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Emerging Markets Slide as Dollar Strengthens

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Emerging Markets

Financial markets are reawakening to the risk that the U.S. expedites interest-rate increases, and that’s buoying the dollar while denting emerging markets and commodities.

The dollar climbed to a seven-week high and Treasuries fell, pushing two-year yields to highest since April, after Atlanta Federal Reserve President Dennis Lockhart and San Francisco’s John Williams said Tuesday two rate hikes may be warranted this year. Chinese stocks tumbled to a two-month low, while the rand led the selloff versus the greenback amid mounting political tension in South Africa. Copper and gold fell for the first time in four days.

The dollar has rebounded in May after declining in the previous three months as the Fed pushed back expectations for rate increases this year. A strengthening U.S. economy and the biggest jump in consumer prices in three years have led traders to boost the odds of a move in June threefold to 12 percent. The Fed will release the minutes of its April policy meeting on Wednesday.

“Expectations appear to be that minutes will signal that a summer hike is on the cards,” said Stuart Bennett, head of Group-of-10 currency strategy at Banco Santander SA in London. The “solidly hawkish” rhetoric from Fed non-voting members of late is proving to be dollar positive, as the possibility of a hike is not priced in by markets, he said.

Currencies

The Bloomberg Dollar Spot Index advanced 0.4 percent at 6:04 a.m in New York. Australia’s dollar lost 0.8 percent. The yen slipped 0.3 percent to 109.43 per dollar, after earlier strengthening as much as 0.4 percent. The euro weakened 0.4 percent to $1.1268.

The MSCI Emerging Markets Currency Index fell 0.5 percent, the most in two weeks. South Korea’s won, Russia’s ruble, the Mexican peso and Malaysian ringgit dropped at least 0.8 percent.

The rand tumbled 1.6 percent to the weakest since March. South African Finance Minister Pravin Gordhan said rumors and accusations that he was involved with espionage are false and “malicious.” The Sunday Times newspaper has reported, citing people it didn’t identify, that Gordhan is at risk of being charged with espionage and fired.

Stocks

The Stoxx Europe 600 Index slipped 0.1 percent. Burberry Group Plc dropped 3.7 percent after the luxury-goods retailer added to the industry’s gloom by posting a second straight drop in annual earnings. Sonova Holding AG tumbled 7.1 percent after the Swiss hearing-aid maker’s second-half earnings missed estimates.

Futures on the S&P 500 were little changed after equities tumbled on Tuesday. Investors will look Wednesday to earnings from retailers including Target Corp., Staples Inc., Lowe’s Cos. and Urban Outfitters Inc. for further indications on the health of U.S. consumers after a slew of disappointing results cast doubt on their willingness to spend.

Minutes from the Fed’s April meeting will also be in focus for clues on the trajectory of interest rates after hawkish comments from regional presidents. The first month with even odds of higher borrowing costs also moved up to November from December.

The MSCI Asia Pacific Index lost 0.8 percent, led by declines in consumer-goods producers. Suzuki Motor Corp. plunged 9.4 percent in Tokyo after saying it used an improper method to test the fuel efficiency of its vehicles.

Chinese stock led declines in emerging markets, with the Hang Seng China Enterprises Index of mainland companies listed in Hong Kong losing 1.5 percent.

Commodities

Copper fell along with other metals amid rising supplies and an uncertain demand outlook in China, the world’s top consumer. Antofagasta Plc, a Chilean copper producer, said it isn’t counting on an improving global economy and expects low copper prices for another year or two, according to a statement from Chairman Jean-Paul Luksic.

Copper for delivery in three months slid 1.5 percent. Gold for immediate delivery lost 0.5 percent.

Oil fell 0.3 percent to $48.16 a barrel in New York after closing on Tuesday at the highest since Oct. 9. Government data Wednesday is forecast to show supplies slid for a second week.

Bonds

The yield on U.S. two-year Treasuries climbed to 0.84 percent, the most since April 27. The 10-year yield was little changed at 1.77 percent. That compares with a one-month low of 1.70 percent at the end of last week. Similar-maturity debt in Singapore declined by the most in three weeks, lifting the yield by five basis points to 2.01 percent.

Jan Hatzius, the chief economist at Goldman Sachs Group Inc., warned that bond investors aren’t prepared for the Fed to raise interest rates despite officials having flagged the possibility of such a move.

