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Shooting First, Asking Questions Later

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By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA

That was pretty much the response of both national governments and financial markets on Friday as fears over the new Omicron Covid-19 variant swept the world. Travel restrictions from Southern Africa have been quickly erected with Israel shutting borders full stop. In financial markets, US bond yields sank as investors rushed for safety (bond prices move inversely to yields), oil prices collapsed by over 9.0%, stock markets headed south with commodity prices and haven currencies such as the Swiss Franc and Japanese Yen has banner days as markets priced in a return to wider movement restrictions.

Having been burnt so badly with their own complacency over the emergence of the delta variant, national governments were taking no chances this time around. Interestingly, both gold and bitcoin flopped as well, and it seems neither is a haven or an inflation hedge when the flag really goes up. Looking at the performance of the platinum group metals on Friday, I am not really surprised that gold sank. But I also suspect that quite a bit of cross margin liquidation accounted for the sell-down in gold and cryptos.

As the week starts a new, it is a very mixed performance in Asia today. Over the weekend, the WHO said that omicron’s symptoms appear to be mild, and the head of Moderna said a newly rejigged version of their vaccine could be available by early 2022. That seems to have been enough to flush out the perpetual optimists of the US stock market, with US index futures strongly rallying this morning. Oil has leapt 4.0% higher as well, recouping nearly half of Friday’s losses. US 10-year T-note futures fell by over 1.0% on Friday (percentage of the price, not headline yield), but have fallen 0.35% this morning, meaning US 10-year yields have edged back up, and the US Dollar, having crumpled on Friday, perhaps the day’s biggest surprise, is stronger across the board.

If US-dominated markets are attracting the buy-the-dippers like flies to a fresh pile of dung, the picture is rather more cautious in early Asian markets. Australia, Japan, and South Korean stock markets are all lower, and sentiment barometers, the Australian and New Zealand Dollars have hardly moved. Gold spiked lower to $1770.00 an ounce when the margin servers went on at 0700 Tokyo, but quickly bounced back to be unchanged at $1793.00 an ounce. Some poor soul has been stopped out in the Monday twilight zone.

Asia’s caution is understandable. Memories are still raw in the region of the delta wave earlier this year, including the author. Asia has a much higher beta to world trade and the global recovery than the US where the majority of GDP is internally generated. Having moved heaven and earth over the past six months to get vaccination rates across the region to impressive levels, the prospect of them being rendered useless and trade suffering is understandably weighing on sentiment. The first move in early Asia on Monday is often the wrong one. If that plays true today, the early optimism shown in the most illiquid time of the week for global markets, could evaporate as the day goes on. It is hard to see Europe for example, already facing another Covid-19 wave and more restrictions, suddenly finding light at the end of the virus tunnel.

The fact is, we don’t know enough about this new variant yet to make a conclusive call on whether this is delta 2.0, or a more benign version. That uncertainly alone should cap optimism but-the-dip waves this week, although the annoying use of “mutant virus” or “mutant strain” has reappeared in the global press as if we were facing the zombie apocalypse. That won’t calm nerves but even as a non-scientist I can tell you that every time a virus mutates it becomes a mutated strain, not a “mutant strain” leading the world to doom. Flu evolves every year in multiple strains (hence we need a flu shot every year), but its not a “mutant flu.” So, stop scaring people to sell column inches. That said, viruses don’t mutate to become worse at what they do, and if this version is subsuming delta, itself a nasty beast, caution is warranted.

Viruses aside, the world does move on and although omicron will capture the hearts and imaginations and column inches of the world and the financial market this week, there is other stuff happening. China releases official PMIs tomorrow and Caixin Manufacturing PMI on Wednesday, and Services PMI on Friday. Wednesday the 1st also sees the usual dump of PMIs for the rest of Asia and Europe, which also sees Eurozone Inflation and pan-Europe Retail Sales on Friday. South Korean Industrial Production and Retail Sale will generate some attention, as will Australian Retail Sales and Balance of Trade.

