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China Trims Loan Prime Rate

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

China appears to be blinking in the face of slowing growth next year, trimming 5 basis points of its 1-year Loan Prime Rate (LPR) to 3.80%, while leaving the 5-year LPR unchanged. Far more loans are based on the 1-year LPR than the 5-year, so the move is a concrete signal that China is moving into supportive monetary policy. That was reinforced by yet another notably weaker than expected Yuan fixing versus the US Dollar this morning.

Over the weekend S&P moved Evergrande into default joining Fitch, and along with Kaisa, this story, and the wider property sector are not going away anytime soon. Additionally, officials in China said that more work was required on monopolistic behaviour by corporate China, and online brokerages are apparently next in their sights. So, the “shared prosperity” policies are also still fully in play as expected. News that China’s Sinovac vaccine appears to be ineffective against the omicron variant means that China’s Covid-zero policy will keep the gates closed to the outside world for all of 2022.

With all of that in mind, it is no real surprise that China is moving quickly to a targeted supportive monetary policy setting. Challenges remain though and the deluge of articles in the press saying that many China equities are at bargain levels is as big a warning sign of trouble ahead as any. They won’t look so cheap in three months’ time if they’re half of what they are today. In this context, it is unsurprising that the rally in Mainland stocks after the LPR cut, ran out of steam within minutes, as they joined the rest of Asia in the red.

The weekend has been a steady stream of negative headlines, with the Grinch who stole Christmas probably thinking he won’t be needed this year. Omicron dominated the headlines with a UK study suggesting it was no less vicious than delta. Exploding case numbers in the UK and Western Europe had governments on the continent tightening entry restrictions and the Netherlands has gone into full lockdown. Similar warnings about impending case numbers were made by US officials as well.

If that wasn’t enough, Democrat Senator Joe Manchin appears to have blindsided the White House and his own Congressional caucus by announcing he won’t support President Biden’s $2 trillion Build Back Better spending programme. That effectively leaves it dead in the water now and the Biden legislative agenda in disarray. Goldman Sachs has already trimmed next years US growth forecast in response.

Of course, a positive headline regarding omicron could hit the wires and temporarily hand-brake turn sentiment once again. With the holidays nearly upon us, liquidity will sharply reduce anyway, exacerbating intra-day moves. Markets this week and next will be for day traders with steely nerves and deep pockets, not for trend followers. As I have repeatedly said, the winner in December is V for Volatility, nothing has changed on that front. Be careful out there.

Omicron and US Politics send Asia stocks lower.

As outlined above, a combination of increasing omicron nerves, particularly in the UK and Europe, and the failure of President Biden’s spending plan to past must with Senator Manchin, has seen Asian equities head directly South in sympathy with Wall Street’s Friday finish. The China LPR cut rally lasted just minutes in Mainland China, highlighting the path of least resistance in Asia today.

On Friday, hawkish comments from Fed officials and omicron nerves sent Wall Street lower. The S&P 500 fall by 1.03%, with the Nasdaq holding its own, edging just 0.07% lower. Value took a bashing on Friday, the Dow Jones tumbling by 1.48% as the schizophrenic tail-chasing of the FOMO-gnomes showed no sign of waning this month. The Build Back Better failure has torpedoed US index futures today. S&P 500 futures are 1.0% lower, Nasdaq futures have plummeted by 1.15%, while Dow futures have fallen by 0.80%.

That sees Japan’s Nikkei 225 tumbling by 1.85% with South Korea’s Kospi lower by 1.50%. Mainland China’s LPR rally lasted minutes before risk aversion internationally, and fears of more government clampdowns domestically sent equities sharply lower. The Shanghai Composite is just 0.40% lower now, but the CSI 300 is down by 1.0%. China’s “national team” may be “stabilising” today. Hong Kong, by contrast, has recovered some early losses, but is still looking fragile, down 1.10% thus far.

Regional markets look no better. Singapore has fallen by 1.05%, complicated by Singtel losing a taxation case in Australia. Taipei has fallen by 0.85% while Kuala Lumpur is 0.40% lower, and Jakarta has retreated by 0.65%. Manila is 1.30%, also suffering a typhoon discount today after the weekend’s landfall, with Bangkok 1.10% in the red. By contrast, Australian markets are holding their own, helped perhaps by a lower Australian Dollar. The ASX 200 is just 0.15% lower, while the All Ordinaries has fallen a relatively modest 0.35%.

Risk aversion lifts the US Dollar.

