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Let the Festivities Begin

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First Day Of Trading Of The Lunar New Year at The Hong Kong Stock Exchange (HKEx)

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

Stock markets are ending the week on a downbeat note after central banks around the world largely adopted a more hawkish stance in recent days.

Only time will tell whether investors support the moves from central banks this week as much as they initially appeared to. More than a decade of ultra-low interest rates has been kind to investors and the path that many central banks have embarked on makes life a little harder for them, but not nearly as hard as high inflation.

It can be tough to take the pulse of the markets in times of such volatility and uncertainty, as we’re currently seeing. But I’m inclined to look at the way they’ve traded in the run-up to, and immediate aftermath of, the central bank announcements and deduce that investors are comfortable with the decisions that have been taken and view them as being in the long term interest of the bull market. What’s happened since may have more to do with the period we’re now heading into as investors prepare for the festivities.

A modest tightening is far more preferable than the risk of soaring inflation and a more aggressive monetary response further down the line. Central banks can’t afford to take those risks, not at a time when their economies are performing well, labour markets are tight and inflation is becoming more ingrained and widespread. The time has clearly come to address the inflation elephant in the room.

Take the case of the BoE. Many were surprised that the MPC raised rates on Thursday but if they hadn’t as a result of omicron uncertainty, they almost certainly would have in February and then multiple times next year. So while it could be argued that waiting for more data would have been prudent, it ultimately makes very little difference.

Especially with a move as insignificant as 15 basis points, one of the smallest hikes ever and the smallest since the late 80s. The message was important though; the tightening cycle has started and policymakers will turn a blind eye to inflation no more. A sentiment shared by many central banks around the world as we head into 2022.

Boost in UK retail sales unlikely to last

UK retail sales capped off an interesting week of data for the country that also saw restrictions tightened, virus numbers hit records and interest rates rose. The November rise was larger than expected while October was revised higher in a sign of consumers bringing forward their Christmas purchases in anticipation of stock shortages, perhaps even fear of more restrictions. The surge is not expected to last and recent developments could hinder retail sales further in the new year.

Oil consolidates as we await more data on omicron

Oil prices are down around 2% on Friday, dragged lower as trading becomes more risk-averse at the end of the week. It had rebounded well over the last couple of days but has run into resistance at the upper end of its recent range, around $73. We could see further consolidation around $70 in the coming sessions as we learn more about omicron, what restrictions it will bring, and whether OPEC+ will react.

The group has put a floor under the price for now, after announcing that adjustments could come at any time depending on the incoming data, but that will only hold so long if restrictions weigh on demand.

Relief for gold despite central banks embarking on tightening cycles

Gold is taking the news that central banks are tightening monetary policy and tackling inflation head-on very well. You would be forgiven for thinking this would be a negative development for the yellow metal and, in the longer term, I expect it will be.

But it’s also a development that was almost entirely expected and priced in. So we may be seeing some profit-taking on the pre-meeting moves which is pulling yields a little lower and weighing on the dollar. This should be a short-term relief move, although that may depend on what the omicron data tells us in the coming weeks. It’s spreading like wildfire here in the UK and other countries appear to having a very similar experience.

A strange end to the year for bitcoin

I keep falling into the trap of trying to link moves in bitcoin to events that are triggering responses across financial markets and it’s becoming quite clear how pointless that was. The cryptocurrency has been consolidating for weeks since its flash crash and everything that’s happened in that time that has been the catalyst for volatility across various asset classes has done little to pique the interest of this particular corner of the market. It feels strange to be talking about massive volatility in the markets and not including bitcoin. But then it’s been another strange year and I’m sure 2022 will be no different.

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Markets

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

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outlook

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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Crude Oil

Brent Crude Oil Trading at $84.53 a Barrel

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Crude Oil - Investors King

The increase in Omicron variant cases has cast doubt on demand for crude oil in the near-term and trimmed gains recorded earlier in the week on Thursday during the Asian trading session.

The brent crude oil, against which Nigerian oil is priced, pulled back from $85.16 per barrel on Wednesday to $84.53 per barrel at 9:50 am Nigerian time on Thursday.