Believe it or not, this week is also a US Non-Farm Payroll week, usually the one ring to rule them all. The street is pricing in another 500K+ jump in jobs although its impact is totally reliant on the evolution of the omicron situation. If that has faded and payrolls are strong, we will be back to the Fed taper-trade. If it hasn’t, then it will be ignored no matter what the headline number is, as the street prices in central banks everywhere, including the Fed, breaking the glass, and hitting the big red “WIMP” button.

Speaking of central bankers, we have a plethora of them speaking tonight in the early hours before Asia. The ECB’s Christine Lagarde and the Federal Reserve’s Jerome Powell and the Reserve Bank of Australia’s Debelle all speak. We have a rent-a-crowd of Fed Governors, Clarida, Williams and Bowman also making speeches. We already know what the only question will be to all of them. Expect to hear lots of x central bank stands ready if needed, we have lots of tools available, monetary policy remains flexible, insert we’ll loosen policy at the first sign of trouble comment without specifically saying it here. That might be good for stocks, commodities, and bonds if you are brave.

A mixed start for Asian stock markets.

US futures markets and Asian stock markets have diverged sharply today, with US index futures rallying after the bonfire of Friday, while Asian markets have moved sharply lower once again early in the session. Part of Asia’s negatively could be a partial catch-up to the scale of the US and European rout, but also their slower pandemic recovery, the scars of delta, and a much higher beta to world trade and the global recovery.

Meanwhile, US index futures raced higher out of the gate this morning and have continued higher, likely grasping at the straw of reports that omicron’s symptoms are milder. S&P 500 futures are 1.10% higher, with Nasdaq futures jumping 1.40%, while Dow Jones futures have risen by 0.75%.

The halo effect of the US futures is starting to reverse the early losses suffered in Asian markets. The Nikkei 225 have reversed its entire early falls to be unchanged, with South Korea’s Kospi is down only 0.40%. Taipei has also recovered, down only 0.30% now. However, Singapore remains 0.90% lower, with Kuala Lumpur 0.25% and Jakarta 0.68% lower. Tourism-centric Bangkok will likely endure a tough start to the day. Australian markets have staged a sharp about-face this morning after a very negative start, both the ASX 200 and All Ordinaries rallying back to be down just 0.10% for the session.

China markets are mixed with casino stocks in Hong Kong sharply lower as China’s clampdowns extend to that sector. Technology stocks have rallied strongly though leaving the Hang Seng down just 0.20%. In Mainland China, the Shanghai Composite is down 0.30% with the CSI 300 easing by 0.25%.

Given the price action seen in Asia today, led by the US futures rally, European stocks are poised to jump higher this afternoon if the US futures rally is sustained. Having been stretchered off with serious injuries on Friday, as Europe faced a double whammy of omicron and its 4th virus wave, European markets, theoretically, have the most to gain if the price action in oil this morning, for example, is anything to go by.

I would add a large note of caution however for equities in general. Despite the irresistible pull of buying-the-dip on tenuous early information on omicron, we have just one negative omicron headline away from going back to where we started. Expect plenty of headline-driven whipsaw price action this week.

The US Dollar stages a post-Friday recovery.

In a rather surprising move for the author, the US Dollar suffered heavily on Friday, the dollar index falling by 0.74% to 96.07 as haven currencies like the Swiss Franc and Japanese Yen staged powerful rallies. EUR/USD rallied as well, perhaps because so much bad news was priced into it, climbing 0.90% to 1.1310. The US Dollar suffered I believe, on cross margining selling, and that an omicron wave would bring the Fed’s taper to a shuddering halt, something with which I agree with, as US yields fell sharply at the long end of the curve.

This morning, the rally in US equity futures and oil has lessened those fears, with US yields also firming. That has seen the dollar index rally by 0.22% to 96.28, with the JPY, CHF and EUR falling by around 0.25%. USD/JPY fell by an impressive 1.70% to 113.40 on Friday, testing 113.00 intraday. From a technical perspective, USD/JPY should start to form a bottom around 113.50 and EUR/USD will likely struggle to make much progress above 1.1300 unless US bond yields dramatically fall from here.

