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V For Volatility

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Nigerian Exchange Limited - Investors King

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

The buy-the-dip mafia was out in force yesterday, with a fair bit Friday’s Wall Street and European equity sell-off unwound, as well as Friday moves in bond, currencies and commodities and energy. Notably, it hasn’t been a complete reversal by any means, as the world settles into a choppy holding pattern, for clarity about just worried, or not, we should be about the new Covid-19 omicron variant.

President Biden attempted to sooth nerves overnight, but what really drove the retracement were anecdotal reports from the South African medical establishment suggesting that symptoms were milder than delta. Always ready to selectively edit the facts to fit the prevailing market sentiment, cases popping up in multiple locations around the world (they were probably there already), kneejerk travel bans on travellers from Southern Africa (there is no evidence it originated there, they just reported it first), and in the case of Japan, all foreigners, and WHO warnings that the new variant posed a “very high” risk, were mostly ignored by investors worldwide. The fact that markets haven’t completely unwound the Friday meltdowns at least suggests a modicum of caution remains.

To be fair, having been scared by delta, much of Asia is still in ultra-cautious mode, as their recovery was only just gathering steam with borders being tentatively reopened. And one can’t blame national governments for shooting first and asking questions later, after paying the price so badly for their delta complacency earlier this year. Whether that escalates into wider restrictions than a ban on travellers from Southern Africa also remains to be seen.

It will likely be a couple of weeks before the great and good of the global scientific community can make a definitive judgement on how serious the omicron variant is. That means December is likely to be choppy and driven by omicron headlines, and the heavyweight data calendar this week, will be rendered irrelevant. All that will matter is whether more restrictions are coming back around the world, and whether central banks, especially the Fed, hit the pause button on monetary tightening plans. I already know the answer to that one. The big winner this month will be volatility, we should see plenty of it. But with markets selling everything on negative omicron headlines and clasping at the most tenuous of straws to buy everything back on any perceived positive headlines, investors looking for thematic direction moves this month, are likely to be sorely disappointed.

Markets got nothing out of the stream of Fed speakers overnight, who seemed to be going out of their way to avoid thoughts on omicron-world monetary policy. We have had some heavyweight data from Asia today though, although as I have just mentioned, it has been largely ignored. South Korean and Japanese Industrial Production was released, with the YoY data outperforming, while the MoM prints disappointed. South Korea falling -3.0%, while Japan rose on 1.10%. Electronics continued to perform well, but automotive and transport suffered due to the semiconductor bugbear. A cynic might say that the recoveries in both countries are stalling, much like the recent data from China suggests.

Speaking of China, official Manufacturing and Non-Manufacturing PMIs were released for November this morning. Manufacturing PMI managed to recover marginally into expansionary territory, creeping up to 50.1. that follows a sharp rise in Industrial Profits over the weekend, with metals refining and energy, unsurprisingly, leading the way. The data suggests China isn’t out of the woods yet though, although you wouldn’t bet against them. Non-Manufacturing PMI held steady at 52.3, with Covid-19 restrictions potentially offset by Singles Day. The general PMI rose sharply from 50.8 to 52.2, and overall, the data suggests an improvement driven by an easing of China’s power crunch and a slight easing in lending criteria to the property sector. The data is steady, rather than spectacular, and I won’t e breaking out the champagne yet.

We have a raft of GDPs across the Eurozone, as well as Eurozone November Flash Inflation, and German Unemployment this after. In the US, we have the Case-Shiller Home Price data, ad well as CB Consumer Confidence and both Janet Yellen and Jerome Powell are testifying on The Hill I believe. Sadly, unless Mr Powell says the taper will stop if omicron is serious, all of this be ignored. V is for volatility, and there is only one story in town this week, and it is invisible to the human eye.

Wall Street rebound lifts Asian equities.

Asian equity markets mostly ignored the sharp rally in US index futures yesterday morning, but with the rally consolidating in OTC markets in the US and Europe overnight, Asia feels confident about dipping its toes in the water today, although the gains are not universal. On Wall Street, investors unwound much of Friday’s sell-off drama, and despite the tenuous reasoning behind the move, always respect momentum.

The S&P 500 rose 1.32%, the Nasdaq leapt 1.88% higher, while the Dow Jones turned in a respectable 0.65% gain. In Asia, the FOMO mafia have continued pushing index futures higher with Dow futures lifting by 0.25%, and S&P 500 and Nasdaq futures booking 0.10% gains.

