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Jumpin’ Vlad Flash Cuts His Gas Gas Gas

The Ukraine/Russia conflict has suffered some headline fatigue of late, and more than a little complacency by the world’s financial markets, as China’s slowdown fears grabbed centre-stage.

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

The Ukraine/Russia conflict has suffered some headline fatigue of late, and more than a little complacency by the world’s financial markets, as China’s slowdown fears grabbed centre-stage. With a nod to the Rolling Stones in the title of today’s newsletter, the economic ripples of the Ukraine conflict are back on the front pages. Equity markets overnight took fright at ominous comments from Russian officials around nuclear war, but it was Russia’s announcement that Poland and Bulgaria would have their gas supplies cut off from Russia from today, unless they paid for them in Roubles, that jarred market nerves.

It seems that the weaponisation of its energy supplies by Russia has now begun, possibly driven by previously reluctant members of NATO getting on board and supplying heavy weapons to Ukraine. Germany has already stated it could painfully manage if Russia banned energy exports. Poland has said it’s gas storage is at 80%, but Bulgaria gets near 90% of its gas supplies from Russia, and its only oil refinery is owned by a Russian company. I am assuming though, that the European Union now has contingencies in place to assist immediately affected members. If this is just the start of further energy escalation by Russia, the European Union faces challenging times ahead.

That likely explains why oil prices only reversed their losses from Monday and didn’t shoot into space. Oil prices seem destined to range in a wide by choppy range. Russia concerns rightly supporting dips, while China’s slowdown fears cap gains with lots of noise in between.

Russia’s natural gas aside, markets swung back into full risk-aversion mode overnight. US yields fell, suggesting that investors were heading for shelter in that space. (bond prices move inversely to yields) The US Dollar soared, with the Euro and the risk-sentiment-correlated Australasian currencies coming in for negative attention. EUR/USD has now well and truly broken its 1985 trendline support and if Russia decides to play its gas supply card, a move below parity is on the cards.

The Nasdaq led the equity market wipe-out overnight, with its near 4.0% retreat led by Tesla, which fell by 12.20%. You could look at it two ways. Either Elon Musk sold his latest stock awards to generate the $21 billion in cash for his part of the Twitter buyout, or the street is starting to wonder how he could possibly effectively run Tesla, Starlink, Space-X and Twitter simultaneously. I do as well.

The mood will remain dark thanks to after-market Q1 results announcements by Microsoft and Alphabet. Microsoft produced an on-expectation set of results, led by the Azure Cloud division, and maintained an upbeat macroeconomic outlook. Alphabet, unfortunately, missed forecasts, thanks to a deceleration in YouTube revenues. That doesn’t really surprise me, like Meta’s platforms, advertising is now becoming intrusive in both its volume and quality, detracting from the core product. I, for one, am sick of being asked if I have pre-diabetes or having an old guy telling me I need to buy off-market cryptos for immediate capital gains.

Alphabet’s results will increase nerves about the outlook for the tech heavyweights that are announcing this week. That sector has been the last man standing in the Nasdaq index. Meta announces tonight and if my recent user experience with them is anything to go by, there is downside risk again in their results. Expect more hitting of the dislike button by US equities tonight if Meta disappoints once again. It will fall to Apple and Amazon to stop the rot.

The overnight data dump from the US was solid, if not spectacular. Durable Goods rose in March, recovering from their Ukraine slump in February. The house price indexes booked another month of gains in February, while CB Consumer Confidence remained high at 107.30 and the Richmond Fed Manufacturing Index for April was steady at 107.30. Perhaps the only blot was slowing New Home Sales, which rose by 763,000 in March versus 835,000 in February as rising mortgage rates bite. Certainly, there was nothing to suggest an impending slowdown or jarred nerves around impending Fed hikes.

Today in Asia, South Korean Consumer Confidence held steady at 103.80 and China Industrial Products YTD (YOY) rose by a much higher than expected 8.50%. that has steadied the ship in Mainland China equity markets today as the rest of Asia heads to the exit door. The big surprise has been Australian Inflation, which hit 5.10% YOY for Q1 today, well above the 4.60% rise expected.

Although the Reserve Bank of Australia is a long way from the inflation debacle that the Reserve Bank of New Zealand has created, it will ramp up the pressure on the RBA to shift its ultra-dovish stance sooner. The Australian Dollar has rallied temporarily today on that assumption. Interestingly, the RBNZ Deputy Governor is making a speech today, in Ireland on macroprudential policy implementation. At least the assembled central bankers will learn what not to do.