Currency markets are also sending out a few subtle signs that risk sentiment remains highly elevated, with Asian currencies falling aggressively on Friday, but making back only very modest gains today. Notably, USD/KRW is unchanged at 1193.50 today, and USD/CNY is barely changed at 6.3860. USD/THB, meanwhile, has actually risen 0.70% to 33.740 and USD/MYR is unchanged at 4.2380. Another warning sign comes from USD/TRY which is also unchanged, although the Mexican Peso and South African Rand, cremated on Friday, have risen 1.0% on thin volumes. The Australian and New Zealand Dollars fell 1.0% to test 2021 lows at 0.7100 and 0.6800 on Friday, but the sentiment indicators have only recovered by 0.25% this morning.

So, in the EM and commodity space, currency markets are adopting a much more cautious tone, suggesting the overall market remains very much on edge. Like equities, a negative omicron headline or two is likely to see the sell-off resume in earnest, which should benefit the Yen and Franc once again. Markets will be very much set up for a binary outcome this week based on omicron headlines, subsuming even the US Non-Farm Payrolls results. Positive news, buy everything, sell havens. Negative news, sell everything, buy havens, watch the whipsaw, and rinse repeat. Volatility will be the winner.

Oil stages an impressive recovery after Friday’s bonfire.

Oil will be the market where short volatility traders go to die this week. The omicron whipsaw is on full display today as Brent and WTI, having fallen by over 9.0% on Friday, have staged a very sharp rally in Asia. Brent crude has risen by 4.78% to $76.35 a barrel, and WTI has rallied by a mighty 5.45% to $71.85 a barrel, thanks to some tenuous reports that omicron’s symptoms are mild. Time will tell if this is correct (and I hope it is), but financial markets aren’t waiting around to find out.

The picture for oil is further muddied by the OPEC+ JMMC meeting and full meeting this week, the latter occurring on Friday. Negotiations with Iran restart in Vienna today as well over their nuclear programme. The prospect of Iranian crude increasing on international markets, another potential volatility point. Add all that in with virus developments and whipsaw price action this week in oil, is more likely to be chainsaw action.

OPEC+ compliance has held steady above 100% for quite some time now, suggesting there is not much swing production available to open the pumps anyway. I also note that pre-omicron, US production had recovered to 11.5 million bpd, yet prices were still high. That would suggest OPEC+ would have been comfortable raising production targets as planned, even if they couldn’t actually pump it.

However, OPEC+ has also repeatedly noted that a resurgent virus is one reason why they have been cautious about lifting production. OPEC+ has also forecast markets moving to a global daily surplus in early 2022. Taken with increasing US production, SPR releases, and now a potential omicron roadblock to the global recovery, OPEC+ probably has all the excuses it needs to hit the pause button on increasing production in December and awaiting further virus clarity. Friday’s capitulation will have cemented that thinking.

Either way you cut it, I can’t help but feel that Friday’s lows were probably the bargain of the year if you were an oil buyer, speculative or physical. Technical indicators are pretty useless in markets like this, but I note that the RSIs on both contracts are close to oversold, and that both Brent crude its 200-day moving average (DMA) on Friday at $72.70, while WTI has regained its 200-DMA at $70.00 a barrel this morning.

Gold, the forgotten haven.

Friday should have been gold’s safe-haven day in the sun, and for a short time it wise, rising $23.0 an ounce to $1815.50 at one stage. However, but the sessions end, gold had slumped back to a $1793.00 close, a minuscule gain. Like bitcoin, gold suffered over the course of Friday even as US yields and the greenback sank. One reason is likely the very poor performance of platinum and palladium on Friday, the other is likely to be cross-margining stop-outs with investors liquidating gold positions to cover losses in equities for instance.

A general recovery by platinum group metals, industrial metals and cryptos today has failed to flow into gold strength, perhaps because US yields and the US Dollar are higher. Whatever the underlying dynamics, the price action is negative, gold rising just 0.10% to $1794.80 this morning, with the recovery rally leaving it behind. That suggests that the downside is the path of least resistance for gold, and it is a sell on rallies this week.

Gold will have resistance at $1800.00 and $1815.00 to start the week, with the post open spike to $1770.00 an ounce this morning, a dubious move even by Monday Asia futures open standards, will provide initial support. In between, gold may find some friends around $1780.00. Failure of $1770.00 signals a retest of $1760.00 and $1740.00 an ounce.

