As the 02/10s yield curve threatens to invert, the markets ponder recession. Given that the Fed will deliver a 75bps hike this month and a likely 50bps in September, an inversion is expected. This probability has fostered a risk-off sentiment as market participants rotate capital out of assets sensitive to a recession. Oil is one such candidate, as the panic drives both Brent and WTI lower.
Further to last week's assessment, the peak and trough formations have changed materially. FXCM's Brent CFD, UKOil (left), has charted a lower peak followed by a lower trough on a weekly scale. This pattern is a significant change as it puts Brent in a downtrend. FXCM's WTI CFD, USOil (right), has only charted a lower peak but is on the cusp of charting a lower trough.
The lower price is not due to a correction to the supply shocks but rather an expectation of demand destruction as market forces adjust ahead of the possible inversion. Markets are on edge as they come to terms with the fact that a recession, and a potential hard landing, have become more concrete.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.