Risk-off atmosphere gripping markets

The positive atmosphere that had continued through into the new year appears to have dampened into the end of last week as we look to this risk-off tone continuing, coming off the back of rising geopolitical tensions.

Following the quick switch in the tone within markets last week as Middle East tensions took a turn for the worse after a top military commander is killed, US and Iran’s continued exchange of threats sustain in preluding the likelihood of further escalations. The corresponding risk-off trades within the market had also played out like clockwork. Notably, defensive stocks had once again gained favour as both the Dow and the S&P 500 index saw prices recede into Friday.

Looking at the comprehensive S&P 500 index, the latest dip in prices however enabled a relief from the overbought situation. To some extent, the latest eruption of the Middle East tensions does provide a break for the strong rally seen in the US equity space from overextending, even as the uptrend remains intact at present. Some signs of bearish divergence on the MACD threatening to form does require monitoring as we await the US-China trade deal signing next week, alongside Q4 earnings. That said, with the anticipation of the events in the coming week, US markets may well stay trading sideways in the week, barring any sudden escalation in tensions.

Haven assets in favour

With the risk aversion interest going strong in the market, it would be hard to miss the surge in haven prices. Gold prices was seen briefly at a height of $1579, deep in overbought territory. This may be one crowded trade given the weak US Dollar trend that had been observed from last year and the fear of further military escalation in the Middle East. Resistance-turned-support seen at $1550, but this would not be a rally to chase.

Turning to USD/JPY, however, which is seen at a 3-month low following last week’s yen strength surge, this currency pair may instead be one of interest instead. Given the appreciation bias for yen at the start of the year and continued expectation for subdued greenback strength, this risk-off mood in the market may be the trigger needed to keep USD/JPY on the decline. One to watch in a gentle start to a packed week of data releases.

Friday: S&P 500 +0.71%; DJIA +0.81%; DAX -1.25%; FTSE +0.24%

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