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Santa Eluding Markets This year

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

A feast of negative headlines over the weekend is dampening sentiment at the start of the week as equity markets slide between one and two percent in Europe.

The US isn’t looking any better, with the open seen piling further misery on Friday’s performance. It’s hard to read too much into the moves at the moment, despite the clear dip in sentiment over the last couple of days.

Is this really omicron nerves as Europe imposes further domestic and travel restrictions, even embrace lockdown in the case of the Netherlands? Or a negative response to the hawkish shift from central banks around the world which was expected before and initially received a positive response?

Or is it disappointment at President Biden’s Build Back Better plan collapsing in a heap after Senator Joe Manchin withdrew his support for the $2 trillion package? That will certainly shave a little off growth next year and is a hammer blow to the Democrats ahead of the midterms.

Or is it more simple than that? The festive season is upon us; perhaps traders are turning the laptops off, traveling, spending time with family, and binging on treats and the usual array of Christmas films. The Santa rally may elude us this year after an impressive pre-Christmas rebound following the initial omicron shock. Given the amount of downside risks going into the new year, it’s hardly surprising to see investors adopting a more cautious approach as they log off for the holidays.

Erdogan doubles down again on interest rates sending lira down another 7%

Turkish President Erdogan continues to pile further misery on the lira and those that rely on it as he remained committed to cutting interest rates over the weekend, despite the currency plunging to new lows on an almost daily basis. His total disregard for the pain it’s going to cause is astonishing and he’s clearly in no mood to even assess the damage, let alone pull back. Nor is he even pretending there’s a line between fiscal and monetary policy anymore which is really disturbing.

Oil suffers ahead of difficult Q1 for the global economy

Oil prices are getting pummelled again as sentiment turns south and countries ponder deepening restrictions and lockdowns. There’s certainly a feel here in the UK that households and businesses are preparing for more severe measures and that the government is desperately trying to hold out until after the holidays. Perhaps that feeling is being shared elsewhere and January is shaping up to be a global reset.

None of this bodes well for crude demand in the first quarter of the year. It’s just a question of whether OPEC+ will hold out until the January meeting to pull the trigger or pile further pain on the global economy this year. A pile of coal under the tree for households battling high inflation, higher interest rates, and soaring energy costs. Throw in record pump prices and the growth outlook next year is severely hampered.

Can gold break the range?

Gold’s resurgence last week was short-lived and to be fair, it appeared to be built on pretty shaky foundations. Central banks raising rates to rein in inflation and the dollar attracting haven flows is hardly the recipe for a sustainable rally in the yellow metal. Still, risk aversion at the end of the year could offer some support if it is maintained.

It’s interesting that last week’s heavy calendar didn’t really see gold propel out of its recent ranges. There was some upside momentum but as we saw Friday, there’s still plenty of uncertainty around the upper end of the range and more than enough sellers interested at those levels. Perhaps we’ll see further consolidation into the end of the year unless we can see it build on last week’s momentum and break $1,820.

Another volatile year but 2022 likely to be another exciting year for bitcoin

Bitcoin is continuing to edge lower as we approach the end of another impressive year for the cryptocurrency space. It’s made enormous strides over the course of 2021 which will leave many excited about what 2022 holds. But with speculation still playing an enormous role in the bitcoin space, it’s no surprise to see it more than 50% up this year and simultaneously more than 30% off its highs. With the recent trajectory, you wouldn’t be surprised to see both of those numbers end the year a little closer together.

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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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