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The Dust Settles

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Egyptian Stock Exchange in Cairo

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

The dust is settling on central bank week, with the Bank of Japan leaving policy rates and its 10-year JGB yield target of 0.0% unchanged. It has announced it will scale back its pandemic bond and commercial buying programmes in 2022 while extending the SME relief programme. USD/JPY is sharply unchanged, unsurprising given that the US/Japan yield differential is its key driver.

The BOJ’s announcement follows in a similar vein to the ECB’s “the lady is not for tapering” tapering not tapering announcement yesterday. Policy rates remained unchanged, but a tapering of the PEPP was announced, although it replaced that by that with, you guessed it, more QE under the old APP scheme, as well as continuing with the TLTRO’s. A very European compromise overall with the ECB acknowledging inflationary pressures, but well and truly hedging its bets. Overall, the QE forever family of the BOJ and ECB made plenty of noise but did very little tinkering under the bonnet. Both the Yen and the Euro are likely to have a tough Q1 versus the US Dollar.

Elsewhere, it was a mixed result. Norway and Britain have hiked modestly, while Australia and Southeast Asia remain cemented to unchanged, inflation be damned. Latin America, Eastern Europe and Russia have seen a series of hikes continuing and this will spare them the worst of the ravages of a stronger US Dollar in H1 2022. Turkey, meanwhile, cut rates under Erdoganomics. President Erdogan also fired a couple of people, and the Turkish Lira looks to have lost another 12% while I have been away this week. I might have to pencil in USD/TRY at 20.000 by early January at this rate. It would be comical if it wasn’t so sad for the people of Turkey.

The FOMC has swung to hawkish, as per the hints from Jerome Powell pre-FOMC. A faster taper and three rate hikes “dot-plotted” into 2022 are the new reality now. I wasn’t the least surprised at the equity and bond market reaction. The “buy everything” story rules the roost and annoying things like reality won’t get in the way of it. The FOMC flip was interpreted by the perpetual mega-bulls as proactively anchoring future inflation expectations, something long-dated bond markets have been pricing in forever, so buy big-tech, I mean growth. How bonds and equities will weather the Fed not buying billions of bonds each month remains to be seen. The story looks to be running out of steam already looking at equity markets overnight. The US yield curve will maintain a healthy attraction if you are a fund manager in QE-forever Europe or Japan, so I am not expecting long-dated yields to explode higher. It does, however, reinforce my thoughts that the US Dollar will be the winner in H1 2022.

I will reiterate once again, however, that V for Volatility, and not directional trends, will continue to be the winner in December. I am also quietly hoping that the US Dollar falls, and equities rise in January as well. The new budget year usually brings a group-think kitchen-sink rush in a particular thematic trade. Unfortunately, bitter experience tells me that the first big move of the year in January is usually the wrong one. So, keep going on the “buy-everything” trade, it’s all part of my cunning plan, and I love it when a plan comes together.

In Asia today, Singapore posted robust non-oil exports. Overall, omicron has not caused the global economy to blink yet it seems, but that appears to be because the world is fed up with lockdowns and restrictions, rather than the virus itself. The news from China continues to concern, however. The bottom-pickers buy recommendations are flowing thick and fast on China property companies. As I said last week, there’s never just one cockroach.

Having vaccinated its population with Sinovac, which doesn’t appear to work against omicron, we can safely assume China won’t be opening borders in 2022. That, along with the still-developing property sector woes will crimp growth. Additionally, the US has added another 34 Chinese entities to its blacklist, so US/China relations are going nowhere in a hurry. Hopefully, the rest of the world can pick up some of the slack in 2022.

I note that the YouTuber’s tool of choice, drone maker DJI, is one of those entities. Are YouTubers about to suffer a Christmas Black Swan? Hit the like and subscribe buttons to see.

A mixed day for Asian equities.

The post-FOMC “inflation expectations are now anchored” rally has petered out. Technology, or growth, took a bath overnight as the Nasdaq plummeted by 2.47%, while the S&P 500 fell 0.87%, with the “value-heavy” Dow Jones easing just 0.09%. In Asia, futures on all three indexes continue to ease, shedding around 0.30%. With multiple expires on equity instruments occurring this evening in the US, some distortion because of that could be in play, as could end of yearbook squaring etc. I expect the choppy price action to continue to spoof fast-money players into the year-end, both in the US and elsewhere.

