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Omicron Fears Continue Receding

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Omicron variant

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

Omicron fears continued to fade overnight, in North America at least, propelling the S&P 500 and Dow Jones to record closes, lifting oil prices, and weighing on the US Dollar. Even gold managed to recoup most of its intra-day losses as optimistic long positions were once again culled.

The upbeat mood was helped along by better than expected US Retail Sales and larger than expected drops in US crude oil and gasoline inventories, suggesting that despite the current virus wave, the US domestic economy continues to power forward. A dearth of heavy-duty data releases globally this week continues to leave markets driven by sentiment and by sentiment, I mean omicron headlines.

China has also shrugged of tightening virus measures in the city of Xi’an, and a Bloomberg report indicating that Evergrande Property has once again missed two offshore bond payments on Tuesday, totalling around USD 220 million. A Ministry of Finance official said that China would guide interest rates lower for 2022 government bond issuance, which despite sounding a little bit illegal potentially in other countries, is a reason for cheer in China stocks, which are performing well today. The controversial IPO of SenseTime in Hong Kong today, up 25.0%, is also lifting the animal spirits of local investors.

Today’s only significant data release in Asia, South Korean Industrial Production, rose to a 17-month high of 5.10% MoM. However, it was overshadowed by a virus-induced slump of 1.90% MoM by Retail Sales in November, with the Kospi gently lower today.

Tonights US Initial Jobless Claims will be of passing interest, a fall below 200,000 for the weekly number likely reinforcing the bullish sentiment dominating markets. Far more important will be China’s official Manufacturing and Non-Manufacturing PMIs for December released tomorrow morning. We should get a very binary outcome, up or down, on a decent deviation from the forecast 50.50 and 52.5 respectively. Otherwise, I expect the modestly bullish risk appetite washing through asset classes to continue as holiday season markets continue.

Asian equities are mixed.

Wall Street rose modestly overnight as receding omicron fears continued attracting buyers out of cover and back into equities, with the S&P 500 and Dow Jones having record closes. The S&P 500 rose by 0.14%, the Nasdaq eased by just 0.10%, and the Dow Jones rose by 0.25%. Most price action needs to be taken with a grain of salt at this time of the year, but the omicron rear-view mirror trade appears to be favouring value over growth right now. In Asia, some long-covering has appeared, pushing futures on all three slightly lower by 0.05%.

Asia is having a mixed day in contrast, and it appears that some pre-New-Years-Eve book squaring is weighing on some markets. Japan’s Nikkei 225 has fallen by 0.35%, with South Korea’s Kospi down by 0.40%. Mainland China is enjoying a firm session, helped by dovish MoF comments earlier this morning around bond yields. The Shanghai Composite is 0.80% higher, while the CSI 300 has jumped by 1.05%. Hong Kong is just 0.30% higher, a successful SenseTime IPO balanced by a slump in Evergrande stock after more missed offshore bond payments.

Singapore has eased by 0.30%, while Taipei and Jakarta are just 0.05% lower, and Kuala Lumpur is down 0.10%. Bangkok is 0.05% higher with Manila closed for a public holiday. Similarly, Australian markets are also subdued ahead of New Year, the ASC 200 and All Ordinaries edging 0.10% lower. Asia, ex-China, looks to have closed their books for the year.

US Dollar fall resumes.

After trading sideways for a few sessions, receding omicron concerns amongst investors saw the US Dollar resume its gentle retreat overnight as traders moved out of defensive positioning. The dollar index fell by 0.28% to 95.89, before rising to 95.95 in listless Asian trading. Support at 95.85 remains marginally intact, and a daily close below 95.80 should signal further losses to 95.50.

Major currencies continue to build modest gains with EUR/USD rising to 1.1345, and GBP/USD jumping to 1.3485 as omicron hospitalisations remain controllable, even as infection numbers surge. USD/JPY has added 20 points to recapture 115.00 as defensive long-yen positioning continues to be unwound., AUD/USD has risen slightly to 0.7250, NZD/USD to 0.6845, and USD/CAD has eased to 1.2790 as investor risk appetite continues to improve.

Asian currencies have performed well this week, backstopped by a stubbornly firm Chinese Yuan, despite weaker PBOC fixings. One would have to say that the renewed risk appetite from international investors is being most strongly expressed in regional Asian currencies at the moment.

Oil edges higher.

Oil prices edged higher overnight thanks to larger than expected falls in US crude and gasoline inventories and receding virus nerves. Brent crude tested $80.00 a barrel intraday but finished the session 0.25% higher at $79.35. Crude inventories pushed WTI 0.75% higher to $76.60 a barrel. Asia has been modestly positive, lifting Brent and WTI 0.30% higher to $79.50 and $76.80 a barrel, respectively.

Brent crude has support at $78.15 and then $77.30 a barrel, its 100-day moving average (DMA). It has resistance at $80.00 a barrel, where it failed once again overnight.  WTI has support at $75.40 and then $74.45, it’s 100-DMA. It has resistance at $77.50 a barrel, near to its overnight high.

Gold flops and recovers.

Gold showed, once again, how frail bullish sentiment is as recent long positions were stopped out overnight, gold falling $26 an ounce intraday to $1789.50 before a weaker US Dollar led to an incipient recovery to $1801.00 in Asia today.

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 now, gold could potentially move higher throughout this week, but I still doubt it could sustain those gains. Traders should stay nimble.

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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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