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Bear Market Friday

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

It’s a little hard to know where to start today after a massive risk aversion wave swept markets overnight, so let’s start where I believe the rot really began, the Bank of England policy decision overnight. The Bank of England raised rates by 0.25% to 1.0% in a split decision (three members wanted 0.50%), which was in line with expectations. It’s what they said, and not what they did, that saw Sterling slump by 2.0%. The bombshell was the 2023 growth forecast, which was marked down massively to -0.25% from 1.25% previously.

The BOE basically said there was going to be a recession next year, somewhat at odds with the Federal Reserve’s statements that a soft landing was possible in the US. Overnight BOE officials basically said they were going to concentrate on tackling inflation because there wasn’t much, they could do to offset a slowdown. UK consumers would, unfortunately, have to endure rising costs of living and recession headlock that would make Stone Cold Steve Austin proud. It is of little surprise that the BOE doesn’t intend to start reducing its GBP 875 billion balance sheet yet. The only positive being the BOE will likely hike rates in small increments and let markets themselves do most of the dirty work.

That is somewhat at odds with Fed Chairman Powell’s comments that the Fed would be able to engineer a soft landing for the US economy as it scrambles to get on top of inflation. Given the economics PHD’s were adamant that inflation was “transitory” last year, I’m struggling to fully buy into that, and so it seems, is the street. I argued yesterday that hiking rates by 0.50% a meeting while scaling up quickly to sell $95 billion of bonds and MBS’ a month off their balance sheet wasn’t dovish at all. Also, Mr Powell’s comments had left plenty of wiggle room to hike by 0.75% if needed. 0.50% hikes could be as “transitory” as inflation. Markets seemed to come to that realisation overnight, US 10-year yields climbed back through 3.0% and stayed there, and everyone knows about the bonfire in equity markets.

The Reserve Bank of India blinked on inflation this week as well with their unscheduled rate hike. I actually applaud them for this, there’s no shame in effectively admitting you were incorrect and acting decisively to sort the mess out. Even an ECB member said overnight that a rate hike would be considered at the June meeting. Considering and doing are two different things though, although if EUR/USD is around parity, their thoughts might be focused. However, their rightful get-out-of-jail card is that they are rapidly moving to oversight of a pseudo-wartime economy.

Master fence-sitting vacillators, the Reserve Bank of Australia, though, haven’t made too many friends with their guidance. Hiking rates by 0.25% earlier this week, while still playing the dovishly hawkish card. The RBA Statement of Monetary Policy this morning though, told a rather different message and I’m wondering if they were hoping nobody was watching because it’s Friday. It massively raised trimmed mean inflation forecasts to 4.75% by December 2022, and 3.25% by December 2023, with core-inflation remaining above the 2-3% target band until 2024. It said it was appropriate to start normalising interest rates and that further increases would be needed to restrain inflation. Australian equities would have been battered today after the Wall Street slump overnight anyway but would probably have suffered a similar fate anyway after the RBA SoMP release.

Slowly but surely, the central bank fence-sitters are being dragged into the inflation fight, even if they are fighting dovish rear guard actions. The reality that inflation has returned to the world after 20 years, that the 15 year run of the cost of capital is zero per cent is over, or that we can no longer rely on central banks to reverse flow wealth transfers to homeowners and equity investors and corporate debt Caligula’s via quantitative easing, appears to be dawning on the world. We may well have reached peak globalisation and with China slowing, a process in place pre-covid-zero I might add, and a war in Eastern Europe that will price shock the worlds food and energy value chains, it is little surprise that equity markets might be having second thoughts about valuations, even at these levels.

And still, the week isn’t over, with US Non-Farm Payrolls still to come. Market expectations are for around 400,000 jobs to be added, roughly the same as March, with unemployment edging lower to 3.50%. A sharp divergence, up or down, from the median forecast, should produce a very binary outcome given the schizophrenic nature of the short-term financial markets at the moment. A print north of 500,000 should provoke a faster tightening by the Fed possible recession equals selling equities, bonds, gold, cryptos, DM and EM FX, buy US Dollars reaction. Conversely, a print under 300,000 should see a sigh of relief less Fed tightening rally. Buy equities, bonds, gold, cryptos, DM and EM currencies and sell US Dollars. It’s that sort of market.