After a stunning downside reversal late in the Tokyo session as the government banned entry to all foreigners, the Nikkei 225 is doing what it does best today, following the Nasdaq. Softer Industrial Production data has tempered the gains, but the Nikkei 225 is still 0.60% higher. However, South Korea’s Kospi is 1.05% lower after the government shelved plans to relax Covid-19 restrictions, highlighting once again, what is really driving markets right now. Meanwhile, Mainland China markets have edged higher, the Shanghai Composite and CSI 00 rising by just 0.15%. The casino sell-off persists in Hong Kong today, the latest sector in the Chinese government spotlight, leading the Hang Seng to shed 1.20%.

Across the region, Singapore is unchanged, unable to shake of PM Lee’s comments that Covid-19 freedoms could be rolled back if necessary. Kuala Lumpur though, has risen by 0.55% with Jakarta rising by 0.40% and Bangkok climbing 1.05% as investors build a tourism premium back in once again. Manila has fallen 1.0% while Taipei has rallied by 0.80%. Australian markets, never short of herd-like optimism, or a proclivity to slavishly follow Wall Street, have rallied strongly. The All Ordinaries is 1.10% higher, while the ASX 200 has risen by 0.80%.

European markets reclaimed some losses overnight, and the price action in Asia will likely inspire more buying initially. The same is likely on Wall Street as the pull of the FOMO remains irresistible. I would caution, however, that we are just one negative omicron headline from the whole rally everywhere, evaporating into thin air.

Currency markets remain much more cautious.

Currency markets were volatile overnight but notably, the recovery rally in the US Dollar ran out of steam. US yields rose only slightly after Friday’s sharp falls. The dollar index rose nearly 50 points to test 96.50 intraday but retreated to finish just 0.13% higher at 96.19. In Asia, the last of those gains have been unwound, the index falling 0.08% to 96.11. The index looks like to trade in a choppy 95.75 to 96.50 range over the next few sessions.

Notably, Euro, Sterling and Yen all fell slightly overnight while the Swiss Franc still managed to record gains, as did the Chinese Yuan and Canadian Dollar. EUR/USD is back to 1.1300, with GBP/USD at 1.3325, while USD/JPY is holding steady at 113.65. USD/JPY will find a recovery back above 114.00 challenging this week. AUD/USD and NZD/USD booked modest gains to 0.7145 and 0.6825 overnight, suggesting caution prevails in the G-10 space regarding omicron, and both antipodeans are only just holding above their 2021 lows still at 0.7100 and 0.6800.

USD/MXN and USD/ZAR fell sharply overnight, and that sees the US Dollar is moving lower across the board versus Asian currencies today, helped along by a fall by USD/CNY to 6.3715. USD/KRW, USD/MYR, USD/INR have fallen by 0.25% while USD/SGD and USD/THB are holding steady.

In the G-10 space, currencies appear to be reflecting some well-deserved caution towards omicron still, as usual, refusing to indulge in the mindless FOMO price action in the equity space. However, in the Asian regional space, local currencies appear to be pricing in the likelihood of a slower Fed taper, or even a halt to it thanks to the new variant. It is hard to argue with either thesis at the moment.

That suggests that a lower than expected Non-Farm Payrolls number on Friday is likely to see strength in the emerging space, rather than the DM space versus the US Dollar. And omicron will likely mute any strong dollar effects from a higher than 500k print on Friday. Like other asset classes, markets will be on tenterhooks for the latest omicron headlines across the news ticker.

Oil’s recovery hits an OPEC+ wall.

Oil managed to claw back some losses overnight, but the price action was far from impressive. Brent crude left higher initially, climbing over 5.0% intra-day, but gave back almost all those gains to finish just 0.74% higher at $73.40 a barrel overnight. WTI fared slightly better, closing 2.75% higher at $70.05 a barrel, and reclaiming its 200-day moving average. (DMA) In Asia, both contracts have added another 0.80% to $73.95 and $70.55.

Brent crude appears to have a higher beta to the OPEC+ meeting, logical given it is an international pricing benchmark, whereas WTI is very much US-centric. Overnight, Russia said that other members had not contacted it regarding halting production increases at the full OPEC+ meeting later this week, and that seems to have capped Brent’s recovery. Things move quickly in OPEC+ circles though and I remain of the opinion that the odds of a temporary halt to production increases is well above 50% now, especially with OPEC+ compliance already above 100%, suggesting limited swing capacity anyway.