The Wall Street tech retreat overnight has had a similar effect on Asian markets with similar weightings, with the US addition of another swath of Chinese companies to their entity lists also weighing on sentiment. The Nikkei 225 is 1.55% lower, with markets completely ignoring the Bank of Japan. South Korea’s Kospi has eased by 0.25%. Mainland China is also lower, the Shanghai Composite falling by 0.95%, and the CSI 300 has retreated by 0.70%. Meanwhile, the Hang Seng is 1.25% in the red.

Regionally, Singapore has eased 0.30% lower while Kuala Lumpur has climbed 0.30%. Jakarta has retreated 0.40%, with Taipei easing just 0.15%. Bangkok and Manila have fallen by 0.40%. Australia is bucking the trend with local markets rising. The All Ordinaries has risen 0.25%, while the ASX has rallied by 0.35%.

Softer post-FOMC US Dollar continues.

The US Dollar fell after the FOMC meeting as investors priced in lower longer-term inflation expectations thanks to a pro-active FOMC. Longer-dated yields continue to trade on the softer side, although volatility remains at the shorter end of the curve. There is also likely to be some end of year book-squaring flows that will weigh on the greenback over the next two weeks. It will be interesting to see if we get the usual squeeze on overnight offshore dollar funding rates over the New Year turn this year, which should be greenback supportive next week.

Also weighing on sentiment is the failure of the Biden Build Back Better Bill to make it through the US Congress this year; if it ever does. Technically, that should mean less government borrowing, and less upward pressure on US bond yields and thus, less upward pressure on the US Dollar. Risk sentiment is also steadier in currency versus equity markets right now, particularly6 regarding omicron. Currency markets are pricing in no virus dip from the new variant, most notable in strength in Asian EM and the commonwealths.

The dollar index fell sharply again overnight by 0.34% to 96.00, easing to 95.92 in Asia. Support at 95.50 could well be tested into the year-end, and I would not be surprised to see that continue into January before the FOMC monetary reality hits markets. EUR/USD rose sharply overnight to 1.1340 after a taper, not taper, announcement from the ECB. The rally remains asthmatic though, unable to reclaim 1.1350, and the Euro, along with the Yen, remain highly vulnerable to US Dollar strength and rate differentials going forward.

A 10 basis point hike from the Bank of England overnight has lifted GBP/USD to 1.3330 today with the street pricing in future hikes after yesterday’s surprise. However, until we close above 1.3500, Sterling remains in a technical downtrend and the UK could yet suffer an omicron upset. AUD, CAD and NZD all outperformed overnight thanks to steady risk sentiment, much like Asian FX.

Asian currencies have had a mixed performance. The Yuan continues to strengthen despite weaker fixes from the PBOC. With China borders likely closed for all of 2022, the trade surplus flows will continue underpinning Yuan strength. The SGD, THB, PHP, and IDR have all performed well post-FOMC, most likely because omicron has been discounted as a risk factor by investors. Although the INR and KRW have failed to rally, they are still holding steady. Both currencies are likely to feel the heat of fast-money outflows into the year-end, limiting gains.

Oil searches for equilibrium.

Oil prices have endured another choppy range-trading week, although, by the standards of early December, the volatility remains modest. A continuing recovery ex-China and the threat of OPEC+ moving suddenly, is offset by an easing energy crunch in China and omicron growth fears. That has left oil markets looking for a more settled equilibrium price until the narrative convincingly changes one way or the other.

Brent crude rose 0.40% to $74.60 overnight, easing to $74.30 in Asia. It looks set to trade between its 100 and 200-day moving averages (DMAs) at $76.80 and $73.20 into the year-end. WTI climbed by 0.70% to $71.95 overnight, easing to $71.60 in Asia. It has clearly denoted resistance above $73.00 a barrel, followed by its 100-DMA at $74.00. Its 200-DMA at $70.50, and technical support at $69.50 a barrel, should contain any sell-offs.

Gold’s recovery continues.

Gold spiked higher overnight, continues its post-FOMC recovery. Gold finished 1.25% higher at $1799.00 an ounce, an impressive rally in two days from its post-FOMC lows around $1753.00 an ounce. In Asia, the rally has continued, with gold rising 0.30% to $1805.00 an ounce as local investors put on risk insurance for the weekend.