Bitcoin

The weekend worries unwound all of bitcoin’s 7.0% loss on Friday, as the power of buy-the-dip dangles an irresistible lure. Bitcoin is trading $57.330.00 in Asia, barely changed from the weekend session and has quite a solid line of resistance just above here at around $58,500.00 of fiat US currency. A rise through $58,500.00 signals a return to 60,000.00 in the first instance.

Bitcoin has successfully held its 100-DMA, today at $54,210.00 for three sessions in a row. My bearish radar won’t shout target acquired until we see a daily close well below that level. But if we do, a move below $50,000.00 is possible.

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Markets

A Busy End to the Week

Stock markets are bouncing back on Friday, although I don’t think anyone is getting excited by the moves which pale in comparison to the losses that preceded them.

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

Stock markets are bouncing back on Friday, although I don’t think anyone is getting excited by the moves which pale in comparison to the losses that preceded them.

This looks like nothing more than a dead cat bounce after a steep decline over the last couple of weeks as investors have been forced to once again accept that interest rates are going to rise further and faster than hoped.

Double-digit eurozone inflation

Inflation in the eurozone hit 10% in September ahead of schedule, with markets expecting a jump to 9.7% from 9.1% in August. In normal circumstances that may have triggered a reaction but these are anything but normal. Markets are still pricing in a more than 70% chance of a 75 basis point rate hike from the ECB next month with an outside chance of 1%. The euro is slightly lower following the release which also showed core inflation rising a little higher than expected to 4.8%.

Sterling recovers as the UK is revised out of a potential recession

We’re seeing the third day of gains for the pound which has now recovered the bulk of the losses sustained after the “mini-budget” a week ago. This is not a sign of investors coming around the new Chancellor’s unfunded tax-cutting, but rather a reflection of the work done since to calm the market reaction. That includes the emergency intervention from the BoE, talk of measures to balance the cost of the tax cuts, reported discussions with the OBR and rumoured unrest within the Tory party. We’ll have to see what that amounts to and sterling could certainly react negatively again to inaction or the wrong action.

GDP data this morning brought some good news, although as far as positive updates go, this is surely towards the more insignificant end. The UK is not in recession after the second quarter GDP was revised up from -0.1% to +0.2%. While all positive revisions are welcome, the technical recession wasn’t really significant in the first place. The important thing was that the UK is struggling to grow and facing a probable deeper recession down the road and today’s revision doesn’t change that. ​

Disappointing Chinese surveys

China’s PMIs highlighted the widening gulf between the performance of state-owned firms versus their private competition. It goes without saying that being backed by the state in uncertain times like this carries certain advantages and that has been evident for some time.

Private firms have been more sensitive to Covid restrictions and have therefore been heavily hampered this year. Still, even with those state-backed benefits, the headline PMI was far from encouraging rising to 50.1 and barely in growth territory. With the non-manufacturing PMI also slipping from 52.6 to 50.6, it’s clear that the economy still faces enormous headwinds and the global economy stalling around it will only add to them.

BoJ ramps up bond purchases amid higher yields

The Bank of Japan ramped up bond purchases overnight as it continues to defend its yield curve control thresholds in volatile market conditions. Rising global yields have forced the central bank to repeatedly purchase JGBs in order to maintain its target. There has been a growing expectation that the BoJ could tweak its 0% target or widen the band it allows fluctuations between in order to ease the pressure on the currency but that’s not been forthcoming, with the MoF instead intervening in the markets for the first time since 1998. The intervention doom loop continues.

RBI rate hike and credit line

The Reserve Bank of India hiked the repo rate by 50bps to 5.9% on Friday, in what will likely be one of its final tightening measures in the fight against inflation. The decision was widely expected and followed shortly after by guidance to state-run refiners to reduce dollar buying in spot markets through the use of a $9 billion credit line. The strength of the dollar is posing a risk to countries around the world, as we’ve seen very clearly in recent weeks as mentioned above, and measures like this will seek to alleviate those pressures. Much more will be needed to make any significant difference though.