That said, Friday’s lows still feel like the bargain of the year if you were an oil buyer, speculative or physical. Rather than second-guessing OPEC+, I am content to watch from the side-lines from here, as oil markets will be more vulnerable than most omicron headlines and violent swings in sentiment. Heightened volatile means that long or short, you P and L can still be nought.

The respective 200-DMAs at $72.70 and $70.00 a barrel should provide some support, if for no reason that a fall to those points will send the relative strength indexes (RSIs) into oversold territory. Above, some resistance should be found at $77.00, and $74.00 a barrel respectively.

Gold looks unimpressive.

Gold’s price action continues to underwhelm, as it finished the overnight session down 0.46% at $1785.00 an ounce, before eking out a 0.20% gain to $1788.50 an ounce in Asia. There are zero signs of any safe-haven bids emerging to shelter from virus volatility, and it is falling despite both US yields and the US Dollar also falling. Gold has now closed below its 50,100 and 200 DMAs clustered between $1791.00 and $1792.50 an ounce.

Gold will have resistance at $1800.00 and $1815.00 to start the week, while yesterday’s spike to $1770.00 an ounce, 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. Friends are what gold needs to find quickly though, and I do not rule out a move lower to $1720.00 this week, especially if the Non-Farms puts the Fed taper back in the spotlight and we have a lull in virus headlines.

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Markets

Lacking Direction

Equity markets are lacking any real direction in Asia and that appears to be carrying into the European session as well.

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

Equity markets are lacking any real direction in Asia and that appears to be carrying into the European session as well.

Europe is seeing minor losses on the open, offsetting some of the small gains in choppy trade at the start of the week. This follows a similarly choppy session in the US on Monday as the Dow flirted with exiting correction territory and the Nasdaq bear market territory.

We may have reached a point in which investors need to decide whether they truly buy into the recovery/no recession narrative or not. That is what appears to have fueled the recovery we’ve seen in equity markets despite the fact that inflation hasn’t even started falling, central banks are still hiking aggressively and recession is on the horizon for many.

It’s time to decide whether this is just a substantial bear market rally or a genuine view that the economic outlook is far less downbeat than many fear. If equity markets are going to push on from here, it must be based on the latter which I’m sure many would welcome but perhaps more through hope than expectation.

Don’t get me wrong, the US in particular still has plenty of reason to be encouraged. The data on Friday highlighted once more just how hot the labour market still is and the consumer is still in a very healthy position. But there are pockets of weakness as well and unless inflation starts to subside, those areas of strength will start to crack.

The inflation data on Wednesday could effectively set the mood for the rest of the summer. That seems quite dramatic but if we fail to see a drop in the headline rate, considering the acceleration we’re expected to see in the core, it could really take the wind out of the sails of stock markets as it would be very difficult for the Fed to then hike by anything less than 75 basis points in September.

Of course, there will be one further labour market and inflation report before the next meeting which will also have a big role to play. But the July data will be very difficult to ignore. If the rally is going to continue, we may need to see a deceleration in the headline rate at a minimum, perhaps even a surprise decline at the core level as well. It’s no wonder we’re seeing so much caution this week.

Oil edges lower as Vienna talks conclude

Oil prices are marginally lower on Tuesday after recovering slightly at the start of the week. All of the talk of recession has caught up with crude prices over the summer, forcing a substantial correction that will be welcomed by those looking on in horror as they fill their cars.

The question is how sustainable $90 oil is when the market remains very tight and OPEC+ is only willing to make small moves in order to address it. It’s comforting to know that Saudi Arabia and the UAE have spare capacity in case of emergency but I’m sure most would rather they actually use some of it considering many countries are facing a cost-of-living recession. ​

Nuclear deal talks in Vienna have concluded, with the EU suggesting a final text will now be put forward for the US and Iran to either agree on or reject. I’m not sure traders are particularly hopeful considering how long it’s taken to get to this point and with there still reportedly being points of contention. An agreement could ease further pressure on oil prices, the extent of which will depend on how quickly the country could then flood the market with additional crude.

Gold eyeing CPI data for breakout catalyst

Gold continues to trade around its recent highs ahead of Wednesday’s inflation report, with a softer dollar on the back of lower yields on Monday supporting the rally once more. The yellow metal continues to see significant resistance around $1,780-1,800 and we may continue to see that in the run-up to the CPI release. A softer inflation number tomorrow, particularly on the core side, could be the catalyst for a breakout to the upside while a stronger number could put $1,800 out of reach for the foreseeable future.

