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The “R” Word

The “R” word is being used more and more as recessionary winds start blowing more loudly through economic data and the price actions across the asset class spectrum.

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

The “R” word is being used more and more as recessionary winds start blowing more loudly through economic data and the price actions across the asset class spectrum. On Friday, US manufacturing and industrial production data were soft. That follows weaker US retail spending and housing market data previously. Even oil prices cracked under the weight of recession noise. A classic case perhaps, of high prices being the best cure for high prices?

US yields eased lower in response as well, but not by much. The US Dollar remained firm while US equities had a mixed session. The Dow Jones edged lower while the S&P 500 edged higher, but the Nasdaq jumped by over 1.40%. One could argue that a recession in the US means less tightening, a boon for the interest-rate-sensitive Nasdaq. But as I mentioned last week, there were a galactic amount of options expiries on US equity markets on Friday, so take the price action with a grain of salt. A US holiday today will keep volumes thin.

In China today, iron ore, steel rebar and coal futures have all plummeted as local markets join the US ones in pricing in a slowdown. Chest thumping over the weekend by China around the Taiwan Strait, and legislation allowing Russian-style “special operations” won’t be giving regional Asia much comfort either.

You can choose from an extensive drop-down menu of recessionary drivers. Rising inflation and interest rates in the developed world, the Ukraine-Russia war and ensuing commodity disruption, the covid-19 slowdown in China, and the list goes on. It is clear that sentiment is turning though and given the appalling track record of forecasting these past couple of years, the more central banks say, “soft landing,” the more nervous markets become, and rightly so.

Unfortunately, with all your monetary bullets fired and stagflation at your doorstep, as a central bank you don’t have any pleasant choices. Do nothing, and inflation continues to rise, but growth may not; expect protests on the streets. Hike rates to dampen inflation but with growth already slowing or falling, you know how the story ends. The best I see it is that the recession, when it arrives, is short and sharp and, at least in much of the developed world, it’s starting from a relatively high base.

Asset price volatility is an inevitable consequence as the street tries to price in the next direction of travel. Currency markets are saying the Fed won’t blink on rates. Bond markets are saying that to, although is US 1-years drop back below 3.0%, then perhaps they are wavering. Gold doesn’t seem to care. Oil is cracking like a refining spread, but has yet to reach my longer-term support lines, although we’re not far away. It would be ironic if falling energy prices from a recession torpedoed the funding for Vladimir Putin’s war machine.

Nowhere has been more frantic than the crypto space which endured some emotional volatility over the weekend as expected. Bitcoin fell 15-odd per cent on Saturday as support at $20,000.00 cracked, finishing 7.50% lower for the day at $18,955.00. It rallied yesterday by 8.40% to $20,550.00, only to fall 3.50% this morning after another Solend Labs, which allows you to lend or borrow in something called Solana, granted itself emergency powers to take over a (very) large account to manage its exposure. The more the merde hits the fan in the DeFi space, the less decentralised it seems to be becoming as reality bites. I can’t help but think of George Orwell’s Animal Farm. “All animals are created equal, but some are more equal than others.”

That said, the price action on Saturday looked very much like forced margin stop-outs triggered by the failure of the $20,000.00 support level. Yesterday’s price action suggests that as well. I don’t rule out a rally by cryptos this week as enough lambs appear to have been silenced for now. Equity markets in the real world may also have had the herd thinned enough temporarily.

Leaving central bank-induced speculative exuberance-based digital Ponzi schemes behind, for now, the week is somewhat thin on tier one data. China has left its One and Five-year Loan Prime Rates unchanged today and may have added fire to the local market commodity price falls. Markets appear disappointed that no stimulus crumbs were thrown to the markets, even a 5 or 10 basis point trim of the 5-year LPR. I still contend that China’s biggest short-term threat is more covid-19 lockdowns. I’ll say it till I’m blue in the face, China is unlikely to be “one and done,” and the virus only has to get lucky once under covid-zero.