There’s something to be said for being the least-ugly horse in the glue factory, and the US Dollar seems to be that horse right now. On Friday, risk aversion saw the dollar index soar by 0.65% to 96.67, before edging lower to 96.60 in Asia. Chief losers were the low yielders, notably the Euro and the Yen. The incipient rally in the world’s most popular sentiment indicators, the Canadian, Australian and New Zealand Dollars, was also quickly snuffed out. US treasury yields are falling in Asia today, indicative of haven flows continuing in US bonds, and that alone should limit US Dollar pullbacks. 96.00 and 97.00 should contain the dollar index nicely this week, with a daily close above or below signalling the US Dollars next directional move.

With virus restrictions ramping up in Europe, EUR/USD’s recovery rally ended as soon as it began on Friday, falling 0.70% to 1.1235, before short-covering lifted it to 1.1248 today. The single currency has failed several times above 1.1360 last week, and weekend developments do not give much reason to change that opinion. Rallies are there to be sold with a failure of 1.1200 opening the downside to 1.1000. EUR/USD has multi-decade support at 1.0700.

USD/JPY has support at 113.00 and with the Bank of Japan reiterating the last 30 years of guidance this morning, that is it is not time to start withdrawing stimulus, the topside remains the weakest link. Having failed ahead of 1.3400, and with virus and political woes mounting, Sterling will be challenged to even rally back to 1.3300 now. The 200-day moving average (DMA) at 1.3145 is immediate support.

As global sentiment barometers, the CAD, AUD, and NZD were stretchered of the field on Friday and have eased further today to 1.2896, 0.7120 and 0.6725 respectively. NZD/USD looks like the ugliest duckling, but all three are now back to approaching 2021 lows. Her Majesty’s Commonwealth Dominions need some good omicron news and fast.

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.

Rather surprisingly, Asian currencies remain mostly resolute in the face of a souring sentiment environment and a strong US Dollar. The main exception is the stagflation-ista Indian Rupee which is also likely suffering fast-money outflows into the year-end, having been the major beneficiary of the shared prosperity clampdowns in China. The main reason for Asian FX fortitude lies with the Chinese Yuan I believe. Despite the PBOC setting weaker Yuan fixes of late, the Yuan is refusing to play ball in open markets. Part of this is the China trade surplus being recycled, and not offset by open borders allowing movement. The solidity of the Yuan has acted as a stabilising influence on regional Asian currencies. Whether this continues, is open for debate.

Oil gets an Omicron/Manchin bath.

Omicron nerves are getting more frazzled by the day, especially in Europe and the UK where the spectre of tighter restrictions loom. Additionally, with Senator Manchin torpedoing the Build Back Better bill, US growth will likely take a small haircut next year. Taken in totality, oil markets are pricing in lower consumption into 2022 and Friday’s sell-off has continued with vigour in Asia this morning.

Brent crude fell by 2.20% on Friday, tumbling another 2.65% in Asia today to $71.00 a barrel. WTI has fared even worse, falling 2.25% on Friday and then dropping another 3.65% to $68.10 a barrel in the Asia session. Ominously, both contracts closed below their respective 200-DMAs on Friday.

Although the short-term outlook for oil is being sunk by negative virus and US legislative sentiment, we should not discount OPEC+ from the equation. OPEC+ left their last meeting open precisely to manage this type of situation. If Brent crude continues to head south from here, I wouldn’t discount OPEC+ stepping in to roll back their recent production increases. Given that compliance is over 100%, this would process would be easy to achieve right now.

Brent crude has resistance at $72.50 and then the 200-DMA at $73.20 a barrel. Support notionally appears at $70.20 a barrel followed by $68.00. WTI has resistance at $69.40 and then the 200-DMA at $70.50 a barrel. Support lies at $66.00 a barrel.

Gold lacks momentum either way.

Gold spiked higher on Friday, touching $1814.00 an ounce intraday, before falling back to an unchanged level at $1798.00 an ounce. In Asia, a slightly softer US Dollar and lower US 10-years have seen gold record a modest 0.23% gain to $1802.20 an ounce.

Gold’s attempts to stage a meaningful recovery do not distil confidence, with traders cutting long positions at the very first sign of trouble intra-day. Gold lacks the momentum, one way or another, to sustain a directional move up or down. In all likelihood, gold will remain a forgotten asset class and face another week of choppy range trading.

Gold has formed a rough double top around the $1815.00 region which will present a formidable barrier t$1840.00.  Support lies at $1790.00, followed by $1780.00 an ounce. $1790.00 to $1815.00 could well be the range for the 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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