The rest of the day’s data calendar is strictly second-tier across the globe today. With the Fed in a pre-meeting blackout, markets will probably remain in risk aversion mode, fearful of expanding energy weaponisation by Russia, and more Covid-zero policy-related bad news from China. In all likelihood, Meta’s results this evening will define the US session in a binary outcome. Poor results will probably have a greater impact on equities in the current environment.

China is the one bright spot for Asian equities today.

The buy-the-dip rally yesterday quickly ran out of steam in New York as Tesla stock plummeted and Russia announced an impending ban on natural gas exports to Poland and Bulgaria. Although US data held steady, the miss in earnings by Alphabet has darkened the move and the overnight price action across asset classes suggested a full-on move to defensive positioning. US equities had a terrible day at the office. The S&P 500 fell by 2.80%, the Nasdaq tumbled b 3.93%, and the Dow Jones retreated by 2.38%. The S&P has fallen through its February lows, while the Nasdaq is in danger of testing its 4,100 February low. Only the Dow, with its value orientation, is holding steady, albeit a 1-year sideways range.

In Asia, the giant falls overnight in US markets have proved irresistible to bargain hunters once again. US futures have edged higher. S&P futures have added 0.45%, Nasdaq futures 0.50%, and Dow futures 0.70%. The price action looks optimistically corrective in nature.

In Asia, China is the one bright spot as markets have risen in response to a slow day for Covid-zero headlines, and better than expected Industrial Profits data. In a rerun of yesterday, the Shanghai Composite has risen by 0.40% with the narrower Shanghai 50 gaining 1.25%. The CSI 300 has rallied by 1.13%, but tellingly, Hong Kong’s Hang Seng has only edged 0.10% higher. Yesterday we saw similar gains by Mainland indexes, only for rallies to evaporate later in the day. I suspect, like yesterday, there is a little “national team” help around today. Nothing has materially changed with China’s situation and the rallies today should be treated with caution.

Elsewhere, it is a sea of red in Asia with a split once again, between the more Nasdaq-correlated North Asia heavyweights, and the more value-orientated markets of ASEAN. Japan’s Nikkei 225 has slumped by 1.45%, with South Korea’s Kospi tumbling by 1.15%, and Taipei retreating by 1.70%. Singapore is down just 0.10%, with Kuala Lumpur 0.30% lower, and Jakarta easing by 0.60%. Manila has fallen heavily by 1.75%, and Bangkok is just 0.05% lower.

Australian markets are also lower today, but not as badly as I feared after much higher than expected inflation data. Australia’s heavy resource base makes it a potential winner the more aggressive Russia becomes in the international energy and resource market. That seems to be limiting the losses in the lucky country which usually has a high US correlation. The ASX 200 is down 0.72%, while the All Ordinaries have fallen by 0.70%.

Nothing about Russia’s move to band natural gas exports to Poland and Bulgaria today can be construed as bullish for European equities. Nor can the threat of widening Russian retaliation in this space be either. As such, I expect European markets to open sharply lower today and stay that way, regardless of developments elsewhere.

US markets will be dictated by whether the FOMO gnomes of Wall Street are in bargain-hunting mode, or not. Meta’s quarterly results are likely to have the final say on whether the overnight meltdown pauses for breath or doesn’t pass go on its way directly to jail.

US Dollar soars on risk-aversion.

The US Dollar soared overnight as risk aversion swept financial markets, with the Euro having a particularly painful session as Russian risks accelerated. The dollar index smashed through 102.00 on its way to a 0.56% gain to 102.30, where it remains in Asia today. At these levels, the dollar index is potentially testing the upper boundary of a 5-year triangle. A weekly close above 103.00 resistance this week will have me pondering making a call for the 120.00 region in the months ahead. In the short-term, support lies at 101.00 followed by 99.75.

EUR/USD had a torrid session as the Russia energy risks started coming true. EUR/USD fell by 0.70% to 1.0635, before booking a tiny gain back to 1.0645 in Asia. The 1985 support line is now well and truly broken and a move back below parity in the coming months is suggested. Widening Russian energy weaponisation will hasten that outlook. In the near-term, the technical picture, potential energy sanctions on Russia, and a widening US/Europe interest rate differential, suggest EUR/USD will now test support at 1.0600 en route to 1.0300. Resistance is at 1.0760 and 1.0810.