Oil edges higher into the weekend

Oil prices are rising again as we head into the weekend, with the focus now on the OPEC+ next week. There’s been plenty of rumours about how the alliance will respond to the deteriorating economic outlook and lower prices. A sizeable cut now looks on the cards, the question is whether it will be large enough to offset the demand destruction caused by the impending economic downturn. Not to mention how any cut would work considering the shortfall in output targets throughout this year.

Brent continues to trade around the March to August lows having traded below here over the last week amid recession fear in the markets. We’re now seeing some resistance around $88, perhaps a sign that traders don’t believe OPEC+ will deliver a large enough cut to make a significant difference.

Encouraging but maybe not sustainable

Gold is making gains for a fourth consecutive day after a difficult start to the week. While the recovery has been encouraging, it’s hard to imagine it building on it in any significant way as that would probably require rate expectations to have peaked and inflation perhaps to have as well. While that may be the case, it’s hard to imagine pressure easing from here which may maintain pressure on the yellow metal for a little longer yet.

Key resistance to the upside lies around $1,680 and $1,700, with $1,620 and $1,600 below being of interest.

A period of stability is what bitcoin needs

It’s been a very choppy week in bitcoin which has failed to make a sustainable run in either direction despite attempts at both. Perhaps we are seeing a floor forming a little shy of the early summer lows around $17,500, although that will very much depend on risk appetite not plummeting once more which it very much has the potential to do. I keep using the word resilience when discussing bitcoin and that has very much remained the case. It did also struggle to build on the rally earlier this week, even hold it into the end of the day, so perhaps a period of stability is what it needs.

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Commodities

Allianz Economic Outlook: African Commodity Exporters in a Better Position

In 2023, the energy crisis and rising interest rates will drag global GDP growth down to just +1.5%, as slow as it was in 2008

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In 2023, the energy crisis and rising interest rates will drag global GDP growth down to just +1.5%, as slow as it was in 2008. It’s the latest forecasts provided by Allianz Trade, which operates through the Allianz Global Corporate & Specialty license in South Africa. 

Since June, global macroeconomic conditions have considerably worsened. Deep and long-lasting ruptures in energy markets and the negative impact on business confidence will push the manufacturing sector in most countries into recession. At the same time, rapidly rising interest rates and falling real disposable incomes will induce a housing recession in the US.

After contracting by -0.6% in the second quarter of 2022, global growth will return to negative territory in Q4 (-0.1% q/q) and is not likely to recover before mid-2023. Overall, we have cut our 2023 forecast to +1.5% (-1.0pp compared to our Q2 forecasts).

Africa: Commodity exporters in a better position

Commodity exporting countries have a more positive outlook, helped by better terms of trade prospects.  GDP forecast for 2023 is as follows: Africa (2.7% from 3.2% in 2022), South Africa (1.5% from 1.8%), Nigeria (unchanged at 2.3%), Ghana (unchanged at 2.5%), and Kenya (4.4% from 4.9%). However, domestic issues are limiting. In South Africa, energy rationing, and logistical bottlenecks – aggravated by flood damage to the port of Durban in April hamper growth while in Nigeria, the oil sector continues to struggle.

Eurozone and US forecast

Eurozone growth is likely to plunge to -0.8% in 2023 due to soaring energy prices and negative confidence effects. Consumer sentiment has already plunged to record lows and business confidence continues to deteriorate rapidly, which will hold back consumption and investment. Increased fiscal support to the tune of 2.5% of GDP on average and limited monetary easing after mid-2023 will help make the recession shorter and shallower, and limit the risks of social unrest.

The US will register a -0.7% fall in GDP, mainly due to rapidly tightening monetary and financial conditions, which will significantly cool the housing market, coupled with a negative external environment and low fiscal support after the mid-term elections.

China’s economic recovery will be difficult 

After a very low level of growth in 2022, China’s economic recovery will be difficult. We have significantly cut our growth forecasts to +2.9% in 2022 (from +4.1%) and +4.5% in 2023 (from +5.2%) based on four factors: the short-lived post-omicron reopening boost, the likely continuation of the zero-Covid policy until Q2 2023, which is weighing on business and household confidence, risks in the property sector and extreme weather currently pressuring energy supply. In addition, lower external demand will limit export growth, which had been a tailwind throughout 2020-2021.