Thankfully, most of us still have our weekends free, but if one wants to watch the direction of travel for market sentiment, the crypto-space this weekend might be interesting to watch, especially if we get some headline bombs. Bitcoin held support perfectly ahead of support at $37,400.00 on Wednesday, rising 5.20% in the general post FOMC relief rally. Overnight, it lost around 8.0% and traded as low as $35,600.00, crashing through the triangle support at $37,400.00. Negative developments over the weekend could spur a sell-off to around 32,000.00 settings Monday up for a bad start. If risk sentiment continues plummeting, the chicken bones on the technical charts suggest Bitcoin could be on its way to $28,000.00 and then 20,000.00. HODL on for dear life.

New York slump sends Asian equities lower.

New York equity markets did a massive volte-face overnight and decided that Jerome Powell had been hawkish after all and that higher rates and recession risks were a higher possibility. The Wednesday relief rally vanished into thin air as US stock markets saw every sector in every index get thrashed. The S&P 500 tumbled by 3.55%, the Nasdaq was battered 4.99% lower, while the Dow Jones retreated by 3.12%. In Asia, US futures on all three major indexes are still catching their breath, easing by around 0.10%.

Japan is the only Asian market bucking the trend today, returning from the Golden Week holidays and pricing in a week’s worth of stock market volatility. That has allowed the Nikkei 225 to record an anaemic 0.63% gain today, helped along by a slumping Yen. South Korea’s Kospi returns from a one-day break, but that is no solace as it falls by 1.22%.

The reaffirmation of China’s commitment to its covid-zero policy has helped an already sombre mood in China with the PBOC setting a stronger Yuan fixing, withdrawing pre-holiday liquidity, and with US delisting worries on the agenda once again. The Shanghai Composite has fallen by 2.30%, the CSI 300 has lost 2.60%, with Hong Kong’s Hang Seng tumbling by 3.65%.

In regional markets, Singapore is 1.30% lower, early trading in India sees the Sensex down 1.50%, while Taipei has fallen by 1.60%. Kuala Lumpur is 0.50% lower, Bangkok is down 1.15%, and Manila has fallen by 0.50%. Australian markets have fallen heavily after the Wall Street slump overnight and have been blindsided by a hawkish RBA SoMP release today. The ASX 200 has retreated by 2.35%, and the All Ordinaries have slumped by 2.45%.

European markets gave back all their early gains overnight, moving into the red with Wall Street in afternoon trading. With the weekend arriving, with its ensuing Eastern Europe event risk, there will be little reason for European investors to walk in looking to buy, especially after Asia’s performance today.

US Dollar regains its losses.

The US Dollar reversed higher, unwinding all its post-FOMC losses as risk aversion swept other asset markets and US 10-year yields rose and closed above 3.0%. Support at 102.50 held beautifully on a closing basis, signalling more US Dollar gains ahead. The dollar index rose by 1.01% to 103.55 overnight gaining another 0.11% to 103.66 in Asia. Support at 102.50 remains intact with immediate resistance at a double top just ahead of 104.00. A close above 104.00 will signal rapid gains to 105.00 and in the bigger picture, the technical picture still says a multi-month rally to above 120.00 is possible.

EUR/USD fell by 0.76% to 1.0540 overnight, easing to 1,0530 in Asia. EUR/USD has nearby support at 1.0470 and resistance at 1.0650. Overall, the EUR/USD technical picture remains extremely bearish. It remains well below its multi-decade breakout at 1.0800, and only a weekly close above there would suggest the downtrend is over for now. Rallies above 1.0700 will remain hard to sustain with risks skewed to a resumption lower. A Russian retaliation to the EU oil embargo targeting natural gas exports would see EUR/USD move toward parity very quickly.

