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

Overnight, more data from South Africa suggesting omicron symptoms were mild gave a green light for the fast-money gnomes of Wall Street to pile back into the buy every-thing global recovery trade. Helping proceedings was news that a deal had been struck in the US Congress to raise the US debt ceiling, avoiding a potential December default.

US equity markets had a mighty session, with the S&P 500 and Nasdaq enjoying their best days since March. The US yield curve steepened once again while oil prices jumped, and the US Dollar maintained its gains. Once again, buy-the-dip has triumphed and in the case of oil, last week was probably the lows for potentially the next 12 months.

I have stated that V for Volatility would be the winner in December, rather than directional momentum, and I believe that still holds true. While the buy everything trade will have its day in the sun for the rest of this week, some serious non-virus risk points are looming. Friday sees US CPI and a print at or above 7.0% is going to raise the heat at next weeks FOMC. We have a central bank policy frenzy next week, but all roads lead to the FOMC. And the odds of faster Fed taper and a signal of earlier rate hikes is rising. Markets continue ignoring this reality at their peril, and if reality bites next Wednesday (US time), the “growth” trade on equities could be in for some tough love.

Another “grey swan” is Russia and Ukraine. The Putin/Biden meeting appeared to be constructive, but the West continues to underestimate the Russian psyche regarding border security, as it does with China. A quick look at the history books will give readers all the answers they need. I will deal with the consequences of an invasion in later newsletters but think $150 oil, the mother of all dips to buy in US equities, and Europe paying the price for the strategic ineptitude of tying their energy security to Russia.

Apart from Japan, which slavishly follows the US equity market direction these days, Asia is once again, painting a more cautious picture. China’s property sector is the primary reason, with Evergrande failing to pay its Monday offshore obligations, Kaisa suspending its stock on the HKEX and another developer, China Aoyuan Group stating it cannot guarantee to be able to meet commitments due to liquidity constraints. As the saying goes, “there’s never just one cockroach,” and the list of distressed China developers seems to be growing daily.

Nerves over constrained China growth in 2022 due to an orderly, or disorderly, restructuring of the property developer sector are weighing on Asian markets. Nor has the China technology sector crackdown run its course either, despite plenty of press time that stocks in the sector look like a “bargain.” The light at the end of the tunnel continues to be the train coming the other way and the Financial Times lead story today is that China is preparing a blacklist to tighten restrictions on China tech companies seeking overseas listings.

It is increasingly clear that China is giving the option of Hong Kong or bust with regards to pseudo overseas listings, with the riches of US valuations being closed off. China tech may be trading at a “discount,” a situation I believe will become structurally embedded in their pricing under President Xi’s shared prosperity regime.  As the saying goes, “the market can remain irrational, longer than you can stay solvent.” In the history of investing, never a truer word has been spoken. Thank you, Mr Keynes.

Today’s other risk point in Asia is this afternoon’s Reserve Bank of India policy decision. Despite stagflationary pressures rising once again, the RBI should stay unchanged on policy rates. However, it is the RBI Governor’s statement afterwards that will have markets on tenterhooks as there may be a signal that rate hikes are coming in 2022. That would temporarily boost the Rupee, but India equities, bloated with hot money from offshore flooding into the tech-IPO space, may start running for the exit. Another choice saying is that “an emerging market is a market you can’t emerge from in an emergency.” Hints of hawkishness from the RBI could open unveil that reality to offshore investors.

Tonight sees the US Jolts Job Openings data released, expected to show some 10.4 million unfilled jobs in America. That will be another reason for next week’s FOMC to consider the t-word we can’t use to describe inflation now, as even less t-word than previously. US API Crude Inventories posted a surprise 3.1 million barrel drop overnight, and official US Inventory data tonight is expected to show a rise of 2.0 million barrels. A similar fall like the API data overnight will throw more fire on oil’s rally.

China caution weighs on Asian equities.

Wall Street enjoyed an outsized session of gains overnight as hot money flocked back into the global recovery trade on diminishing omicron fears. The S&P 500 rose 2.07% with the Nasdaq leaping 3.03% higher, while the Dow Jones added 1.42%. Futures on all three indexes have continued to rally in Asia, climbing by around 0.35%.

Asian markets are having an uneven day, with gains being lesser in scope or non-existent. The chief driver of caution is the deepening woes surrounding the China property sector and its potential impact on 2022 growth. That said, hopes of more stimulus measures from China and falling Covid-19 cases has seen Mainland equities post solid gains.