Global inflation outlook

Inflation will remain high until Q1 2023 after energy prices have peaked, with food and services adding upside pressure. We expect global inflation to average 5.3% in 2023 (after close to 8% in 2022). Eurozone inflation should peak at 10% in Q4 2022 and then average 5.6% in 2023. In the US, inflation is likely to have peaked already but should remain above 4% until Q1 2023, falling below 2% only after Q3 2023 (averaging 2.9% in 2023).

Inflation outlook in Africa

Inflation is set to continue increasing driven by costlier food and fuel prices with Africa forecast to finish 2022 averaging 14.7% and then 9.6% in 2023, Nigeria (18% and 15%), South Africa (6.8% and 5%), Ghana (31.3% and 20.3%) and Kenya (6.5% and 5.5%). Heightened food security risks in North Africa and many parts of sub-Saharan Africa where the role of agriculture and the tendency to rely on imported food products makes the countries particularly vulnerable to the agricultural shock caused by the geopolitical conflict.

Global trade

Global trade growth in volume will also remain low at +1.2% in 2023 as advanced economies face a domestic demand-led recession. The return of credit risk is to be expected as this recession will be triaging the good, the bad and the ugly of corporate vulnerabilities. The rebound in business insolvencies gained momentum during 2022 (+18% q/q in Q2 2022, from +5% in Q1). The largest acceleration happened in Western Europe (+26% y/y YTD). Though we are still witnessing historically low numbers of bankruptcies in the US (-19% YTD as of Q2), China (-14% as of August) and Germany (-4% as of June), Spain, the UK and Switzerland already show pre-pandemic insolvency numbers. The trifecta of lower demand, prolonged production constraints (input prices, labor shortages and supply-chain matters) and increasing financing issues (access and costs) is mechanically pushing up expectations in business insolvencies, notably for European countries and sectors most exposed to energy issues. The -0.8% decline in Eurozone GDP has the potential to accelerate the rise in insolvencies by +25pp in 2023 (to more than +40%), with Germany up +16%, France up +29%, Italy up 31% and Spain up 25%. This increases the probability of seeing the extension of and new (targeted) state aid measures.

South Africa

Evidence that South Africa’s economy is faltering has continued to build. June hard activity data came in well below consensus expectations with retail sales as well as manufacturing and mining production dropping back in m/m terms. We expect the economy to have contracted sharply in Q2 as the hit to output from severe flooding was probably not recouped and as load shedding intensified once again. More timely indicators suggest that activity has remained weak in Q3. Scarce energy availability has continued to weigh on energy-intensive sectors; the manufacturing PM declined from 52.2 in June to a one-year low of 47.6 in July. And successive falls in consumer confidence probably dampened retail sales further with elevated inflation taking its toll.  Inflation rose from 7.4% y/y in June to a 13-year-high of 7.8% y/y in July on the back of mounting fuel and food price pressures. Core inflation, at 4.6% y/y, remained close to the midpoint of the 3-6% target band. Uncomfortably high inflation, currency weakness, and Fed tightening will probably keep monetary policymakers in a hawkish mood, even as the economy struggles.

Nigeria

Nigeria’s economy expanded by a better-than-expected 3.5% y/y in Q2, up from 3.1% y/y in Q1. The pick-up in headline growth was largely due to the contraction in the oil sector easing, while growth in the non-oil economy held up well. In seasonally-adjusted terms, GDP rose by around 0.9% q/q. More timely indicators suggest that activity picked up further at the start of Q3. The MI rose from 50.9 in June to 53.2 in July. And private sector credit growth reached 21.3% y/y in July. But production in the key oil sector remained very low, essentially unchanged from June at 1.18mn bpd in July. Meanwhile, the currency weakened against the US dollar, both on the Nafex exchange rate and the black market. Inflation jumped from 18.6% y/y in June to 19.6% y/y in July, the highest since September 2005. The main driver behind the increase in the headline rate was another sharp rise in food inflation, although price pressures rose in other categories too. Elevated inflation is likely to push policymakers to continue raising interest rates.

