all of the risks involved and seek independent advice if necessary. Losses can exceed investment.
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