GBP/USD fell through 1.2700 and 1.2760 overnight, on its way to a 1.30% loss to 1.2575, where it remains in Asia. Sterling is guilty by association with the Euro, with Brexit nerves around Northern Ireland, a too dovish Bank of England, and a soaring cost of living all weighing on the currency. That said, the relative strength index (RSI) is now at extreme oversold levels, meaning some sharp relief rallies are now possible. The technical picture is now signalling further losses to 1.2200 and potentially sub-1.2000 in the weeks ahead. GBP/USD would need to reclaim 1.3050 to change the bearish outlook.

Falling US yields and perhaps some haven flows into Yen itself eased the upward pressure once again on USD/JPY overnight. USD/JPY fell 0.70% to 127.25 overnight, drifting to 127.65 in Asia. USD/JPY risks remain heavily skewed higher, thanks to a hawkish Fed. Support remains at 127.00 and 126.00, with resistance at 129.50 and 130.00.

AUD/USD reclaimed most of its overnight losses today after higher than expected inflation data increased the pressure on the RBA to start tightening policy sooner. AUD/USD has rallied by 0;66% to 0.7170 today having closed below support at 0.7150 overnight. ​ AUD/USD could spend the next few sessions consolidating between 0.7150 and 0.7250 but remains vulnerable to another US equity or Russia/China risk-aversion move. NZD/USD slumped another 0.90% to 0.6370 overnight and ominously, has not coat-tailed the AUD higher today. Short-term rallies back to 0.6700 are possible, but it remains on track to test 0.6525 and potentially, 0.6400 this week.

USD/CNH and USD/CNY traded sideways overnight and are almost unchanged at 6.5850 and 6.5540 today. The PBOC set another neutral USD/CNY fixing this morning, possibly signalling that the Yuan selloff has gone far enough for now. Additionally, stronger Industrial Profits data and a quiet Covid-zero news ticker today appear to be lending the Yuan temporary support. The plethora of China risks are now complicated by Russia’s energy militancy, and thus USD/Yuan risk remains heavily weighted to the upside, even if some short-term pullbacks are possible thanks to very overbought short-term technicals.

USD/KRW and USD/THB rose sharply overnight, but some stability in the Yuan, and lower US yields, is allowing Asia currencies to pause for breath today. Whether the relief is temporary or not is up for conjecture. A Russia-derived spike in energy prices again will certainly increase downward pressure on regional currencies. USD/MYR finally steadied and USD/INR mysteriously unwound yesterday’s palm-oil-ban gains. Like the Philippines, it appears that Bank Indonesia is back capping US Dollar gains, as is the Bank of Korea apparently.

Oil trades sideways in Asia.

Oil markets reversed their losses from Monday overnight, rising after Russia announced natural gas export bans on Poland and Bulgaria from today unless they paid in Roubles. Brent crude rose by 2.85% to $105.40, and WTI rallied by 3.10% to 101.60 a barrel. In Asia both contracts booked one per cent gains in early trading but have since given all of those back to be almost unchanged from the New York close.

The rally, spurred by rising China Industrial Profits, which alleviated slowdown fears, has evaporated as quickly as it began, suggesting that Asia markets remain much more concerned about China’s slowdown than events in eastern Europe. That complacency could come back to bite them. If Russia makes little progress in its latest offensive, the Kremlin could lash out and widen those export bans if Europe doesn’t accept the Rouble blackmail. Once Germany is included, we can assume energy prices will be heading higher once again. For now, risk aversion is capping oil’s gains.

With that in mind, I am sticking to my guns and continue to expect that Brent will remain in a choppy $100.00 to $120.00 range, with WTI in a $95.00 to $115.00 range.

Gold ponders its next move.

Gold managed to gain some risk aversion support overnight, shrugging of a much stronger US Dollar to post a modest 0.40% gain to $1904.50 an ounce. In Asia, upward momentum has quickly subsided, gold reversing 0.35% lower to $1898.50 an ounce.

The question now is, has gold’s correction lower run its course, and are we approaching levels to buy, given an escalation in geopolitical risks once again? The price action suggests not as gold rallied only modestly overnight and has quickly given back those gains today. It remains anchored at the bottom of this week’s range. Gold has support at $1891.50 and $1880.00 an ounce. Failure of $1880.00 signals a capitulation trade targeting triangle support at $1835.00, and then $1800.00 an ounce. On the topside, gold has resistance at $1915.00, $1940.00, $1980.00, and $2000.00 an ounce.