Bitcoin rallies losing momentum

Bitcoin is not generating the same momentum in its rallies in recent weeks, as it continues to run into strong resistance on approach to $25,000. In much the same way that US stock markets are lingering around potentially important levels ahead of the inflation data, we could see bitcoin behaving in a similar manner. A weaker inflation reading could be the catalyst it needs to break $25,000 and set its sights on the $28,000-32,000 region once more, where it hasn’t traded since the early part of the summer.

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Energy

Nigeria Loses N184 Billion to Gas Flaring in H1 2022

Nigeria lost N184 billion to gas flaring in the first half (H1) of 2022, the Nigerian Oil Spill Monitor.

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Oil and Gas

Nigeria, Africa’s largest economy, lost N184 billion to gas flaring in the first half (H1) of 2022, the Nigerian Oil Spill Monitor, a unit under the Nigerian Oil Spill Detection and Response Agency (NOSDRA), reported on Sunday.

Despite Nigeria’s huge gas deposits, Africa’s largest economy continues to struggle with the necessary infrastructure needed to convert gas flaring to useful natural liquified gas. In the last 18 months, Nigeria has lost almost a trillion Naira in gas value.

The report showed that Nigeria lost a total sum of N707 billion in 2021 alone while another N184 billion was lost in the first half of 2022.

NOSDRA report noted that gas companies operating in the country flared 126 billion standard cubic feet (SCF) of gas in the first six months of 2022, resulting in $441.2 million or N188.887 billion (using the I&E exchange rate) lost.

Further analysis of the report showed that oil firms operating in the offshore oilfields flared 62.2 billion SCF of gas valued at $217.6 million in the first half of 2022. However, companies operating onshore flared a total of 63.9 billion SCF, estimated at $223.6 million.

Speaking on the situation, Prof. Olalekan Olafuyi, the Chairman of the Society of Petroleum Engineers (SPE), Nigeria Council, in an interview on Sunday, said the Federal Government is working on raising gas flaring penalties to further compel oil companies operating in the country to comply with the existing gas policy.

He said “We are working closely with the Nigerian Upstream Petroleum Regulatory Commission, and I can categorically say that companies who flare gas will now pay more than those utilising it. So, it will be to their advantage to start thinking of ways to utilise their gas instead of flaring them.”

Presently, the federal government imposed a penalty of $2 on 1000 SCF of gas flared by oil companies producing above 10,000 barrels per day (bpd). While companies producing less than 10,000 bpd are fined $0.5 per 1000 scf of gas flared.

Even though Olafuyi did not state how much increase the new rate would attract, he said the Federal Government is working with the Nigerian Upstream Petroleum Regulatory Commission (BUPRC) to devise a suitable penalty increase.

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Crude Oil

Oil Drops to $93.32 a Barrel on Monday

Oil prices declined on Monday amid concerns over the recession and the drop in crude oil imports in China, the world’s largest importer of the commodity.

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Oil - Investors King

Oil prices declined on Monday amid concerns over the recession and the drop in crude oil imports in China, the world’s largest importer of the commodity.

Brent crude oil, the international benchmark for Nigerian oil, dropped to $93.32 per barrel at 12:47 pm Nigerian time, down from $96.06 a barrel it attained during the Asian trading session.

U.S. West Texas Intermediate oil also depreciated from $89.47 a barrel to $87.45.

China, the world’s top crude importer, imported 8.79 million barrels per day (bpd) of crude in July, up from a four-year low in June, but still 9.5% lower than a year ago, customs data showed.

Chinese refiners drew down stockpiles amid high crude prices and weak domestic margins even as the country’s overall exports gained momentum.

Reflecting lower U.S. gasoline demand, and as China’s zero-Covid strategy pushes recovery further out, ANZ revised down its oil demand forecasts for 2022 and 2023 by 300,000 bpd and 500,000 bpd, respectively.

Oil demand for 2022 is now estimated to rise by 1.8 million bpd year-on-year and settle at 99.7 million bpd, just short of pre-pandemic highs, the bank said.

Russian crude and oil products exports continued to flow despite an impending embargo from the European Union that will take effect on Dec. 5.

In the United States, energy firms cut the number of oil rigs by the most last week since September, the first drop in 10 weeks.

The U.S. clean energy sector received a boost after the Senate on Sunday passed a sweeping $430 billion bill intended to fight climate change, among other issues.

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