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Omicron Becomes Omigone

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Omicron

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

You would be hard pushed to find a reason not to be in a jubilant mood as an investor as financial markets dished out the happy new year’s overnight, the first trading day of the year. I spent it on a series of almost empty flights on the trek to managed isolation in New Zealand, but for the rest of the world, the New York session finished with plenty of New Year’s goodies. Stocks finished higher, oil moved higher, the US Dollar moved higher, and US treasury yields moved higher. All signs that the US economy is starting the year in continuing recovery mode.

The chief reason behind the return of investor confidence is omicron, a trend really occurring since Christmas and the incessant “Jeff, will we get a Santa Claus rally?” As more data pours in, it seems that yes, the virus variant is much more contagious, but it is not leading to a proportionally larger number of hospital admissions, the opposite in fact. Quid pro quo, it won’t’ stop the global economic recovery, although China will remain locked up with Hong Kong and New Zealand, therefore “buy everything.”

Tesla jumped 13.0% overnight as it delivered more cars than forecast in Q4. The cost of replacing batteries remain its dirty little secret, and is highly ironic in some ways, as a four-wheeled tree hugger that has fewer moving parts than a normally aspirated petrol burner. Google “Finn,” “explosives'”, “battery,” and “Tesla” for one man’s adventure with an “ancient” 2013 Tesla.  Apple also briefly touched a $3 trillion market cap yesterday, mostly because it’s Apple and its cool, but also because the street wanted to see a 3-handle.

One warning sign around equity exuberance though is the US bond market, with US 10-year yields climbing around 13 basis points to 1.635%, its highest, I believe, since late October. With a return of the post-Omicron buy everything trade, will come to the hard realisation that globally, inflation continues and yields globally, have likely seen the bottom. Monetary policy normalisation will be the name of the game for central banks, although it will look more normal in some countries than in others. The US, Russia, Latin America, and the Commonwealth countries will show normalisation to greater and larger extents. Japan and the Eurozone will change the names on the doors but keep monetising their government’s debt the same as ever behind it, while much of Asia, will tolerate stagflation to support growth making them mostly “bold and hold.”

Although the omicron relief trade could continue dominating investor sentiment for much of January, the new budget year always needs a “throw the kitchen sink at it” to get started, the US bond market is telling us not to get too carried away. Bitter experience also tells me that the first big direction trade of the year is usually wrong. Stock markets, in particular, will have to work much harder to make an honest dollar in 2022, as monetary policy settings get moved back from fantasy to reality.

Asian markets though are showing omicron resilience, with China and pan-Asian Manufacturing PMIs over the last couple of days, mostly outperforming for December. Today’s China Caixin Manufacturing PMI rose to 50.9, while Japan’s Jibun Bank PMI reading held steady at 54.3. Yesterday, Singapore GDP also proved resilient, with 2021 GDP finishing 7.20% for the year, completely reversing with interest, the 5.40% contraction of 2020. That, interestingly, is a trend that has been repeated all over the world, it just doesn’t feel like it in our everyday life.

Germany’s Unemployment and Retail Sales kick off Europe’s week, along with French Inflation. The US releases the JOLTS Job Openings and USD ISM Manufacturing PMI. Omicron headlines will likely have a diminishing impact now that the new year has started and with the data seemingly clear about its virulence. If today’s data from Germany and the US show employment and job vacancies holding firm versus omicron, investors should the year in an ebullient mood as omicron becomes omigone

Asia’s cautious equity mood continues.

With most of the region back at work today, Asian markets have refused to blindly piggyback New York’s overnight rally higher, even as the omicron relief rally gathers steam. The Indonesia coal export ban, and the suspension of Evergrande shares yesterday left plenty of two-way risk on the table for Asia, especially where China is concerned.  Overnight, Wall Street powered higher, led by Tesla and Apple. The S&P 500 rose by 0.53%, the Nasdaq rallied by 1.03%, and the Dow Jones climbed by 0.68%. Futures remain unchanged on all three indexes in Asian trading.

Wall Street’s performance has green-lighted gains in Japan today, but Asia is still displaying a mixed performance. The Nikkei 225 is 1.35%, higher even as the Kospi falls by 0.45%. Property and energy nerves are sweeping Chinese markets, as well as a partial virus shut-down of the city of Zhengzhou, booster requirements in Hong Kong and tighter information security requirements for companies wishing to IPO overseas. With that number of headwinds, it is not surprising that China is in the red. The Shanghai Composite is 0.65% lower, the CSI 300 is 1.20% lower, and Hong Kong is down 0.25%.