The Nikkei 225 has jumped 1.50% higher today, with the Kospi adding 0.90%. In Mainland China, the Shanghai Composite is also 0.90% higher and the CSI 300, more emerging and technology company facing, has added only 0.10%. The same theme is playing out in Hong Kong, home to many of the China tech and property developer heavyweights. The Hang Seng has eased lower by 0.10%. With the negative headlines streaming in still from those sectors, the Hang Seng will remain challenged even as Mainland equities rise on stimulus hopes.

Singapore has fallen by 0.25% with Kuala Lumpur down by 0.10% and Jakarta rising just 0.25% today on China concerns. Bangkok has risen by 0.50% as easing omicron concerns boost sentiment in the tourism sector. Manila is 0.25% higher, while Taipei has climbed by 0.45%. Australian markets are all-in on the Wall Street rally, much like Tokyo. The ASX 200 has rallied by 1.45%, with the All Ordinaries leaping higher by 1.65%.

With the Putin/Biden meeting passing without incident, and with European equities ignoring the China property sector concerns, Eurozone equities should continue rallying this afternoon as omicron fears fade. The US Jolts data this evening is unlikely to derail the pent-up bullish momentum on Wall Street, which may have to wait until Friday’s US CPI data.

US Dollar fades on resurgent growth trade.

The US Dollar faded overnight as fading omicron concerns saw hot money flooding back into the global recovery trade. The gains were mostly seen in the EM space, however, where even the Turkish Lira managed to rally last night. In the major currency space, the US Dollar held steady, likely due to the US yield curve modestly steepening overnight.

EUR/USD, GBP/USD and USD/JPY are holding steady at 1.1290,1.3255 and 113.50 in Asia, barely changed for the last 24 hours. The lack of strength versus the US Dollar, even as the greenback fell elsewhere, suggests that all EUR, GBP and Yen remain highly correlated to the Fed taper-trade and that the balance of risks is still tilted towards the downside for all three.

AUD/USD, NZD/USD both rallied overnight as global investor sentiment sharply rebounded.  AUD/USD has risen to 0.7130 and NZD/USD has risen to 0.6790. The 0.7000 and 0.6700 areas remain key support zones for both and although the sun is shining Downunder today, both are highly vulnerable to a swing in sentiment once again, or the reality of tighter US monetary policy next week. The rallies could extend into the end of the week but should be approached with a high degree of caution.

The same can be said about the strength in Asian currencies being seen overnight and today versus the US Dollar. The swing in sentiment back to the global recovery has seen decent strength across the board in the Asia FX space, but once again, is subject to the whims of investor sentiment. It is clear that a lot of fast money rushed into the space overnight, but if anything, Asian currencies, even without China nerves, are more vulnerable than most to the reality of potentially tighter US monetary policy.

Oil surges on lower omicron concerns.

Oil prices rose overnight as omicron concerns continued to fade, and US API Crude Inventories showed a surprise draw of 3.1 million barrels. Assuming momentum remains positive in global markets, a fall in official US Crude Inventories (-1.7 mio exp), will probably be an excuse for oil prices to rally once again. Base metals are also rallying in Asia today, as is natural gas, ostensibly on expectations of much higher infrastructure spending in 2022. If that is so, then oil prices have also found another reason to be bullish in 2022.

Brent crude rose by 2.0% to $75.10 overnight where it remains in Asian trading. WTI leapt 2.45% higher to $71.70 a barrel, where it remains in Asia. Both contracts have recovered above their respective 100-day moving averages with initial resistance at $76.00 and WTI $73.00 respectively. I continue to believe that the lows of last week will be the lows for possibly all of next year.

Gold creeps higher.

The wave of omicron inspired growth optimism sweeping financial markets overnight appears to be tempting a few gold bulls back into the market in search of a bargain. Gold rose 0.30% to $1784.00 an ounce overnight, adding another 0.35% to $1790.00 an ounce in Asia today. Gold could well continue staging a modest recovery this week, as long as sentiment remains positive.

In the bigger picture, gold still looks confined to a $1770.00 to $1800.00 range this week, unable to sustain momentum above or below those levels. The 50,100 and 200-day moving averages (DMAs), clustered between $1790.60 and $1795.00 provides immediate resistance, followed by $1800.00, and then $1810.00. Support lies at $1770.00 and $1760.00.

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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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