“The market’s underestimating their willingness to follow through on what they say,” Hatzius said in an interview on Bloomberg Television. “If you look at where the yield curve is priced — how little normalization of monetary policy is discounted — that’s very striking.”

Heta Asset Resolution AG bonds jumped after creditors reached an agreement with the Austrian government to settle a dispute over 11 billion euros ($12.4 billion) of guaranteed debt. The 1.25 billion euros of 4.25 percent notes due Oct. 31 climbed about five cents on the euro to 88 cents, according to data compiled by Bloomberg.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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Markets

Markets Today – Inflation, Jobless Claims, Boris Blunder, Oil, Gold, Bitcoin

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outlook

By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

It’s been a rollercoaster start to the year and as we head into earnings season, it’s hard to say exactly where investors stand.

Blocking out the January noise is one thing but it’s made far more complicated by omicron, inflation, and the rapid evolution of monetary policy. Yesterday’s reaction to the inflation data was a case in point. The data mostly exceeded expectations, albeit marginally, while headline inflation was a near 40-year high of 7%. And yet the response was broadly positive.

I get that traders were perhaps fearing the worst and, as I’ve referenced before, it does feel like markets are at peak fear on US monetary policy which could make relief rallies more likely. But there is also underlying anxiety in the markets that could make for some volatile price action for the foreseeable future.

Perhaps earnings season will bring some welcome normality to the markets after a period of fear, relief, and speculation. The fourth quarter is expected to have been another strong quarter, although the emergence of omicron will likely have had an impact during the critical holiday period for many companies. Of course, as we’ve seen throughout the pandemic, that will likely have been to the benefit of others.

And while earnings season will provide a distraction, it is happening against an uncertain backdrop for interest rates and inflation which will keep investors on their toes. It does seem that investors are on the edge of what they will tolerate and it won’t take much to push them over the edge. Which will be fine if we are near the peak of inflation, as many expect.

The data today looks a mixed bag on the face of it, with jobless claims coming in a little higher than expected, which may be down to seasonal adjustments. The overall trend remains positive and continues to point to a tight labor market. The PPI data on the other hand will be welcomed, with the headline number slipping to 0.2% month on month. Perhaps a sign of supply-side pressures finally starting to abate which will come as a relief after inflation hit a near-40 year high last month.

Sterling solid as pressure mounts on Boris

It seems impossible to ignore the political soap opera currently taking place in the UK, with Prime Minister Boris Johnson once again in the public firing line after finally admitting to attending an office party in May 2020.

In other circumstances, uncertainty around the top job in the country could bring pressure in the markets but the pound is performing very well. Perhaps that’s a reflection of the controversy that forever surrounds Boris, and we’re all therefore numb to it, or a sign of the environment we’re in that the PM being a resignation risk is further down the list when compared with inflation, interest rates, omicron, energy prices etc.

Oil remains bullish near highs

Oil prices are easing again today after moving back towards seven-year highs in recent weeks. It was given an additional bump yesterday following the release of the EIA data which showed a larger draw than expected. But with crude already trading near its peak, it maybe didn’t carry the same momentum it otherwise would.

The fundamentals continue to look bullish for gold. Temporary disruptions in Kazakhstan and Libya are close to being resolved, with the latter taking a little longer to get fully back online. But OPEC being unable to hit output targets at a time when demand remains strong is ultimately keeping prices elevated and will continue to do so.

A big test for gold

Gold is off a little today but the price remains elevated with key resistance in sight. The yellow metal has remained well supported in recent weeks even as yields around the world continue to rise in anticipation of aggressive tightening from central banks.

It could be argued that the bullish case for gold is its reputation as an inflation hedge, especially given central banks’ recent record for recognizing how severe the situation is. But with inflation likely nearing its peak, that may not last. That said, fear around Fed tightening may also be peaking which could support gold in the short-term and a break through $1,833 could signal further upside to come.

Can bitcoin break key resistance?

Bitcoin is enjoying some relief along with other risk assets and has recaptured $44,000, only a few days after briefly dipping below $40,000. That swift 10% rebound is nothing by bitcoin standards and if it can break $45,500, we could see another sharp move higher as belief starts to grow that the worst of the rout is behind it. It looks like a fragile rebound at the moment but a break of that resistance could change that.