Sterling collapsed overnight after the Bank of England hiked rates by 0.25%, but signalled a UK recession next year, marking 2023 growth down to 0.25%. Combined with US Dollar strength, GPP/USD fell by 2.21% to 1.2355, edging up to 1.2360 in Asia. GBP/USD has immediate resistance at 1.2400 and then 1.2635. The technical picture is very negative now and failure of the overnight low at 1.2325 will signal another selloff to 1.2200. In the months ahead, GBP/USD could well test its Brexit and then March 2020 lows.

Japan has returned from holidays today, with USD/JPY rising 0.84% to 131.15 overnight as US 10-year yields shot up through 3.0% once again. Today, USD/JPY has gained 0.30$ to 131.60, with the Yen getting no solace from higher than expected Tokyo inflation data. With the Bank of Japan showing no signs of adjusting its 0.25% JGB yield cap, and US rates continuing to climb as the Fed gets busy fighting inflation, downside pressure on the Yen seems inevitable. A rally by USD/JPY through 132.35 sets the stage for a move to the 135.00 area next week.

Asian currencies, including the offshore Yuan, reversed the previous day’s gains plus interest overnight as the risk aversion wave by equities, and higher US yields, saw investors pile into US Dollars. With China officials affirming their commitment to covid-zero, China’s growth fears are providing another headwind to regional currencies. With more and more central banks globally capitulating on inflation denial and moving to a rate hiking stance, pressure on Asian currencies is set to ramp up in the months ahead.

A stronger Yuan fixing today by the PBOC has had no notable impact on either USD/CNH or USD/CNY. USD/CNH has powered through resistance at 6.7000, on its way to 6.7150 today. USD/CNY has risen to 6.6740. China authorities are showing no signs of concern about the fall of the Yuan, and until they do, Asian regional currencies will remain under pressure from a stronger US Dollar and diverging monetary policies. Despite the RBI rate hike, USD/INR is testing resistance at 76.60 today, USD/MYR has risen 0.60% to 4.3750 and still has 4.4500 written all over it. ​ Meanwhile, it looks like the central bank in South Korea and the Philippines are around on the topside of USD/KRW and USD/PHP. USD/SGD is testing 1.3900 this morning and failure could see the pair move towards 1.4100 next week.

Oil prices trade sideways.

After initially leaping higher after the proposed EU ban on Russian oil was released, oil markets have spent the past two sessions consolidating those gains. Overnight, oil traded in a wide and choppy range, but ultimately, Brent crude finished just 0.80% higher at $110.95, and WTI rose 0.95% to 108.55 a barrel. In Asia, both contracts are almost unchanged in pre-weekend trading.

The news that the US will launch tenders to restock 60 million barrels of oil back into its SPR had no impact on prices overnight. Most likely as the tender exercise won’t start until autumn, an aeon in these markets. Similarly, the OPEC+ announcement that it would proceed with its pre-planned 430,000 bpd production increase had no impact either. That is because, with OPEC+ compliance at over 160%, there is zero chance of certain members filling that quota anywhere as production challenges impact Nigeria and other African members.

That leaves oil at the mercy of the Ukraine/Russia conflict and the EU oil ban supporting the downside, while China slowdown fears, with some OPEC members noting much-reduced demand from the Mainland, acting as a cap on upside price moves. I still believe markets are under-pricing Ukraine/Russia risks, but that story will have to wait for another day it seems.

Brent crude has formed a triple top at $114.75 a barrel, which will be a formidable barrier in the near term. Support lies at $103.50 a barrel and I am sticking to my broader $100.00 to $120.00 a barrel wider range for the months ahead for now. WTI has resistance at $111.50 with support at 100.00 a barrel. Once again, I remain comfortable with a $95.00 to $115.00 a barrel outlook in the medium term.

Gold is actually holding up quite well.

Like Grace Jones, gold is a slave to the rhythm, in this case, the rhythm of the US Dollar. Gold staged quite an impressive rally in early trading yesterday, but as the US Dollar soared, it gave back all those gains to finish 0.23% lower at $1877.00 an ounce, where it remains in moribund Asian trading.

Still, given the moves seen in other asset classes, gold is holding up reasonably well. It is steady despite US 10-year yields moving above 3.0% once again, and it is definitely outperforming Bitcoin right now. That could be coincident with the return of China from holidays, or that there is more than a little risk-hedging based buying quietly going through the market.

