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An Action-Packed Few Days



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

Caution is once again evident in equity markets on Wednesday as we await the final Fed rate decision of the year.

Once again we find ourselves in an environment in which investors have perhaps got carried away with some early promising reports on the severity of the omicron variant and have not fully appreciated the downside economic risks facing the global economy.

Central banks have little choice but to start tightening monetary policy in the majority of cases, as inflation continues to rise to uncomfortable levels, become more widespread, and show signs of becoming more permanent. Omicron posing a greater threat and forcing restrictions may delay the inevitable but not for long as policymakers can’t afford to be complacent.

The Fed is not likely to hesitate following its meeting today and is widely expected to accelerate the tapering of its asset purchases, allowing for rate hikes to start in the second quarter. It could be argued that it’s taken longer than it should have but policymakers are finally coming around to the markets way of thinking and rate hikes are not far away.

The retail sales data for November won’t deter the Fed, with consumer spending more broadly remaining strong and the data perhaps signalling that purchases were brought forward as a result of supply concerns. The consumer remains in a strong position going into the new year and today’s report won’t be a cause for concern.

UK inflation hits decade high ahead of BoE meeting

The UK data this week highlights exactly why policymakers are being forced to withdraw stimulus earlier than they’d like and at a time of significant uncertainty around the variant. Not only are inflationary pressures accelerating faster than they anticipated and becoming more widespread, but an ever-tightening labour market is chipping away at the argument that it’s only temporary.

Odds on the Bank of England to raise rates tomorrow have increased following the data this week, although the consensus view remains that it will refrain due to the significant amount of uncertainty that omicron is creating as restrictions are reimposed. By February, the MPC will have much more data to hand and the booster program will have had time to improve the nation’s resistance to the virus. It certainly won’t be easy, but it may be sensible for policymakers to turn a blind eye to decade-high inflation this week.

Oil eases but OPEC+ could strike at any point

Oil prices are continuing to pare post-OPEC+ gains ahead of the Fed meeting. Ongoing reports of omicron-driven restrictions, combined with disappointing data from China which casts doubt over its growth potential are weighing on crude prices as we head into a highly uncertain period for the global economy.

The IEA also reported that the oil market has returned to surplus and that inventories will swell early next year, with first-quarter demand seen dropping by 600,000 barrels per day. It’s hard not to see this as a political victory for Joe Biden and the Democrats ahead of the midterms, given the timing of their coordinated SPR release. He’ll end up getting a lot of credit, despite the bulk of the price decline being omicron-related.

That said, it just takes OPEC+ to follow through on the immediate adjustment threat for prices to rise once again which will keep oil sellers on edge. This may limit the downside for now, although markets do like to eventually test the resolve of these warnings eventually.

Gold vulnerable to hawkish Fed

Gold is relatively flat on the day ahead of the all-important Fed decision. The yellow metal has been range-bound for weeks as every other asset class has whipsawed all over the place, while traders get to grips with the new variant. The Fed will have a huge role to play in how gold trades into year-end, starting today.

The central bank can’t afford to be complacent and isn’t expected to be. A policy mistake on that front could be bullish for gold as investors will be forced to factor in higher inflation which certainly improves to appeal of the yellow metal. If policymakers accelerate tapering, as expected, and price in two or three hikes for next year, we could see gold really test the lows of the last couple of months.

Santa rally for bitcoin?

Bitcoin has also been relatively steady recently, albeit with a slight bearish bias as it struggles to generate any momentum above $50,000. It slipped below $47,000 earlier this week but quickly found its feet again and, despite being above here once more, is off a little today. Perhaps there is an eye on the Fed meeting here as well, with the crypto-crowd hoping for a continuation of inflationary loose policy, which they’ve long believed is bullish for the cryptocurrency.  I guess we’ll soon see if bitcoin can look forward to a Santa rally of its own.


Markets Today – Cautiously Higher, China, Oil, Gold, Bitcoin



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

European stock markets moved cautiously higher on Monday as investors were tempted back in after a turbulent start to the year.

It’s been a relatively quiet start to the week, with the US bank holiday naturally weighing on activity. With that in mind, I don’t think we can read too much into today’s advances, especially as they’re occurring alongside rising yields which doesn’t seem particularly sustainable at a time of such anxiety in the markets.