Kenya

Uncertainty surrounding elections held earlier in August has continued to linger. The official tally showed a tight victory for William Ruto, but runner-up Raila Odinga challenged the results in the courts, reversing some of the gains in Kenya’s sovereign dollar bonds since the start of the month. Nonetheless, the Supreme Court ruled the election was free and fair and William Ruto was sworn in as President on September 13. Defeated Raila Odinga did not attend the inauguration. Shoring up the economy is likely to be a key priority for the new President. The public debt burden stood at 67% of GDP as of June. And the external position is in a poor state too; in May, the trade deficit was the widest since at least 2000 as imports surged by more than exports grew. Activity probably deteriorated further since; the PMI dropped from 46.8 in June to 46.3 in July. Meanwhile, the currency has continued to weaken (-6% vs. USD as of mid-September). This has contributed to the rise in price pressures; headline inflation increased to a five-year high of 8.3% y/y in July, above the central bank’s inflation target range. After keeping interest rates unchanged in July, the central bank is likely to tighten again before long. We have penciled in a +150bps increase in the benchmark rate, to 9.00%, by year-end.

Ghana

Ghana entered talks with the IMF in July, but this has failed to soothe investors ‘concerns about the public finances. Sovereign dollar spreads have continued to widen, and the cedi has fallen further – it is now down by 37% against the dollar year-to-date. Given the large amount of sovereign FX debt, the fall in the cedi will only make the job of putting the debt position on a sustainable footing more difficult. Two credit rating agencies lowered Ghana’s long – term foreign currency rating further into junk territory.  A sovereign default is by no means imminent given that the FX debt repayment schedule is light over the next couple of years. But an IMF deal, including a firm commitment to fiscal consolidation, will need to be secured soon to soothe investors’ concerns. Meanwhile, the weaker cedi will add fuel to inflation, which came in at a stronger-than-expected 31.7% y/y in July – close to a 19-year high. All of this prompted the central bank to call an emergency meeting and hike interest rates by 300bp, to 22%, this month. Against this backdrop, economic activity is suffering. GDP growth slowed to just 3.3% y/y in Q1 and more timely indicators show that both business and consumer confidence have slumped. The risks to our below-consensus forecast for Ghana’s economy to expand by 3.0% this year lie firmly to the downside.

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Crude Oil

Fear of Global Recession Weighs on Crude Oil Prices

Global uncertainty concerning recession continued to dictate the price of crude oil and other global commodities

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Crude oil - Investors King

Global uncertainty concerning recession continued to dictate the price of commodities, especially crude oil which has now declined for a second trading session on Monday.

Brent crude oil, against which Nigerian oil is priced, slipped by $1, or 1.2%, to $85.15 a barrel at 11:36 a.m Nigerian time on Tuesday. Brent crude dipped as low as $84.51, the lowest since Jan. 14.

U.S. West Texas Intermediate (WTI) crude shed 87 cents, or 1.1%, to $77.87 a barrel. WTI dropped as low as $77.21, the lowest since Jan. 6.

Brent and WTI slumped by about 5% on Friday.

The dollar index that measures the greenback against a basket of major currencies climbed to a 20-year high on Monday.

A stronger dollar tends to curtail demand for dollar-denominated oil.

Meanwhile, interest rate increases imposed by central banks in numerous oil-consuming countries to fight surging inflation has raised fears of an economic slowdown and accompanying slump in oil demand.

“A backdrop of global monetary policy tightening by the key central banks to quell elevated inflation, and a splendid run-up in the greenback towards more than two-decade highs, has raised concerns about an economic slowdown and is acting as a key headwind for crude prices,” said Sugandha Sachdeva at Religare Broking.

Disruptions in the oil market from the Russia-Ukraine war, with European Union sanctions banning Russian crude set to start in December, has lent some support to prices.

Attention is turning to what the Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia, together known as OPEC+, will do when they meet on Oct. 5, having agreed at their previous meeting to cut output modestly.

However, OPEC+ is producing well below its targeted output, meaning that a further cut may not have much impact on supply.

Data last week showed OPEC+ missed its target by 3.58 million barrels per day in August, a bigger shortfall than in July.

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