Gold looks set to vacillate around its 100-day moving average, today at $1881.65, in a wide but real range of $1850.00 to $1920.00 an ounce, for the time being. Only failure of the break-out triangle apex at $1835.00 swings gold back into bearish territory. That said, gold needs to close above resistance at $1920.00, and preferably $1960.00 an ounce to get the gold bugs excited again. I see more whipsaw trading ranges in the days ahead.

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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Energy

African Energy Chamber to Host Energy Transition Forum at The 2022 Energy Week  

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African Energy Chamber (AEC) says it will host the Energy Transition Forum, in partnership with public and private sector organisations, government representatives, energy stakeholders and investors in October. 

In a statement made available to Investors King AEC stated that “The Energy Transition Forum will address critical issues such as the lack of adequate funding, the diversification of the energy mix, workforce development, and regulatory reforms necessary to enable Africa to expand its energy sector to address energy security, affordability, access, and sustainability matters”.

“With some 600 million people across the continent living in energy poverty and over 900 million without access to clean cooking, Africa needs to exploit all of its vast natural resources in order to make energy poverty history by 2030. In this respect, stakeholders across the continent are opting for an integrated approach to developing energy resources whereby every resource is utilized in order to kickstart economic growth and electrification. With over 125.3 billion barrels of crude oil, 620 trillion cubic feet of gas, and nearly 16.4 billion short tons of coal, the continent is well-positioned to drive economic growth,” it added. 

Executive Chairman of the AEC, NJ Ayuk, said: “With nearly 66 per cent of the world’s population living without electricity access based in Africa, the continent needs to ramp up the production of all its energy resources including gas, oil, wind and solar to ensure energy poverty is history by 2030. The AEC is honored to host the Energy Transition Forum at AEW 2022 where an African narrative of a just and inclusive energy transition that is fit for Africa will be developed. We will go from Cape to Cairo with a well-defined African message. Africans and the energy sector have a rare chance to define the narrative and we must.” 

The Energy Transition Forum is bringing together investors, regulatory authorities and energy market players to discuss the role of gas in Africa’s energy future and energy transition. The challenges of limited investments in gas exploration, production, and infrastructure development in gas-rich countries such as Nigeria, Algeria, Egypt, Niger, and Mozambique will also be addressed.

According to the AEC, climate change continues to impact Africa, leading to an increasing number of African countries such as Nigeria, Namibia, Morocco, South Africa, Uganda, and Kenya introducing policy reforms and initiatives to scale up renewable energy penetration in Africa. 

Investors King gathered that Nigeria has vowed to achieve climate neutrality by 2060 by increasing the share of natural gas and renewables in its energy mix while Namibia aims to make the development of hydrogen central to its energy policy. At the same time, South Africa has introduced its Hydrogen Society Roadmap to fast-forward the development of local content and hydrogen infrastructure whilst Morocco’s Law 13-09 and Egypt’s net metering scheme aims to expand distributed renewables development.

The chamber added that the AEW 2022, under the theme – “Exploring and Investing in Africa’s Energy Future while Driving an Enabling Environment” will feature high-level meetings and panel discussions where government ministers, investors, academia, and energy market stakeholders will discuss how Africa can attract funding to boost exploration, production and infrastructure development to ensure secure supply while remaining a climate champion. 

The African Energy Week is scheduled to take place from 18th – 21st October 2022 in South Africa at Africa’s premier event for the oil and gas sector.

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Siemens Announces Plan to Transit From Fossil to Sustainable Energy

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Technology giant, Siemens Energy has announced a transit from fossil to sustainable energy through a management restructuring and shares evaluation.

This comes after the company launched a voluntary cash tender offer to acquire all outstanding shares in Siemens Gamesa Renewable Energy, or approximately 32.9 percent of Siemens Gamesa’s share capital which it does not already own.

Chairman of the Supervisory Board of Siemens Energy AG, Joe Kaeser, said: “The full integration of SGRE is an important milestone for Siemens Energy’s positioning as a driver of the energy transition from fossil to sustainable energy solutions.

