Risk-on mood returns ahead of NFP

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Risk appetite flickered to life on Thursday as progress on debt ceiling talks in the United States and Russia’s offer to stabilise energy markets lifted global sentiment.

European stocks rebounded amid the improving market mood with US stock futures rising, indicating a positive open for Wall Street this afternoon. In the FX space, the dollar index slightly weakened while the euro lingered near a 14-month low. Looking at the commodities space, oil extended losses thanks to Russia’s offer to rescue Europe from its energy crisis while gold struggled for direction.

This has been another volatile week for markets with the sentiment pendulum swinging back and forth. The main risk event and potential market shaker will of course be the US jobs report on Friday which will influence the Federal Reserve’s timeline for tapering. Given how markets remain highly sensitive to a reduction in bond buying and rate hike expectations, this could translate into explosive levels of volatility.

All eyes on the US jobs report

The question on the mind of many investors is whether the pending NFP report will pass the Federal Reserve’s taper test.

It is worth keeping in mind that Fed Chair Jerome Powell recently stated that additional job gains in September will give policymakers the green light to start tapering in November. With 450k jobs forecast to be created in September, this is quite a jump from the disappointing 243k of job gains witnessed in August. Unemployment is expected to fall to 5.1% compared to the 5.2% in the previous month while average hourly earnings are set to slip to 0.4% versus the 0.6% prior.

A solid report will most likely cement expectations over the Fed tapering in November. Such a development should inject dollar bulls with a renewed dose of confidence, resulting in the DXY potentially hitting fresh 2021 highs. Alternatively, a disappointing print is seen as cooling hawkish expectations and weakening the dollar.

Gold waits on NFP

Gold has essentially been a battleground for bulls and bears this week with conflicting themes pulling and pushing the metal in a relatively narrow range. The choppy price action illustrates the growing struggle for power ahead of the key jobs data. Given how gold remains quite sensitive to taper expectations, real yields and dollar direction, thereport’s outcome shouldset the tone for the precious metal in October.

Looking at the technical picture, prices are trading around the sticky $1750/$1760 region as of writing. A weekly close below this week’s low at $1745 could signal a decline towards $1721. Should the $1750 area prove to be reliable support, bulls may be able to advance towards the 100-day simple moving average at $1780.

Oil punches above $83, US Jobs report in focus

Oil’s explosive movement can be compared to a speeding train reaching full velocity with the fundamentals keeping the engines running at maximum capacity.

US oil prices have hit levels not seen in seven years while Brent tested three-year highs after OPEC+ decided not to increase their output by more than previously agreed. OPEC+ decision was made despite calls from world leaders to bring additional production to markets amid the growing global energy crunch. While the sharp appreciation in prices may be a welcome development for OPEC+, the cartel’s actions threaten to raise tensions between major energy consumers, especially those who are dealing with high inflation. Despite the slight decline in oil prices today, the combination of tightening supplies and rising demand is likely to support upside gains.

Regarding the technical picture, oil remains firmly bullish on the daily charts with indicators pointing to further upside. Brent is currently trading around $81.50 with the October 2018 high at $86.71, while WTI is lingering around $78.00 with $80.00 acting as the first level of interest.

What does this mean for Nigeria?

It is widely known that a massive chunk of Nigeria’s export earnings and government revenues are from crude sales. Rising oil prices may bolster export earnings and foreign exchange reserves. Given how Nigeria is still in the process of a fragile economic recovery from the negative impacts of Covid-19, the jump in oil prices could somewhat brighten the outlook.

Keep an eye on Gold

Outside of Nigeria, all eyes will be the US jobs report which will heavily influence Fed taper expectations. It may be wise to keep an eye on gold due to its sensitivity to such reports.

After experiencing its biggest monthly loss since June in September, Gold has kicked of October in a choppy fashion due to conflicting forces. Its Gold bugs remain supported by concerns over higher inflation and fears around slowing global growth.

However, bears continue to draw strength from an appreciating dollar, Fed taper expectations, and rising Treasury yields. Given how the precious metal remains highly sensitive to rate hike expectations, there could be increased volatility through the non-farm payrolls data on Friday.

A strong jobs report may be bad news for gold, especially after Fed Chair Powell stated that additional job gains in September will give policymakers the green light to start tapering in November. Alternatively, a disappointing jobs report is seen cooling taper expectations, consequently weakening the dollar and reducing some pressure on gold.

by Lukman Otunuga, Senior Research Analyst at FXTM

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