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US Equity Rally Pauses

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

It was a mostly sideways session overnight in New York, the US Dollar remained steady, oil held near recent highs, and the equity rally paused for breath. The dearth of data releases globally continued although the second-tier data from the US continued to be positive. The Case-Shiller House Price Index and US House Price Index releases rose as expected, while the Redbook activity report rose to 21.40% for December YoY, and the Richmond Fed Manufacturing Index and Dallas Fed Services Index both beat expectations.

Although omicron cases in the US and Europe amongst others, continue to surge, it has yet to make its presence felt negatively in economic data. Europe’s restrictions will have a tail impact but, for now, markets are overwhelmingly pricing in the latest variant as a milder incarnation, despite its easier contractibility. With market activity much reduced for the holiday season, investors continue to tentatively price in a global recovery hitting a minor bump, and not a pothole.

The Chinese government continues to make soothing comments about lending to the real economy to support more balanced and inclusive growth next year, with the property sector woes taking a backseat, for now. Market’s have quickly put the complete lockdown of the city of Xi’an behind them. The narrative will only swing back to negative if the virus escapes the city boundaries and initiates outbreaks in other Chinese cities.

Asia’s calendar remains thin this week, in line with markets elsewhere. Singapore’s Import and Export Prices, and PPI, will be of passing interest, if only because inflationary pressures continue to rise in the City-state. Higher than forecast YoY numbers could cause some reassessment of the Monetary Authority of Singapore’s tightening path, although local equities seem as immune to that reality as they do everywhere else.

The most interesting data tonight will likely be US official crude oil inventories, where omicrons rampage could show up in higher oil derivative stockpiles. That may give the oil recovery some food for thought but is very unlikely to derail it. The fast-money tail-chasers inhabiting the oil market recently look like they are finally taking a holiday break instead of drinking too much coffee.

South Korean Industrial Production tomorrow and South Korean Inflation and official China PMIs on Friday will be the focus of regional traders still at their desks. Otherwise, we remain at the mercy of headline-driven volatility, a theme that has dominated December.

The major mover overnight was Bitcoin, which fell by 6.70% to $47,560 of fiat US currency. I can’t see any news behind the move, and I suspect year-end book squaring into thin market conditions exaggerated the range. There is nothing to suggest that Bitcoin’s recent $45,000 to $52,000 is under threat. Only a daily close above or below those levels’ hints that a new directional move is in play. Although I consider the crypto space as a whole to be a giant case of the Emperor’s New Clothes, and the home moronic speculative banality, I do acknowledge it is a tradeable if not investable, “asset class,” and perhaps more fun than the casino. In that respect, only a weekly close below $40,000.00 will have me concerned that another major downside correction is in play.

Asian equities follow New York split

Wall Street had a mixed night overnight, even as US yields tracked lower. Investors in big-tech trimmed long positions and it looked for all money like a defensive rotation from growth into value as the Nasdaq fell, while the Dow Jones gained. The S&P 500 was almost unchanged, rising just 0.10%. The Nasdaq fell by 0.56%, while the Dow Jones rose by 0.26%. In Asia, that trend has continued with Dow futures rising another 0.27%, with the S&P unchanged and Nasdaq futures falling 0.15%.

That has led to a North Asia ASEAN split today, with more tech-centric North Asia markets retreating, while ASEAN has moved higher. The Nikkei 225 and South Korean Kospi have dropped by 0.85%. Mainland China is under pressure, the Shanghai Composite easing 0.55% while the CSI 300 has retreated 1.0% lower. Hong Kong has followed them South, falling 0.65%.

Singapore has risen by 0.30% today, with Taipei jumping 0.80% higher, bucking the tech trend lower. Jakarta and Kuala Lumpur are unchanged with, Bangkok rallying by 0.15%, while Manila is 0.40% lower. Australian markets are full of optimism today, led by, you guessed it, banks, and resources. The ASX 200 and All Ordinaries have rallied by 1.15%.

US Dollar trades sideways.

Currency markets are in holiday mode and will likely remain so until the middle of next week. The dollar index is barely changed at 96.15, marking four days of sideways trading. The US Dollar still looks vulnerable to positive headlines on the virus front. Support remains between 95.80 and 95.85, with resistance at 96.30 initially.

Major currencies continue to tread water with EUR/USD at 1.1310, GBP/USD at 1.3435, USD/JPY at 114.80, AUD/USD at 0.7225, NZD/USD at 0.6810 and USD/CAD at 1.2820. Of that group, USD/JPY and GBP/USD look most interesting. USD/JPY is grinding higher on rate differentials and a higher oil price, while Sterling looks to be catching an omicron tailwind as cases remain high, but hospitalisations low.

Asian currencies have performed well this week, backstopped by a firm Chinese Yuan. The Malaysian Ringgit, Indonesian Rupee and Indonesian Rupiah have all performed very well as receding omicron fears sees hot money move quietly back into the 2022 global recovery story.

Oil consolidates recent gains.

Oil prices consolidated their Monday’s gains overnight in a sideways session for the second day running. US AP Crude Inventories fell by just over 3 million barrels, supporting both contracts. Brent crude was unchanged at $78.95 a barrel, while WTI edged slightly higher to $76.10. Some long-covering is evident in Asia today in an otherwise nondescript session. Brent and WTI have moved 20 cents lower to $78.75 and $75.90 a barrel.

Brent crude has support at $77.20 a barrel, its 100-day moving average (DMA). It has resistance at $80.00 a barrel, where it failed overnight. WTI has support at $75.00 and then $74.35, it’s 100-DMA. It has resistance at $77.00 a barrel, near to its overnight high.

Gold rally falters.

Gold probed the topside overnight, eroding resistance at $1815.00 but failing ahead of $1820.00 an ounce. It then quickly changed course, finishing the day 0.33% lower at $1806.60 an ounce. The price action is very much like gold lately, the perpetual bulls pushing prices higher, but then running for the exit at the first sign of trouble, or a loss of momentum.

Gold’s attempts to stage a meaningful recovery remain unconvincing, with traders cutting long positions at the very first sign of trouble intra-day.It cleared the double top around the $1815.00 region but stalled just above at $1820.00.  It faces resistance also at $1840.00 an ounce.  Support lies at $1790.00, followed by $1780.00 an ounce. $1790.00 to $1815.00 continues to be my call for the range for the week.

With the US Dollar looking more vulnerable to positive virus sentiment at the moment, gold could potentially move higher throughout this week, but I still doubt it could sustain those gains.

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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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