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Crude Oil

Brent Crude Oil Trading at $84.53 a Barrel

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Crude Oil - Investors King

The increase in Omicron variant cases has cast doubt on demand for crude oil in the near-term and trimmed gains recorded earlier in the week on Thursday during the Asian trading session.

The brent crude oil, against which Nigerian oil is priced, pulled back from $85.16 per barrel on Wednesday to $84.53 per barrel at 9:50 am Nigerian time on Thursday.

The uncertainty surrounding the highly contagious Omicron variant and its impact on fuel demand has shown by the U.S Energy Information Administration on Wednesday dragged on the global crude oil outlook.

The data released on Wednesday revealed that gasoline stockpiles rose by 8 million barrels last week, way higher than the 2.4 million barrel increase projected by experts. Suggesting that demand for the commodity is gradually waning in response to omicron.

“Gasoline demand was weaker-than-expected and still below pre-pandemic levels, and if this becomes a trend, oil won’t be able to continue to push higher,” OANDA analyst Edward Moya stated.

However, in a note to Investors King, Craig Erlam, a senior market analyst, UK & EMEA, OANDA, expected the impact of omicron to be short-lived. Libya’s inability to ramp up production after outage and OPEC plus continuous failure to meet production target are expected to support crude oil in the main term even with Kazakhstan expected to get back to pre-disruption levels in a few days.

“With omicron seen being less of a drag on growth and demand than feared. Combine this with short supply and there may be some room to run in the rally as restrictions are removed. Of course, Covid brings unpredictability and zero-covid policies of China and some others bring plenty of downside risk for prices,” he said.

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Commodities

Soybean Oil Prices to Rise by 4% in 2022 Over Increase in Demand for Biofuels

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Soybean Oil

In 2022, global soybean oil prices, driven by an increase in the demand for biofuels, have been projected to rise by about 4 percent, to $1,425 per tonne; a market report from IndexBox reveals.

According to the IndexBox report, the growing demand for biofuels, especially in Asia, will increase the prices of soybean oil globally.

The platform put it that in 2021, the average annual soybean oil price rose by 65 percent year-on-year to $1,385 per tonne, from $838 per tonne. Strong demand and high freight rates in China, which is the world’s second-largest importer of soybean oil, resulted in the most rapid price growth of the commodity in the third quarter (Q3) of the same year. Weather-related disruptions to production in South America also caused soybean oil prices to rise fast.

In 2020, IndexBox estimates that soybean oil purchases in the foreign markets rose by 7.5% to 13 million tonnes, increasing for the second year in a row after three years of decline. In value terms, soybean oil imports have grown notably to $10.3 billion.

India was the highest importing country with a purchase volume of around 3.7 million tonnes, accounting for 28% of global supplies. China ranked second with a purchase volume of 963 thousand tonnes.  Algeria (670 thousand tonnes) and Bangladesh (666 thousand tonnes) were ranked as the third and fourth major importing country.

The four countries altogether accounted for about 17% of total soybean oil imports. Coming behind as the fifth-highest importer is Morocco (547 thousand tonnes), followed by Mauritania (537 thousand tonnes), Peru (521 thousand tonnes), South Korea (390 thousand tonnes), Colombia (378 thousand tonnes), Venezuela (373 thousand tonnes), Egypt (243 thousand tonnes), Poland (229 thousand tonnes) and Nepal (215 thousand tonnes).

India in value terms ($3 billion) being the largest market for soybean oil imports in the world, accounted for 29 percent of global imports. The second position in the ranking was taken by China ($725 million) with a 7 percent share. North African country, Algeria came third with a share of 4.6 percent of the total value.

Top Soybean oil exporters

In 2020, Argentina was the major exporter of soybean oil (5.3 million tonnes), constituting 42% of total exports. The United States (1238 thousand tonnes), Brazil (1110 thousand tonnes), Paraguay (631 thousand tonnes), the Netherlands (615 thousand tonnes) and Russia (611 thousand tonnes) follow, altogether accounting for 33% of global supplies. Meanwhile, Spain (387 thousand tonnes), Bolivia (377 thousand tonnes), Ukraine (302 thousand tonnes), Turkey (208 thousand tonnes) and Germany (192 thousand tonnes) had relatively small shares in the total volume.

In value terms, Argentina remains the largest supplier of soybean oil in the world ($ 3.7 billion), which accounts for 39% of global exports. The United States ($ 979 million), with a share of 10% of the total supply is ranked second. Both countries are followed by Brazil with an 8% share.

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