Elsewhere in the Asia-Pacific, tomorrow’s Reserve Bank Of Australia Minutes is released tomorrow, with markets picking over the carcass searching for any clues on the direction of RBA interest rate policy. How high, and for how long, will rates move higher? Friday’s Japan Inflation Rate will have more interest than any time over the last 20 years I expect as the Bank of Japan defied the word and maintained super-easy monetary policy last Friday.

We received a swath of PMI data from across the globe on Thursday. The US calendar sees New Home Sales tomorrow and Existing Home Sales on Friday. Both have downside risks and may add to the recessionary noise. The week’s highlight is likely to be testimony from Fed Chairman Jerome Powell on Wednesday and Thursday. But we also have a plethora of Fed speakers throughout the week as well. With a dearth of tier-1 data, Fed speakers are likely to drive intraday volatility, although it wouldn’t surprise me that after last week’s bonfire, risk assets in general consolidated higher this week. Either way, we can expect plenty of intraday noise, but ultimately directionless volatility this week in my opinion.

Asian equities start the week lower.

Asian markets are off to a weak start as the recessionary fears sweeping the US on Friday, continue to weigh on sentiment in Asia. For once Asian markets are not moving in lockstep with the US ones, and I put that down to the distortions of options expiries on Wall Street on Friday. The S&P 500 closed up just 0.22% on Friday, but the Nasdaq leapt 1.43% higher, while the Dow Jones edged 0.16% lower after soft US Manufacturing and Industrial Production data. In Asia, US futures are rising, although with it being a US holiday today, I am not placing too much emphasis on the price action. S&P futures are 0.17% higher, Nasdaq futures are 0.50% higher, while Dow futures are unchanged.

Another outperformer is China, which is well and truly bucking the trend in Asia today. Mainland China markets have reversed sharply higher after China left its 1 and 5-year LPRs unchanged, a counterintuitive move. News that Shenzhen has apparently locked some neighbourhoods in virus curbs should also be a headwind. Nevertheless, the Shanghai Composite is now unchanged, but the CSI 300 has risen by 0.65%, with Hong Kong’s Hang Seng edging 0.15% higher. The price action looks to be “buy at worst” and “smoothing.”

Over in Japan, the Nikkei 225 has fallen by 1.0%, with South Korea’s Kospi slumping by 2.20% today. Taipei is 1.10%, with Singapore remaining unchanged. Kuala Lumpur has lost 1.25%, while Jakarta id 0.90% lower, and Bangkok and Manila have eased by 0.10%. In Australia, falling China resource prices have pushed the ASX 200 down by 0.45%, with the All Ordinaries losing 0.65%.

After such a torrid week last week, a corrective bounce by equity markets cannot be ruled out this week. However, that may have to wait for another 24 hours as US markets are closed today. With nothing on the calendar of note today, European markets may take some solace from lower energy and commodity prices, although European natural gas supplies are tighter than ever as Russian flows reduce.

For US markets, the plethora of Fed speakers this week, including a double-header from Jerome Powell, are likely to drive intraday volatility in the absence of many tier-1 data releases.

US Dollar remains firm but choppy

The US Dollar held onto its intraday gains on Friday, as US bond inflows seemed to support it as investors preferred safety over risk into the weekend and today’s US holiday. With the weekend being relatively uneventful, the US Dollar has eased in Asia, but overall continues a pattern of choppy range trading. The dollar index rose 0.82% to 104.65 on Friday, thanks mostly to a weak yen. In Asia, it has eased 0.26% to 104.38. The dollar index has support at 1.0350 with resistance now distant at 1.0570.

EUR/USD eased by 0.56% to 1.0495 on Friday in another 100-point session, climbing by 0.31% to 1.0525 in Asia as weekend hedges are taken off. Dutch natural gas futures prices remain elevated, so the single currency is not receiving much of a boost from last Friday’s oil retreat. It has initial resistance at 1.0600, with challenging resistance at 1.0650. Support is at 1.0450 and 1.0400 now although I note that EUR/USD has based twice at 1.0350. That leaves the door open slightly to a corrective recovery this week.

