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Markets exposure to losses stretches further than China

Global Markets & China

The instability of the US markets to maintain gains provides confirmation that while the events in China are being seen as a major catalyst behind the aggressive swings in the financial markets, sentiment is being weighed down by a wide variety of different factors. The recent losses in the markets are not just limited to China uncertainty but also because there is a timely combination of other uncertainties that are making the markets a minefield right now. Commodity prices are depressed and the price of WTI falling to new milestone lows would have encouraged selling pressures, while the concerns over the pace of economic recovery in both Europe and Japan remain regular headline attractions, and the Federal Reserve have come under scrutiny for providing a lack of clarity throughout the whole of 2015 on when they really intend on beginning to raise US interest rates.

China needs to do more

It came as little surprise to anyone that the PBoC eased monetary policy further yesterday and with the markets pushing heavily for the moves, this allowed a small recovery in sentiment. With that being said, the interest rate cuts from the PBoC are nowhere near enough to support continuously declining economic momentum in China and the pressure will remain on the central bank to do more. Make no mistake at all, the government GDP target at 7% is absolutely critical and the central bank are going to do whatever it takes to defend and limit the probability of economic growth falling below this level.

The issue with this is that the economy is already both exposed and vulnerable to falling below the government target, and the recent data from China has just heightened anxieties that this is going to occur as early as this quarter. Markets are going to remain on edge with every single economic data announcement from China over the upcoming period, and the expectations for further interest rate cuts or even possibly further Yuan devaluation is going to remain elevated.


WTI managed to recover nearly $2 of its dramatic losses over recent weeks yesterday, but this is just a small recovery before the declines likely resume later on. Despite the spectacular USD weakness as the US session commenced on Monday, WTI was unable to gain any momentum and this reflects strongly on how weak investor sentiment is currently towards the commodity. The small rebound that we have seen in WTI has been encouraged by the latest easing of monetary policy from the People’s Bank of China (PBoC) and I personally think it will be limited to below $40 and that the selling will resume as economic concerns continue elsewhere.

The dramatic fall in the price of oil over the previous year has continually highlighted that there is an aggressive oversupply in the markets, however it is actually reduced demand for the commodity that I think will provide a major catalyst behind WTI dropping as far as the low $30’s. There is no doubting that China is entering a far deeper economic downturn than previously anticipated, while the EU is stuck in a period of economic stagnation and the pace of improvement in the Japanese economy is minimal, with all of this meaning that there is going to be continually less demand for oil. The oversupply and demand equation remains even further weighted in the corner of the bears than it was at the beginning of the year, and all of these factors combined point towards even further lows for the oil markets.


The GBPUSD bulls have suffered from profittaking after the pair managed to climb to fresh twomonth highs at 1.5818. The sentiment towards the Pound received encouragement following the strong core inflation reading late last week. It shouldn’t be understated how significant the above expectations core inflation reading was towards improving investor sentiment, and it played a pivotal role behind the GBPUSD breaking away from a onemonth trading range that repeatedly limited gains below 1.57.

Breaking away from the previous trading range where 1.57 was seen as a top has basically meant the GBPUSD has set a new trading range between 1.57 and its 2015 highs just below 1.60. Due to the increasing uncertainty that the Federal Reserve will need to at the very least delay any interest rate increases due to what is occurring in the global markets, GBPUSD investors will be reluctant to begin taking heavy profit below 1.57 and the bulls could receive further encouragement if the upcoming GDP reading continues to highlight the consistently robust UK economic outlook.

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