It will be interesting to see if investors are tempted back in now that earnings season is underway. The emergence of omicron may mean that many companies don’t enjoy the kind of performance that was expected before but that doesn’t mean there won’t be plenty of positives to take away.

Of course, there are areas that will naturally chip away at that enthusiasm. Whether that’s margins being squeezed, prices increased or staffing costs, for example, there’ll be plenty for investors to get their heads around as they contend with sky-high valuations and a tricky economy this year.

PBOC cuts rates despite strong growth in 2021

A mixed bag of data overnight from China, where GDP growth exceeded expectations but retail sales fell short and the unemployment rate ticked higher. While the economy is still performing well after far exceeding its growth targets for 2021, many challenges remain, not least the crackdown on the property market that has led to firms defaulting on coupon payments and being forced into negotiations with bondholders.

This explains the PBOC decision overnight to cut interest rates and further easing is expected to follow as the central bank looks to support the economy through a turbulent period.

Oil rally continues as output continues to fall short

Oil prices are edging higher again at the start of the week as it continues its remarkable run since bottoming in early December. It’s up more than 30% over that time and there still appears to be momentum in the move. Kazakhstan has seen its output return to pre-unrest levels but that’s done little to slow the rally in recent sessions.

Ultimately it comes down to the ability of OPEC+ to deliver the 400,000 barrel per day increase that it’s vowed to do each month. The evidence suggests it’s not that straightforward and the group is missing the targets by a large margin after a period of underinvestment and outages. That should continue to be supportive for oil and increase talk of triple-figure prices.

Can gold break key resistance?

Gold is marginally higher on the day after pulling back again late last week. The yellow metal has repeatedly struggled at $1,833 and it would appear it’s having the same struggles this time around as well. It did finally break through here in November but it didn’t last and it seems the psychological barrier is as firm as ever.

That said, it’s impossible to ignore gold at the moment as it continues to rally despite more and more rate hikes being priced in around the world and yields rising in tandem. There could be an argument that we’re seeing safe haven or inflation hedge moves due to the current environment which could become more clear over the coming weeks.

Another run at $40,000?

Bitcoin is down a little over 2% at the start of the week and continues to look vulnerable having failed to bounce back strongly off the recent lows. It appeared to be gathering some upside momentum at times last week but it quickly ran into resistance just shy of $45,000 where it had previously seen support. All eyes are now on $40,000 and whether we’re going to see another run at that major support level.

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Crude Oil

Oil Extends Gain Above $86 Per Barrel Amid Tight Supply




Brent crude oil extended gains above $86.16 per barrel on Monday as global oil investors are projecting that supply will remain tight despite the surge in Libya crude oil production. The increase, they bet would be offset by restraint from top crude oil producers.

Frantic oil buying, driven by supply outages and signs the Omicron coronavirus variant will not be as disruptive to fuel demand as previously feared, has pushed some crude grades to multi-year highs, suggesting the rally in Brent futures could be sustained for a while longer, traders said.

“The bullish sentiment is continuing as (producer group) OPEC+ is not providing enough supply to meet strong global demand,” said Fujitomi Securities analyst Toshitaka Tazawa.

The Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, together known as OPEC+, are gradually relaxing output cuts implemented when demand collapsed in 2020.

But many smaller producers cannot raise supply and others have been wary of pumping too much oil in case of renewed COVID-19 setbacks.

Meanwhile, Libya’s total oil output is back to 1.2 million barrels per day (bpd), according to National Oil Corp. Libyan output was about 900,000 bpd last week owing to a blockade of western oilfields.

“Libya’s oil production had dropped to a good 700,000 bpd at the start of the year, which had played its part in the price rise,” said Commerzbank analyst Carsten Fritsch.

Concerns over supply constraints outweighed the news of China’s possible oil release from reserves, said Fujitomi’s Tazawa.

Sources told Reuters that China plans to release oil reserves around the Lunar New Year holidays between Jan. 31 and Feb. 6 as part of a plan coordinated by the United States to reduce global prices.

Saudi Energy Minister Prince Abdulaziz bin Salman said on Monday that it is the prerogative of the U.S. government whether to release supply from strategic petroleum reserves.

Festering geopolitical threats to supply are also supporting bullish sentiment, analysts said.

U.S. officials voiced fears on Friday that Russia was preparing to attack Ukraine if diplomacy failed. Russia, which has amassed 100,000 troops on Ukraine’s border, released pictures of its forces on the move.

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




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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