Sterling has another awful day as its economic picture darkens, falling by 1.10% to 1.2215 on Friday, edging 0.22% higher to 1.2240 in Asia. ​ GBP/USD has initial resistance at 1.2400 and 1.2500, with support at 1.2200 and then 1.1950.

USD/JPY powered higher on Friday as the Bank of Japan left monetary policy unchanged and continues to heavily intervene to cap ultra-low JGB yields. With Japan’s inflation only expected to hit 2.50% this Friday, I can’t really blame them, but with the US, Switzerland, the United Kingdom, et al hiking, the interest rate differential continues to power USD/JPY higher. USD/JPY leapt 2.10% higher to 135.00 on Friday, with last week’s 131.50 low a distant memory and a bargain for somebody. Having probed 135.45 today, USD/JPY has eased back to 134.85 this morning, as commodity prices fell. It is likely to be only a respite though as unless US yields move sharply lower this week. USD/JPY has resistance at 135.60with support distant at 132.20.

Swings in investor sentiment continue to generate all the two-way volatility in the Australian and New Zealand Dollars. AUD/USD fell 1.60% on Friday to 0.6935 before rising to 0.6955 in Asia. NZD/USD fell 0.80% to 0.6315 on Friday before rising to 0.6330 in Asia. A US holiday is dampening volumes but both Australasians have traced out bottoming patterns on the charts. As long as 0.6850 and 0.6200 hold respectively, further gains to 0.7150 and 0.6450 cannot be ruled out.

On a 24-hour basis, Asian currencies are mostly unchanged today after the losses on Friday, and were mostly unwound this morning. The main reason has been a rally by China’s CNY and CNH after the PBOC left both the 1 and 5-year LPRs unchanged. USD/CNY has fallen 0.60% to 6.6760, while USD/CNH has fallen by 0.50% to 6.6745, dragging USD/Asia lower. Although the KRW, INR, MYR, THB, and IDR look the most vulnerable and remain near last week’s lows, a US holiday today should mean range-trading continues into Wednesday.

Oil slumps on recession fears.

Oil prices plummeted on Friday as increasing recession fears after soft US Manufacturing and Industrial Production data saw a mess sell-off in futures markets. Brent crude fell by 5.0% to $113.15 a barrel, but WTI plummeted by 6.0% to $110.00 a barrel. In Asia Brent has edged 0.25% lower to $112.85, while WTI has fallen by 0.75% to $109.20 a barrel.

Looking at the price action, I am undecided whether Friday’s capitulation is the start of a repricing of oil lower as the world economy slows dramatically in the months ahead, or whether it was a capitulation of extended speculative long positioning in the futures markets. Chinese Customs reported record oil imports for May this morning, suggesting demand remains as strong as ever. That remains so around the world, and the squeeze on refined products like diesel and gasoline remain as tight as ever.

Friday’s falls have bought my six-month support lines back into focus. On Brent crude, that is at $107.00 a barrel today, just below its 100-day moving average (DMA) at $107.95. Ahead of this, it has support at $112.00, with resistance at $114.25 and $116.00 a barrel. WTIs six-month support line is at $106.00 a barrel, just ahead of its 100-DMA at 105.00. It has interim support at $108.25, and resistance at $112.50 a barrel.

Of the two, WTI looks the more vulnerable, having fallen further and closed closer to its multi-month support zone. If the US cuts federal fuel taxes, that could be enough to tip the scales lower. It is hard to see either contract moving lower than $100.00 a barrel given the state of the physical market. From a technical perspective though, I would ideally like to see one or both contracts tracing out a couple of daily closes below the support lines mentioned and the 100-DMAs, before reassessing my longer-term bullish outlook.

Gold range continues.

It was another wax on, wax off day for gold on Friday as it retraced Thursday’s gains and fell by 0.88% to $1840.00 an ounce on US Dollar strength. In Asia, it has gained slightly by 0.25% to $1845.00 an ounce.