“This will benefit customers, employees, shareholders, and ultimately society. It is critical that the deteriorating situation at SGRE is being stopped as soon as possible, and the value-creating repositioning starts quickly. The Supervisory Board strongly supports the Executive Boards plans for the integration of SGRE”.

According to a statement from the company, starting from October, the former gas and power segment will be divided into three business areas.

The largest of the new business areas, with sales of around 9 billion euros (9.6 billion dollars), is gas services. This included the gas and large steam turbine business and associated services.

It is followed by grid technologies with sales of 5.8 billion euros in the areas of power transmission and energy storage. The smallest business area is the transformation of the industry with sales of 3.9 billion euros.

Here, the focus was on reducing energy consumption and carbon dioxide emissions in industrial processes from hydrogen to automation and industrial steam turbines to compressors. Logistics, IT and procurement divisions were to be bundled together.

The removal of some levels of management at Siemens Energy was expected to bring faster decision-making processes. Where there were previously up to 11 levels in the firm’s hierarchy, there would be a maximum of six in the future. This would eliminate around 30 per cent of the previous management positions, Siemens Energy said. The employees affected would be given other tasks within the business, according to the statement.

Siemens Energy claims that after full integration, the combined group could see cost synergies of up to EUR 300 million within three years, owing to lower supply chain and logistics costs, aligned project execution, joint and integrated R&D efforts, and cost savings through an optimized administrative setup.

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NNPC, Sahara Group To Invest Over N150B in Two Gas Carriers

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Gas Exports Drop as Shell Declares Force Majeure

The Nigerian National Petroleum Company Limited (NNPC) and leading energy conglomerate, Sahara Group have taken delivery of two 23,000 CBM Liquefied Petroleum Gas (LPG) vessels at the Hyundai MIPO Shipyard in Ulsan, South Korea.

The new carriers, the MT BARUMK and MT SAPET, have brought NNPC and Sahara Group’s joint venture investment to over N150 billion ($300 m), bringing the Joint venture’s (JV) gas infrastructure pledge to $1 billion by 2026 closer to reality. MT Sahara Gas and MT Africa Gas were previously part of the fleet. Hyundai MIPO Dockyard, a leading global constructor of mid-sized carriers, produced all four ships.

Recall, Investors King reported that Nigeria earned $868.5 million from gas exports and N13.36 billion from domestic gas sales, according to an examination of the gas revenue statistics and other monthly reports acquired from the Nigerian National Petroleum Company Limited.

Data from the oil firm showed that the Federal Government, through NNPC, garnered the funds from the sale of Natural Gas Liquids/Liquefied Petroleum Gas, as well as Nigeria Liquefied Natural Gas feedstock.

West African Gas Limited (WAGL), a joint venture between NNPC and Oceanbed (a Sahara Group subsidiary), is driving NNPC’s five-year $1 billion investment plan which was announced in 2021, to expedite the decade-long gas and energy transition strategy.

To the joy of visitors, NNPC’s GMD, Mele Kyari, announced that an order for three more new vessels was being finalized, adding, “We have an objective of delivering 10 vessels over the next 10 years. In our energy transformation quest, the NNPC and our partners stand out for their integrity, and our commitment to environmental sustainability is steadfast.”

WAGL and Sahara Group have invested in the JV with MT BARUMK and MT SAPET. WAGL is strengthening its gas fleet and terminal infrastructure, while Sahara Group continues to make significant progress in the development of over 120,000 metric tonnes of storage facilities in 11 African nations, including Nigeria, Senegal, Ghana, Cote d’Ivoire, Tanzania, and Zambia.

“This is another epoch-making achievement for the NNPC and Sahara Group, and we remain firmly committed to delivering more formidable gas projects for the benefit of Nigeria and the entire sub-region,” Kyari said.

Executive Director Sahara Group, Temitope Shonubi stated that “WAGL has successfully operated two mid-sized LPG Carriers MT Africa Gas and MT Sahara Gas in the region in accordance with worldwide standards, transporting over 6 million CBM of LPG across West Africa, with the new vessels, we will be able to accelerate and lead Africa’s energy revolution.”

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