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Crude Oil

Oil Gains Slightly on Thursday as China Eases COVID-19 Measures

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Oil prices rebound on Thursday following China’s announcement that it was easing COVID-19 measures imposed to curb the spread of the virus.

China on Wednesday announced the most sweeping changes to its resolute anti-COVID regime since the pandemic began, while at least 20 oil tankers faced delays in crossing to the Mediterranean from Russia’s Black Sea ports.

Brent crude rose 27 cents, or 0.4%, to $77.44 a barrel, while U.S. West Texas Intermediate (WTI) crude gained 49 cents, or 0.7%, to $72.50.

“Today, we do see some green price action,” said Naeem Aslam, analyst at Avatrade. “Prices are oversold due to the intense sell-off for the past few days. However, the price action still doesn’t show a strong bullish bias.”

The 14-day relative strength index for Brent was below 30 on Thursday according to Eikon data, a level taken by technical analysts as indicating an asset is oversold and could be poised for a rebound.

Both Brent and U.S. crude hit 2022 lows on Wednesday, unwinding all the gains made after Russia’s invasion of Ukraine exacerbated the worst global energy supply crisis in decades and sent oil close to its all-time high of $147.

Western officials were in talks with Turkish counterparts to resolve the tanker queues, a British Treasury official said on Wednesday, after the G7 and European Union rolled out new the restrictions on Dec. 5 aimed at Russian oil exports.

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Markets

Wind Out of the Sails

UK consumer spending remains subdued, with BRC reporting a 4.1% annual increase

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

Stock markets are making small losses on Tuesday, while US futures are relatively unchanged ahead of the open.

The recovery rally has lost momentum in recent sessions which is understandable after that jobs report. That’s not to say optimism can’t and won’t return but that wages component was a huge body blow. Investors are a little winded and it may just take a little time to get their breath back.

The PPI data on Friday could offer a helping hand on that front but even then, it will be hard to ease the concern Fed policymakers will undoubtedly have about the pace of wage growth, consumer resilience and the still large savings buffer. None of this aligns with a swift and relatively pain-free return to 2% inflation.

RBA maintains flexible approach

The key takeaway from the RBA meeting today was flexibility. There is no pre-set path and while policymakers expect to need to raise rates at upcoming meetings, the data will dictate if so and by how much. That doesn’t help investors gage exactly what we can expect from the central bank but in such uncertain times, that makes a lot of sense. And you can see that reflected in the interest rate probabilities for the first quarter of next year. As it stands, no change or 25 basis points in February is a coin toss, while 3.35% in March (25bps above the current rate) is seen as being 50% likely with 25bps either side around 25% each. Clearly the RBAs communication strategy is going to plan.

Households feeling the squeeze this festive season

It will come as a surprise to no one that UK consumer spending remains subdued, with BRC reporting a 4.1% annual increase. With inflation running at 11.1%, spending is falling well behind, as is the case with wages, which suggests people are buying less and being more selective with what they do this festive season. Again, what can you expect when the economy is probably already in recession amid a terrible cost-of-living crisis that hurts those worst off most. The road to recovery for the UK is going to be long and painful, it seems.

The only guarantee for oil markets

It’s been a volatile start to the week in oil markets, continuing in much the same way we ended last, with traders still working through the announcements from the G7 and OPEC+, as well as the latest Covid moves from China. In many way, none of the above improve visibility in the crude oil space; they arguably actually make the outlook more uncertain.

But the intial response to the above has seemingly been negative for crude prices, with the loosening of Chinese Covid curbs not enough to offset the $60 price cap and unchanged OPEC+ decision. The cap is probably viewed as a business as usual for now, with Russia reportedly selling below these levels already and improving its ability to get around the sanctions. Which means output remains broadly steady.

The move from OPEC+ was probably driven by the lack of visibility on China and Russia but as the group has warned in the past, should prices fall too far and the market become imbalanced, it won’t wait until the next scheduled meeting to respond. It seems that the only thing guaranteed in the oil market for now is volatility.

