Investors buy the rumour, sell the news amid volatility


Investors buy the rumour, sell the news amid volatility
Gold rallied and a risk-off sentiment prevailed as rhetoric between world leaders soured.

dubai - Oil, currencies, safe havens and bitcoin were not immune to the headlines

By Jameel Ahmad

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Published: Sun 20 Aug 2017, 8:30 PM

Last updated: Sun 20 Aug 2017, 10:32 PM

After the Organisation of the Petroleum Exporting Countries' recent meeting in Abu Dhabi, it looks like history is once again repeating itself, with investors selling the news after an Opec meeting. Oil is feeling the pressure following reports of a strengthening US dollar and a reduction in Chinese demand. Safe havens have also been influenced by the headlines and with geopolitical tensions added to the mix, there was an increased demand for the Japanese yen and gold.

Sentiment and oversupply
The Opec's recent meeting in Abu Dhabi did little to quell the oil industry's oversupply concerns, which is not surprising due to the fact that the main topic under discussion was compliance with the output cut agreement rather than the broad issue of oversupply. The topic may not inspire headlines, but adherence is a key theme in the group's ongoing battle against oversupply, and the outcome of the meeting was of definite interest to the media.

While a few leading Opec producers are still struggling to meet production targets, the group has repeated its commitment to production cuts throughout 2017.

Despite the Opec's best efforts, investors are pressuring them to do more. Recent reports of drilling in the US have further ignited oversupply concerns, and merely emphasise how little influence Opec wields when it comes to stabalising the global oil market. The group lacks the control it enjoyed historically; the industry is a very different beast to the one of 10 to 20 years ago. Advances in technology and the emergence of US shale have played a significant role in redefining their role and influence in the oil markets.

US shale production is likely to remain a major concern for Opec. The slightest indication of bullish sentiment in oil valuation and American shale producers turn up the tap on production - resulting in increased global stockpiles. The latest IEA (International Energy Agency) data suggests the issue will not abate any time soon, with the global oil glut projected to persist throughout 2018.

Reduction in demand for oil has further exacerbated the issue. July saw a drop in refinery runs in China, sparking concerns that a reserve of refined products would reduce Chinese oil consumption even more. This news saw oil prices slip lower on Monday, despite a 'risk-on' approach across global equities. When it comes to oil, prices are driven more by sentiment and supply than charts and historic data.

Geopolitical tensions
The Trump effect was felt in full last week, when the escalating war of words between America's president and North Korea's premier jolted the typically sluggish summer markets awake. The threat of calamity coloured world headlines and encouraged a global sell-off, the likes of which haven't been seen since May 2017 and sent the price of precious metals surging.

As the week progressed and the rhetoric between the two leaders soured, a 'risk-off' sentiment prevailed. Gold, the Swiss franc (CHF) and Japanese yen (JPY) all rallied, with the JPY reaching two-month highs against the USD. The CHF, however, outperformed almost every major competitor, rising against the euro to reach 2015 highs.

Precious metals also charted an impressive rise. Gold settled at an eight-week high and we saw increased demand for platinum and silver. With the UAE dirham being pegged to the US dollar, the local note would have noticed weakness against some of its counterparts, a theme that has continued over the past week.

A 0.3 per cent decline in gold during trading on August 14 was the first sign that demand for safe havens is starting to wane as the threat of an escalation in tensions between the US and North Korea dissipated. The headlines may be less provocative this week, but can investors afford to ignore the possibility of conflict? The markets have taken a 'risk-on' sentiment that appears to suggest they can. Perhaps investors are aware that the tensions between the US and North Korea are nothing new, but the tone of the wording used last week gave the markets a brief scare.

Cryptocurrency rallies
Reports of quicker trade execution speeds saw the bitcoin rally over the weekend, with the SegWit2x solution implemented on August 11. The cryptocurrency posted a 17 per cent rise over the next two days, reaching $4,187 by August 14.

It is thought that scaling issues (i.e., concerns over how to increase transaction volumes) will prevent the digital currency from rising much higher. That said, no one could have predicted the 300 per cent increase we've seen in bitcoin over the past eight months. To my mind, bitcoin remains a speculative and risky asset. However, with competitor ethereum posting similar gains this year, clearly not all investors view cryptocurrencies in the same light.

Recent movements in oil, currencies, safe havens and bitcoin have kept the old saying, "Buy the rumour, and sell the news" at the top of one's mind this month. Newly published IEA data combined with reports of increased US drilling contributed to a lower oil price, while JPY, CHF and gold surged as the threat of war intensified. Even cryptocurrencies proved they weren't immune to the headlines, with investors 'buying the rumour' that the digital currency rally is far from over.

The writer is vice-president of corporate research at FXTM. Views expressed are his own and do not reflect the newspaper's policies.

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