Oil price breaks out of a rising channel as risk-off dominates the start of the trading week. Equity markets drop on renewed COVID-19 fears.
The first trading day of the week brought a severe correction on risk-on assets. As such, the oil price dropped below $70, and, on its move lower, it broke out of a rising channel in place since November last year.
Such a drop could not be an isolated case considering how correlated financial markets are during the pandemic. So the risk-on transformed in risk-off, with the Japanese yen and the US dollar the main beneficiaries. At the opposite end of the spectrum, equity markets dropped, ending the day at their lows.
The correction seen in the equity markets is only normal at this point. Nothing goes up in a straight line without a period of consolidation or a correction from time to time. A drop of a few percentages from record highs is nothing to worry about for investors. But if the oil price reversal continues, the equity markets will have a hard time outperforming in the second half of the year, especially considering that the Fed is expected to taper its asset purchases.
European indices are seen recovering some of yesterday’s losses, as US futures recovered too. Gold managed to hold above $1,800, a remarkable performance considering the blood bath in the equity markets.
Just like yesterday, today’s economic calendar is light in economic events. Therefore, the price action in the equity markets will be the key driver for financial assets’ volatility.
Markets to Watch
Crude oil, USD/JPY, GBP/USD– markets in focus today.
Oil price dropped from a rising channel in place since the end of last year. The market may retest the channel, as it often does after such a break. However, a retest is not mandatory. Traders will focus now on a move below the previous higher low seen at $63. Such a move suggests a bearish trend has started, and more weakness lies ahead.
The Japanese yen was the top performer of the trading week so far. It dropped to 109, acting as a safe haven, as investors pulled out from equities. The move lower resembles a falling wedge pattern, but only a daily close above 110 offers a bullish perspective. If not, new lows might be in the cards, with the 107.50 area the next important level.
The United Kingdom celebrated “Freedom Day” yesterday, as restrictions against COVID-19 were lifted. But the British pound had one of the worst days in months, dropping like a rock as investors bought the US dollar. On its way lower, it broke the neckline of a double top pattern and now the focus shifts to its measured move, seen close to 1.30.
Winners and Losers
Crude oil and equities are weak, while the Japanese yen and the US dollar outperformed at the start of the trading week.