The uncertainty surrounding the highly contagious Omicron variant and its impact on fuel demand has shown by the U.S Energy Information Administration on Wednesday dragged on the global crude oil outlook.

The data released on Wednesday revealed that gasoline stockpiles rose by 8 million barrels last week, way higher than the 2.4 million barrel increase projected by experts. Suggesting that demand for the commodity is gradually waning in response to omicron.

“Gasoline demand was weaker-than-expected and still below pre-pandemic levels, and if this becomes a trend, oil won’t be able to continue to push higher,” OANDA analyst Edward Moya stated.

However, in a note to Investors King, Craig Erlam, a senior market analyst, UK & EMEA, OANDA, expected the impact of omicron to be short-lived. Libya’s inability to ramp up production after outage and OPEC plus continuous failure to meet production target are expected to support crude oil in the main term even with Kazakhstan expected to get back to pre-disruption levels in a few days.

“With omicron seen being less of a drag on growth and demand than feared. Combine this with short supply and there may be some room to run in the rally as restrictions are removed. Of course, Covid brings unpredictability and zero-covid policies of China and some others bring plenty of downside risk for prices,” he said.

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Commodities

Soybean Oil Prices to Rise by 4% in 2022 Over Increase in Demand for Biofuels

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Soybean Oil

In 2022, global soybean oil prices, driven by an increase in the demand for biofuels, have been projected to rise by about 4 percent, to $1,425 per tonne; a market report from IndexBox reveals.

According to the IndexBox report, the growing demand for biofuels, especially in Asia, will increase the prices of soybean oil globally.

The platform put it that in 2021, the average annual soybean oil price rose by 65 percent year-on-year to $1,385 per tonne, from $838 per tonne. Strong demand and high freight rates in China, which is the world’s second-largest importer of soybean oil, resulted in the most rapid price growth of the commodity in the third quarter (Q3) of the same year. Weather-related disruptions to production in South America also caused soybean oil prices to rise fast.

In 2020, IndexBox estimates that soybean oil purchases in the foreign markets rose by 7.5% to 13 million tonnes, increasing for the second year in a row after three years of decline. In value terms, soybean oil imports have grown notably to $10.3 billion.

India was the highest importing country with a purchase volume of around 3.7 million tonnes, accounting for 28% of global supplies. China ranked second with a purchase volume of 963 thousand tonnes.  Algeria (670 thousand tonnes) and Bangladesh (666 thousand tonnes) were ranked as the third and fourth major importing country.

The four countries altogether accounted for about 17% of total soybean oil imports. Coming behind as the fifth-highest importer is Morocco (547 thousand tonnes), followed by Mauritania (537 thousand tonnes), Peru (521 thousand tonnes), South Korea (390 thousand tonnes), Colombia (378 thousand tonnes), Venezuela (373 thousand tonnes), Egypt (243 thousand tonnes), Poland (229 thousand tonnes) and Nepal (215 thousand tonnes).

India in value terms ($3 billion) being the largest market for soybean oil imports in the world, accounted for 29 percent of global imports. The second position in the ranking was taken by China ($725 million) with a 7 percent share. North African country, Algeria came third with a share of 4.6 percent of the total value.

Top Soybean oil exporters

In 2020, Argentina was the major exporter of soybean oil (5.3 million tonnes), constituting 42% of total exports. The United States (1238 thousand tonnes), Brazil (1110 thousand tonnes), Paraguay (631 thousand tonnes), the Netherlands (615 thousand tonnes) and Russia (611 thousand tonnes) follow, altogether accounting for 33% of global supplies. Meanwhile, Spain (387 thousand tonnes), Bolivia (377 thousand tonnes), Ukraine (302 thousand tonnes), Turkey (208 thousand tonnes) and Germany (192 thousand tonnes) had relatively small shares in the total volume.

In value terms, Argentina remains the largest supplier of soybean oil in the world ($ 3.7 billion), which accounts for 39% of global exports. The United States ($ 979 million), with a share of 10% of the total supply is ranked second. Both countries are followed by Brazil with an 8% share.

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