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Markets Today – Central Banks, UK Boosters, Lira Lows, Apple, Oil, Gold, Bitcoin

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

What a week we have in store and equity markets are off to another strong start as investors brush aside downside economic risks this winter.

Once again we’re seeing the resilience of investors in action. This week we have a plethora of central bank decisions, the highlight of which will obviously be the Fed on Wednesday, as well as a wide array of economic data and, let’s not forget, more information on the Omicron variant and the risks it poses in the coming months.

The bulk of this week’s event risk is loaded into the second half of the week but there’ll clearly be no shortage of action before then as we’re already seeing. It may just be that there’s heightened focus on Omicron and the measures leaders are taking to get to grips with it and prevent a more severe crisis in the coming weeks.

UK getting nervous about Omicron as over 30s encouraged to get booster

We’re already seeing the effect the new variant is having here in the UK, with more restrictions being imposed and the government urging people 30 and over to get the booster. Suddenly it’s a scramble to get boosted, so much so that we’re seeing long queues outside vaccinations centres and, as I’ve experienced the last 24 hours, a booking website completely incapable of handling the surge in numbers.

The economy was already facing numerous headwinds this winter and the clear concern coming from the top is only going to filter down and be a drag at an important time for many businesses. With the Prime Minister refusing to rule out further curbs before Christmas and his credibility at a low following recent leaks, who knows what the coming weeks will hold. The hope is that the late dash for the booster will be enough to save Christmas this year.

All considered it’s hardly surprising that market pricing for a rate hike from the BoE this week has plunged. The MPC was slaughtered last month for overwhelmingly voting against raising rates after misleading investors in the weeks leading up to the meeting. This time investors are clearly focused more on the rational argument for hiking, which in the current environment, there isn’t much of. February makes much more sense.

Lira plunges against ahead of CBRT on Thursday

I obviously understand why the Fed is the headline event this week but it’s the CBRT I’m most looking forward to. The central bank and government are signing from the same hymn sheet but living on a different planet from the rest of us. Inflation is above 21% and yet interest rates are expected to fall by another 100 basis points on Thursday to 14%, totaling a cut of 500 basis points since September.

A fourth intervention in the currency markets after the dollar rallied above 14 against the lira at the start of the week on the back of the S&P outlook downgrade will prove to be about as successful as the rest. The lines aren’t even blurred between government and central bank anymore, as evident in remarks by Finance Minister Nureddin Nebati on Sunday, when he claimed: “we won’t raise the interest rate”. That makes for an interesting rate decision on Thursday, but unfortunately further pain for Turkish businesses and households for many months to come.

Apple ticking all the boxes

Apple is closing in on a $3 trillion market cap in what would be another landmark moment for the company, coming a little over a year after hitting $2 trillion and three years after $1 trillion. It really is an incredible achievement and just begs the question, how long until it hits $4 trillion? They have a fantastic product lineup and so much to offer in the coming years. It’s had its doubters at times over the years, particularly on the innovation side, but it appears to be ticking all the boxes at the moment.

Oil stabilizes as we await more Omicron data

Oil prices appear to have stabilized over the last week after roaring back from their Omicron-induced losses. OPEC+ put a floor under the price for now as the group warned of sudden adjustments in output but ultimately, the price will only hold up as long as investors continue to believe Omicron poses no substantial threat. Leaders appear more concerned than investors at the moment which is always a worry, but with oil prices 15% off their October highs, there does appear to be some caution priced in at these levels.

Gold range-bound ahead of the Fed

Gold is seeing some support for a second day but remains below $1,800 and within the range it’s traded broadly within over the last few weeks. If it can break above $1,810 it may pick up some momentum to the upside but I struggle to see that ahead of the Fed decision on Wednesday. Then it’s a question of what gold bulls will want to see from the meeting. No taper acceleration? Pushback against rate hikes? Transitory being brought out of retirement? I’m not sure we’ll see any of these.

Bitcoin struggling once more

Bitcoin is back below $50,000 and really struggling to find any bullish momentum when the price does rebound. An improvement in risk appetite hasn’t even helped the cryptocurrency which could be facing a move back towards the levels seen during the flash crash earlier this month if $47,000 falls. Perhaps central banks collectively paring back tightening expectations will get the crypto community excited again this week.

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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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