Will markets see an energy-led inflation spike?

Five markets in focus today: US Light Crude, GBP/USD, EUR/GBP, Natural Gas and Japan 225 Cash.

Gas flare
Source: Bloomberg

US Light Crude (WTI)

We have seen the market bid up US light crude again and while WTI and Brent have been fairly out of the trader’s spotlights for a while, price action is now in play. We’ve already seen a reasonable move in US light crude, but the break of the March high of $105.21 seems important. Iraq is OPECs second largest oil producer, so concerns around civil war should keep crude supported.

Some traders might play the Brent/WTI spread, by being long brent and shorting WTI and netting off their exposure, and I feel this could be a good strategy to play the energy complex. The other issue here is the global economy simply isn’t ready for an energy-led inflation spike and this could hold equities back.

GBP/USD

If you’re wondering why sterling spiked in early Asian trade then you have to look at comments from BoE governor Mark Carney. Mr Carney has been one of the more dovish members within the central banks ranks, so when traders see comments like ‘the start of BoE rate increases is getting nearer’ and an ‘acute need for vigilance on housing market’ they react.

These comments were tempered by a view that there is still much spare capacity in the labour market and that when rates do finally go up the path of tightening will be gradual. Certainly it’s no surprise for economists to hear such narrative from Mr Carney as all these factors are widely known, however its significant in so much that it highlights a change in stance from the governor and he seems to be joining a few on the board who could dissent in coming meetings.

EUR/GBP

Being short EUR/GBP has been a core position for a number of investment banks for many months and those who like to align strategies with central bank divergence and the underlying trend would have done well shorting this pair. After Mark Carneys comments we have seen EUR/GBP test the 80 level for the first time since November. The daily chart shows the pair grossly oversold however, with the nine-day RSI at 15 and price now just over three standard deviations from the 20-day moving average. Selling rallies would be my preference and one could potentially look at working offers into 0.8056 – the 38.2% retracement of the recent sell-off from 0.8149.

Natural Gas (August)

Traders pushed up natural gas aggressively overnight as data showed the lowest levels of stockpiles for this time of year since 2003. $4.80 (or 4800 on IG’s platform) seems key given previous supply that has been seen on the daily chart, however what’s interesting is the nine-day RSI is delicately poised to break the 50 level and subsequently print a higher high. This could suggest a stronger move higher in the short-term.

Japan 225 Cash (Nikkei)

The index is lower from yesterdays close, largely as a result of a weak US retail sales (+0.3% vs +0.6% expected) and the impact it had on USD/JPY. The BoJ meeting takes place in the afternoon (no set time), although not a lot is expected and traders have heard from a number of key BoJ members of late, so in theory this should be an uneventful meeting.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.