Singapore has jumped 1,0% higher after impressive GDP data yesterday, with Taiwan also performing well, climbing 0.90%. Jakarta has risen by 0.65%, but Kuala Lumpur has fallen by -.70%, with Manila down 1.10%, while Bangkok has climbed 1.10%, Australian markets have jumped on the Wall Street rally, helped by low hospitalisation rates as omicron sweeps the country. The All Ordinaries are 0.77% higher, with the ASX 200 rising by 0.87%.

With an underlying omicron is omigone theme pervading, today should see a positive start to European trading.

US Dollar rises sharply on higher yields.

The US dollar rallied sharply against the major currencies overnight as US 10-year bond yields surged back above 1.60%. The dollar index of major currencies rose sharply by 0.58% to 96.22 overnight, more than offsetting the previous days falls and leaving major technical support at 95.50 intact once again.

EUR/USD has fallen 0.70% to 1.1300 and has traced out a number of failures ahead of 1.1400 resistance. Failure of support at 1.1270 heralds a retest of 1.1200. GBP/USD has fallen 0.40% to 1.3470, with resistance at 2.3550, last week’s high and the 100-day moving average (DMA). Failure of support at 1.3400 signals the next leg lower. The widening US/Japan rate differential has pushed USD/JPY 40 points higher to 115.75 today, Asia’s biggest FX mover. Assuming that US yields remain elevated, there is nothing on the charts to stop a rally to 118.00 in the coming weeks.

The US Dollar rally stopped the AUD/NZD and CAD rallies in their track, marking an abrupt end to their holiday season rallies. Although equities rallied on diminishing omicron fears, that same situation has allowed US yields to rise sharply, lifting the US Dollar. The US Dollar rally could peter out if sentiment remains strong, but the moves in equities and currencies highlight what a messy year could be ahead, without the unifying theme of the post-vaccine recovery central bank back-stop in play. In the meantime, AUD/USD has fallen to 0.7200 overnight and is in danger of retesting 0.7100. NZD/USD has fallen to 0.67800 and could revisit 0.6700 initially, and USD/CAD moving higher to 1.2800.

With USD/CNY anchored around 6.3700, and China content with monetary settings for now, including daily liquidity via the repo, Asian currencies have remained anchored as well. However, some cracks are starting to appear, with USD/KRW rising to 1194.50 today and USD/MYR jumping higher to 4.1800. If US yields continue to move higher this week, Asian FX weakness could become more widespread, with INR, PHP, and IDR the most vulnerable to widening yield differential perceptions.

Oil moves to the top of its range.

Oil prices edged higher overnight, Brent crude rising 1.25% to $78.90, and WTI climbing 0.85% to $75.95 barrel. Diminishing omicron concerns have supported oil through the holiday period and the spectre of OPEC+ now looms over energy markets. The OPEC+ monthly meeting has rolled around quickly this time, probably because they left the last one open in December as omicron hit, to support prices. The JMMC and full grouping meet this week with the OPEC+ still-open meeting oil floor having done its job without costing a cent. I do not expect any changes or surprises from OPEC+ this week, but its mere threat should keep a floor under prices this week.

Oil has risen again in Asia, helped along by Indonesia banning coal exports over the weekend, having exported so much this year that their own stocks in Java for power generation are now dangerously low. The ban will impact China the most initially, but given their inventory building, should not cause too much of a stir. In the meantime, it has been enough to life oil prices in Asia by around 0.50% to $79.35 for Brent, and $7.35 a barrel on WTI.

Brent crude has support at $77.60 and $77.50 barrel, its 100-day moving average (DMA), followed by 77.30. It has resistance at $80.00, and $82.00 a barrel.  WTI has support at $75.00 and then $74.60, it’s 100-DMA. It has resistance at $77.50 a barrel, and then $79.30.

Gold’s Christmas rally ends abruptly.

Gold showed, once again, how frail bullish sentiment is as recent long positions were stopped out overnight, gold falling 1.50%, or $28.50 an ounce, intraday to close at $1801.50 an ounce. Some short-covering has seen it creep up to 1804.00 an ounce in Asia.

Gold’s attempts to stage a meaningful recovery remain unconvincing, with traders cutting long positions at the very first sign of trouble intra-day. This time it was the US bond market, with yields rising sharply and sending gold into an equally vicious tail-spin, unwinding its entire Christmas rally. This is not the first time we have seen this sort of price action in the last month, with golds most consistent pricing factor being its ability to disappoint bullish investors.

Gold has resistance at $1830.00 and $1840.00 an ounce, although it would be a huge surprise if we saw those levels this week. Support lies at $1790.00, followed by $1780.00 an ounce. $1790.00 to $1820.00 is my call for the range this 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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