Gold has now cleared and closed above its 50, 100 and 200-DMAs at $1789.00, $1795.00 and $1786.50, an ostensibly bullish technical move. As ever, though, the rally overnight has more than a small hint of desperate fast-money to it. Gold bulls have been led to water before, only to find a massive Nile crocodile awaiting them in the watering hole.

The jury is still out on whether the rally is sustainable, although is US Dollar weakness continues, combined with year-end risk hedging, there may still be juice left in it. Gold has resistance at $1810.00 and $1820.00 an ounce and that could possibly extend to $1840.00 an ounce. Readers should tread with extreme caution if we see that level before the month-end.

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Markets

A Wild 24 Hours

Stock markets aren’t faring too badly on Thursday, which is arguably surprising considering how eventful the last 24 hours have been.

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Traders Wall Street

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

Stock markets aren’t faring too badly on Thursday, which is arguably surprising considering how eventful the last 24 hours have been.

It’s hard to know where to start on a day like today. While the Fed’s hawkish rate hike is probably the dominant driver in the broader markets, the dangerous nuclear threats from the Kremlin are causing quite a stir and then there’s the small matter of Japan’s first FX intervention in 24 years which has triggered some huge moves in the yen.

Fed resists the urge

The Fed’s decision to hike by 75 basis points, despite the obvious temptation to opt for a full percentage point, was probably sensible given the scale of tightening we’ve already seen this year. It now expects to go further with rates, with markets pricing in another 125 basis points this year and 25 next, although as we’ve seen throughout the year, that will probably change as we get more data. In much the same way that investors got too excited by the July inflation data, it may prove to be the case that the August setback isn’t as bad as feared. In such uncertain times, overreaction is becoming the norm.

Japan finally intervenes as BoJ stands firm

The Bank of Japan is standing firm on its policy stance, despite the widening differential with the US and others. That has put considerable pressure on the currency this year, so much so that the Ministry of Finance completed its first intervention in 24 years as the yen neared 146 against the dollar. The move on the back of that was quite something and it may not be the last. Interestingly, the level the pair reached was only a little shy of that in 1998 when it last intervened, prompting further speculation about whether this is the unofficial line in the sand. That has been denied but the rate check also occurred around 145 so perhaps there is more to it than just volatility. It will be interesting to see how keen traders are to put that to the test in future.

BoE continues with conservative approach

The Bank of England raised rates by 50 basis points today; a move some may view as a little conservative under the circumstances. Of course, that’s an accusation that’s been levelled against the MPC a lot this year as it proceeded with 25 basis point hikes while others were accelerating them. But without the benefit of new economic projections and details of tomorrow’s mini-budget, the decision is that much harder as was evident from the vote split. Perhaps the BoE will regret passing up another opportunity to ramp up the pace of tightening, with inflation now seen peaking just below 11% in October and remaining in double-digits for a few months after. But with the economy potentially already in recession, the Bank – like many others – finds itself between a rock and a hard place.

CBRT keeps cutting despite soaring inflation

One central bank that isn’t concerned about the consequences of its actions is the CBRT. It cut rates by another 100 basis points today despite inflation sitting above 80% which sent the lira to a new record low against the dollar. You have to wonder what it will take for the central bank to accept that its experiment – at the worst possible time – has failed but clearly, we’re not nearly at that point. More pain to come, it seems.

Franc slides as SNB hikes by 75 basis points

The Swiss National Bank hiked rates by 75 basis points today which was at the lower end of expectations. The franc tumbled in the aftermath of the decision, slipping more than 1.5% against the dollar, euro and pound. That’s despite Chair Thomas Jordan hinting at more to come including potentially at an unscheduled meeting, should conditions warrant such action. He also suggested that FX interventions could take place as necessary – which is obviously a hot topic today – while also stressing that the stronger franc has actually aided the fight against inflation.

Oil rises amid more nuclear threats

Oil prices are rising again on Thursday after giving up initial gains a day earlier. Nuclear threats are increasingly becoming the norm from the Kremlin but energy prices remain very sensitive to them. Still, crude isn’t trading too far from the six-month lows and another round of aggressive tightening around the world today won’t be helping, as economic fears continue to weigh on demand prospects. A move below those lows – around $86-88 in Brent – could signal much gloomier economic forecasts and frustrate OPEC+ which has stated it could announce further output cuts, even before the next scheduled meeting.