Gold paring losses

The dollar recovered strongly on Monday as trade became increasingly risk-averse, hitting gold and forcing it back below $1,800 where it briefly traded above. It’s attempting to pare those losses today, up around half a percent on the day but it may struggle in the short-term. It’s been an incredible recovery until now but Friday was a massive setback. We now have to wait for PPI on Friday for some good news, with Fed policymakers in the blackout period ahead of the final meeting of the year, next week.

Stabilising?

The risk-reversal trade on Monday took the wind out of bitcoins sails, not that it would have taken much in the circumstances. It’s trading back around $17,000 where it has spent most of the last week, which the community will probably be relieved about. Anticipating what’s going to come next for cryptos feels incredibly difficult and dependent on the ongoing fallout from FTX. To reiterate what I’ve said recently, silence is bliss.

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Markets

A Nervy Start to the Week

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

What could have been a really positive week for equity markets is off to a much more nervy start, with stocks in Europe treading water and US futures slightly lower.

The inflation report on Friday was red hot once more, extinguishing any hope that investors could hop aboard the Fed pivot train and ride stock markets higher into year-end. Perhaps it’s not quite so dramatic but it was a real setback, something we should be used to by now.

The wages component was the killer blow. That was not just a beat, it obliterated expectations and came in double the forecasted number. It may be a blip, but it’s a huge one and it will almost certainly take more than one much cooler report in January to comfort those that still fear inflation becoming entrenched.

That’s ultimately where we’re now up to in the inflation story. Many accept that base effects and lower energy prices will drive the headline inflation figure much lower next year, among other things, while a slower economy – maybe recession – will eventually hit demand and contribute to the decline. But what the Fed fears now is fighting entrenched inflation and these wage numbers won’t make for comfortable reading.

An economic victory for China amid gloomy PMIs

Chinese stocks were the clear outperformer overnight as authorities continued to work towards a softening of the country’s zero-Covid stance with the end goal seemingly being the end of it altogether. It’s thought that it will be downgraded to category B management as early as next month with officials claiming it’s less threatening than previous strains, a huge move away from the rhetoric and approach of the last few years.

This came as the Caixin services PMI slipped to 46.7, much lower than anticipated. That said, I’m not sure anyone will be shocked given the record Covid surge, but the more targeted – albeit seemingly confused – approach being taken has ensured less disruption, as evidenced by how much better the PMI has performed compared with earlier this year.

And it’s not just China that’s seeing surveys underperforming and, in many cases, putting in sub-50 readings. Europe is either already in recession or heading for it and the surveys highlight just how pessimistic firms are despite the winter getting off to a warmer start.

Japan is among the few recording a growth reading, although having slipped from 53.2 in October to 50.3 last month, you have to wonder for how long. Input prices are punishing firms, with some now raising prices in order to pass those higher costs on. That won’t help activity or convince the BoJ to declare victory, as higher energy and food costs are also hitting domestic demand. The one major outlier is India where the services PMI accelerated higher to 56.4 buoyed by domestic and external demand. An impressive feat in this global environment.

Oil higher as China looks to ease Covid restrictions

Oil prices are higher on Monday, rallying 2%, after the G7 imposed a $60 price cap on Russian oil and OPEC+ announced no new output cuts. Both bring a degree of uncertainty, with the details of the cap and the impact on Russian sales still unclear.

From the OPEC+ perspective, it can’t be easy to make reliable forecasts against that backdrop and the constantly evolving Covid situation in China, which currently looks far more promising from a demand perspective. The decision to leave output unchanged was probably the right one for now and there’s nothing to stop the group from coming together again before the next scheduled meeting should the situation warrant it.

A major setback

It goes without saying that the jobs report on Friday was a big setback for gold as it leaves huge uncertainty around where the terminal rate will land. Of course, we should be used to bumps in the road by now, having experienced many already this year. There’s no reason why the path back to 2% should be any smoother.

But the yellow metal did recover those jobs report losses and even hit a new four-month high today. Perhaps the big difference now is momentum. It’s run into strong resistance around those August highs around $1,810 and simply doesn’t have the momentum it would have had the report been cooler. We’re now more than four weeks into the recovery rally in gold and a corrective move of some kind may be on the cards.

Silence is bliss

Bitcoin continues to enjoy a mild relief rally and has even moved above $17,000 to trade at its highest level in almost a month. It’s probably too early to celebrate yet though as these are very cautious gains that could be quickly and easily wiped out by more negative headlines related to FTX. Silence is currently bliss for the crypto community.

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