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Rate Hike Frenzy Continues

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

It was another choppy session overnight in equity and currency markets, followed today, by another cautious Asian session on equity markets, with forex markets marching on the spot. In other words, business as usual for the past few days.

Federal Reserve rate hike nerves continue to grow tauter after Friday’s fall in unemployment and rise in employment cost indexes. From three hikes, I am now hearing for hikes could be possible this year. I would have been laughed out of the room for saying as much a month ago. Actually, I was, it’s funny how quickly sentiment shifts.

Given how cautious the FOMC has been over the past two years, to the point of appearing snail-like, I am struggling to see them hitting the panic button right now. As such I am struggling to pencil in a March hike just as the Fed taper finishes, although I don’t disagree with three hikes across all of 2022. I am definitely disagreeing with four hikes. As such, I do believe we may be approaching “peak Fed-fear” for now. That could see a sharp jump for equities, a retreat by US yields and the US Dollar. The first move the market throws the kitchen sink at is usually the wrong one, always fade January.

Wall Street spent much of the evening on the back foot, especially the interest rate sensitive Nasdaq. It’s sudden rally into positive territory towards the end of the session. The sudden reversal was put down to “bottom-fishing” and I’ll not disagree with that. But I believe the volatility is being spurred by the US monetary policy outlook. Until just how hawkish, or not, the FOMC will be, becomes clearer, we can expect more days with a lot of intra-day noise, but not change by the close, to be ahead.

Data wise, Asia’s calendar today is fairly quiet. Indonesia and Australian Retail Sales for November outperformed, reflecting the recovery in consumer sentiment in both post-delta. The arrival of omicron, particularly in Australia, will likely mean a new year’s hit to consumer demand once again. Apart from that, markets will be awaiting China CPI tomorrow morning and US CPI tomorrow evening as the week’s highlights.

Readers should watch the situation in China as well. Evergrande dodged another bullet yesterday by engineering a domestic bond extension with creditors. But Evergrande, Shimao and other private property developers remain in deep trouble and a slow-moving credit trainwreck. It has the potential to further cut into China’s growth prospects this year. Likewise, the omicron variant keeps popping up in small numbers across China, even as it and Hong Kong tighten restrictions. The only way for Covid-zero policy countries in 2022 is down, whether by wider outbreaks or social restrictions.

Another mixed day for Asian equities.

Wall Street had a schizophrenic session overnight, falling hard for most of the day as markets continued winding themselves up that the Federal Reserve could tighten by as early as March, amid escalating inflation concerns. It is very much a short-term phenomenon though, as US inflation break evens all the way from 1 to 10 years are still pricing in a return to a 2.0% inflation nirvana. Markets rallied sharply for no apparent reason near the end of the session hinting that fast-money flows are dominating at the moment. The S&P 500 finished 0.14% lower even as the Nasdaq unwound over 2.0% intraday losses to finish 0.05% higher. The Dow Jones suffered a late value to growth rotations, falling 0.46%.

In Asia, it is another mixed day once again with the value-centric ASEAN markets outperforming. With Japan returning from holiday today, the Nikkei 225 has played catchup as it falls 0.93%. South Korea’s Kospi by contrast, has eased just 0.15%, with both Japan and South Korean markets ignoring yet another North Korean missile test this morning.

In China, upward momentum quickly faded and reversed as Covid-19 restrictions were tightened once again in some Chinese cities, notably Zhengzhou today. With China showing no signs of opening the stimulus floodgates, swirling virus nerves and property sector concerns, local markets are struggling to maintain any sort of upward momentum. The Shanghai Composite is 0.45% lower, while the CSI 300 is down 0.75%. Hong Kong has gained a temporary respite from the latest Evergrande debt rollover, but the Hang Seng is still only 0.15% higher.

Singapore is 0.45% higher today as it continues to be a defensive play versus Northern Asia with investors still wanting Asia exposure. Taipei, Jakarta and Kuala Lumpur are 0.25% higher, with Manila down 0.15% while Bangkok has climbed 0.45% higher. A weak and nervous New York session, and spiralling omicron cases Australian markets sharply lower today. The All Ordinaries and ASX 200 have tumbled by 0.80%.

Europe should open neutral this morning and I believe markets there will remain more focused on movements in German Bund yields, than noise from Wall Street.

Currency markets nervously range-trade.

The US Dollar rallied sharply overnight as US equities headed south, only to give back most of those gains towards the end of the New York session as the Nasdaq recovered. US Bond markets provided no direction with yields almost unchanged. It all paints a picture of nervous tail-chasing as the dollar index finished 0.22% higher at 95.95, before edging lower to 94.85 in Asia today. In the bigger picture, the dollar index is range trading. I am waiting for 95.50 or 96.50 to break to signal the US Dollar’s next directional move.

EUR/USD and GBP/USD both feel intra-session before steadying at the New York close. GBP/USD continues to erode resistance at 1.3600, signalling a further rally to 1.3800 if broken. EUR/USD’s is marooned at 1.1340 and only a close above 1.1400 will lessen the bearish outlook. Risks are still skewed towards a retest of 1.1200, especially if German Bund yields stop rising. USD/JPY has eased to 115.25 but remains a bid on dips into 115.00 as long as US yields remain at these levels, targeting 118.00 initially.

AUD/USD and NZD/USD are unmoved at 0.7190 and 0.6190 today. Both continue to be bounced around on RORO (risk-on, risk-off) sentiment swings, but ultimately, are range-trading right now. Key levels for AUD/USD are 0.7150 and 0.7300, and 0.6700 and 0.6850 for NZD/USD. USD/CAD is trading sideways at 1.2650 and has support at 1.2600, and resistance at 1.2700.

USD/Asia has run into offers overnight and I suspect some regional central banks may be looking to cap the US Dollar’s rally for now. USD/KRW has fallen to 1195.00, USD/PHP to 51.15, while USD/MYR has eased to 4.1940, and USD/THB to 33.520. USD/CNY and USD/CNH remain just below 6.3800 which is becoming a key pivot point now. The key directional driver this week will be the US CPI data, especially if a high CPI print lifts Fed hiking expectations, pressuring Asian FX.

Oil consolidates.

Oil prices eased slightly overnight in corrective price action consistent with a consolidation of oil’s recent impressive price gains. Brent crude fell by 1.0% to $81.00, rising to $81.30 a barrel in Asia. WTI fell by 0.55% to $78.40, rising slightly to $78.75 in Asian trading.

Despite prices easing again overnight, oil continues to hold onto almost all its gains since the start of December. Omicron has yet to wreak the havoc of the delta variant and may never do so, keeping the global recovery on track, and OPEC+ compliance means that spare production capacity is limited. Both factors will continue supporting oil’s bullish outlook.

In the nearer term, Brent crude has support at $79.60 and the 100-day moving average (DMA) at $78.55 a barrel. A rally through $83.00 signals more gains to $86.00 a barrel.  WTI has support at $78.00 and $77.50 a barrel, with resistance at $80.50 and 82.00 a barrel.

Gold rallies in Asia.

Gold continued range-trading overnight. With US yields moving sideways buyers cautiously push gold higher by 0.30% to $1801.75 an ounce overnight. In Asia, the buying momentum has continued, perhaps after North Korea’s latest missile test today. Gold has risen 0.45% to $1809.50 an ounce.

Gold has resistance here at $1810.00 and $1830.00 an ounce. Support lies at $1785.00, followed by $1780.00 and $1760.00 an ounce. Gold continues to drag in hapless bulls to false rallies, and as such, I believe gold will trade in a $1775.00 to $1815.00 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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