Choppy trading in gold as the dollar pares gains

Gold has been quite choppy since breaking below $1,680 last week. It has fluctuated largely between here and $1,650 since then and even briefly moved above in the aftermath of the Fed decision. Even today, it slipped back towards the lower end of that range but has since recovered back to the upper end as the dollar has erased gains. Perhaps that’s a sign of a floor appearing, with the market now having priced in a large amount of tightening. I’m not convinced at this stage as the break of $1,680 appeared very significant but time will tell. A pull back in the dollar could certainly facilitate such a recovery in gold.

Bitcoin seeing strong support

Bitcoin is managing small gains after slipping earlier in the day. Once more, it slipped back towards $18,000 where it ran into some support. With the summer lows around $17,500 just a little below again, this is a huge test for bitcoin and cryptos overall. If risk appetite doesn’t improve, that support is at risk of breaking, with further support then potentially appearing around $16,000.

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Energy

D.Light Launches Solar Products in Nigeria to Transform Lives of Low-Income Individuals

D.Light has officially launched into the Nigerian market to transform the lives of low-income individuals

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Renewable Energy - Investors King

D.Light, a pioneering manufacturer and provider of Solar products has officially launched into the Nigerian market to transform the lives of low-income individuals.

This expansion into Nigeria is coming after the company secured a $50 million investment some months ago to better focus on the renewable energy space and support its expansion in Africa.

Speaking at the launch, Co-founder and President Sam Goldman said “The reality is that we are still so far from where we need to be in terms of our population and their needs.

“Hence our target market is the low-income individuals; not just the rural communities which is why the company adopts the ‘pay-as-you-go” model. Access to sustainable energy will not be possible unless we solve the funding problem.

Also speaking about D.light’s mission in Nigeria and across the globe, the chairman of the board, Mrs. Ibukun Awosika stated that the company seeks to transform the lives of a lot of people on earth, as well as bridge the gap to ensure inclusiveness for everyone.

Her words, “Our vision is to change the lives of billions of people on the face of the earth who are crying for equity to have a chance to live a better life.

“We are in Nigeria to transform Africa one community at a time, and this is our driving force she said”.

The co-founder and CEO, Ned Tozun explained that d.light has employed over 6,000 people across Africa.,

He said, “Our target is lower-income individuals. There is a sun in the village and the cities, so when we just say a rural market, it is not.

“The guy who lives in Lagos, but doesn’t have a generator shouldn’t even use a generator if he can have a solar solution. Why? Because of environmental sustainability.

“So, when you think about all the ESG matters, you will encourage more people to use alternate sources of energy rather than polluting sources of energy and that helps everywhere; whether you are in the city or the village. It is about lower income.

“What we’ve done is to think of the entire problem chain. Firstly, innovate the product. Two, how do you deliver it? Deliver it to them at the most reasonable price. Thirdly, make sure it’s affordable for them”.

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Crude Oil

Crude Oil Pulls Back to $91 a Barrel on Monday

Despite the strong U.S. dollar and slowing demand for crude oil, the price of the commodity pulled back on Monday during the New York trading session.

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Crude oil - Investors King

Despite the strong U.S. dollar and slowing demand for crude oil, the price of the commodity pulled back on Monday during the New York trading session.

Brent crude oil, against which Nigerian oil is priced, pulled back from $88 a barrel to $91.52 at 5:31 pm Nigerian time. While the U.S. West Texas Intermediate oil pared losses to $84.75 a barrel, up from $81.65 it traded in the early hours of the day.

The price of the commodity traded lower in the early hours of the day on concerns that central banks will raise interest rates to curb inflationary pressures, a move expected to further hurt demand for crude oil and support the U.S. Dollar’s attractiveness to foreign investors.

“Ideas that continued rate increases will slow world crude demand and keep upward pressure on the U.S. Dollar is triggering long liquidation in both crude and natural gas this morning,” said Dennis Kissler, senior vice president of trading at BOK Financial.

While the pullback may not last given a series of factors impacting the outlook of the commodity, supply remained tight and will continue to dictate prices for the remaining part of the year, especially with the Organization of Petroleum Exporting Countries and allies led by Russia, known as OPEC+ still struggling to up production.

The cartel fell short in August, missing its target by 3.583 million barrels per day (mbpd) following a 2.892 mbpd missed in July.

“The market still has the start of European sanctions on Russian oil hanging over it. As supply is disrupted in early December, the market is unlikely to see any quick response from U.S. producers,” ANZ analysts said.

However, the gradual easing of COVID-19 restrictions in China, the largest importer of the commodity, may help bolster prices.

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