Commodities to benefit from Cross Asset rotation

FX_IDC:XAUUSD   Gold Spot / U.S. Dollar
Global equity markets remain positive into the coming week. Both the US S&P500 and the UK FTSE are printing historic highs, whilst European markets pressure significant resistances. Both the Hong Kong Hang Seng Index and the China Shanghai Composite Index are capitalising on recent gains.
However, there are warning signals appearing, suggesting further gains - especially in the overextended US and UK indexes – could prove increasingly difficult to maintain.

Weekly momentum readings are already overstretched and showing signs of turning lower.
This would suggest heightened risk of profit-taking over the coming weeks and potential for a corrective pullback as money managers reduce their global equity allocations.

However, we continue to see underlying strength in the longer term charts, and currently expected any immediate pullbacks to be limited in consolidation.

The USD DXY Index is also showing signs of toppish behaviour, with prices finding difficulty clearing the December 2016 year highs. Increased volatility is unfolding, and coupled with unwinding negative divergence on falling momentum studies, risks are also increasing for a corrective USD pullback.

The obvious beneficiary will be the EUR, with EUR/USD expected to post a corrective bounce, whilst USD/CHF and USD/JPY follow the USD lower. We also see downside risks in USD/CAD , but this pair is expected to receive extra downwards pressure from the anticipated rally in Oil .

Whilst GBP/USD settles into consolidation – the globally weak tone in GBP is countering the pullback in the USD – we anticipate AUD/USD will extend its corrective bounce as it receives an extra boost from improving Gold prices.

Finally, the commodities space is showing further signs of improvement. Oil prices remain bullish and are expected to continue higher, whilst Gold prices continue to correct the November-December bear trend. Whilst Copper prices settle into an uneasy consolidation phase, we see further upside potential in Corn .

All in all, we see increased downside risks in global equities and a pullback in the USD. The commodities space is expected to benefit from cross asset rotation, as money managers move their extra USD into Gold and increase their AUD/USD allocations.