Despite the noise of the past week, it remains anchored in the middle of its one-month range. The overnight price action shows that the inverse correlation to the US Dollar is as strong as ever

Gold has resistance at $1860.00 and $1880.00, the latter appearing an insurmountable obstacle for now. Support is at $1805.00 and then $1780.00 an ounce. Failure of the latter sets in motion a much deeper correction, while I would need to see a couple of daily closes above $1900.00 to get excited about the upside.

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

Nigeria Sells $1 Billion Worth of Natural Gas to Portugal in 2022 – NNPC

The Federal Government of Nigeria has sold natural gas worth $1 billion to Portugal in 2022, according to the Nigerian National Petroleum Company (NNPC).

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Gas-Pipeline

The Federal Government of Nigeria has sold natural gas worth $1 billion to Portugal in 2022, according to the Nigerian National Petroleum Company (NNPC).

Mele Kyari, the Chief Executive Officer, NNPC, was quoted as saying at the Nigeria-Portugal Business and Trade Forum attended by President Muhammadu Buhari.

The NNPC boss said Portugal has been purchasing Nigeria’s energy for decades now and explained that President Buhari is on a state visit to Portugal for the second United Nations Ocean Conference.

He said “President Muhammadu Buhari is on a state visit to Portugal for the second United Nations Ocean Conference.

“On the sidelines of the event, President Muhammadu Buhari is leading a high-level Nigerian business delegation to the Nigeria-Portugal Business & Trade Forum.

“On the President’s delegation is the CEO NNPC Ltd, Mallam Mele Kyari, who highlighted the age-long energy partnership between the two countries, stressing that Nigeria supplies 70 per cent of energy imports to the European nation.”

On its Twitter page, the NNPC further quoted Kyari as saying, “This year alone, we have sold over a billion-dollar worth of natural gas to Portugal.”

NNPC boss also noted that there were ample opportunities to grow the energy supply to Portugal.

He told participants at the forum that Nigeria had invested in critical infrastructure to ensure domestic gas availability and increase gas supply to the international market.

 

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Markets

Markets Today – Under Pressure, US Data, Oil, Gold, Bitcoin

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

Stock markets have fallen heavily in June so it seems only fitting that they’re ending the month with big losses as reality continues to bite.

There’s no getting away from recession chat and while the heads of the Fed, ECB and BoE didn’t exactly fuel that during their panel discussion on Wednesday, they didn’t do anything to dispel it either. They all know that there’s a strong likelihood of recession this year or next and investors are increasingly accepting that fate as well.

There’s been a plethora of economic data from across Europe this morning, mostly tier two and three, and it was a bit of a mixed bag. The labour market figures, for example, remain strong with the anomaly being Germany but this was heavily distorted by the integration of Ukrainian refugees into the labour market. Underlying numbers remain in good shape even if across the bloc, employment growth is expected to slow.

It’s impossible to ignore the fact that households are being squeezed and we’re seeing that appear in the data, particularly in the UK which will probably fall into recession later this year. But it is unlikely to be alone in that which is why bear-market rallies are proving to be so short-lived.

US inflation boost but spending slips

US inflation data was unusually encouraging ahead of the open. Perhaps that’s getting a little carried away but it didn’t deliver another crushing below so maybe this feeling is actually relief rather than joy. The core reading was a little better than expected at 0.3%, in line with April, while the headline also fell a little short of expectations at 0.6%.

The income and spending data were arguably less encouraging. Earnings rose 0.5% as expected, a slight acceleration from April, while spending rose only 0.2%, a big drop from 0.9% a month earlier and half the forecast. Another sign of the squeeze taking a toll on households? The US economy is among the best positioned to fend off a recession but it’s not completely immune to the cost-of-living crisis. It may be catching up.

Oil lower as OPEC+ sticks to August target

Oil prices are modestly lower on Thursday, further paring recent gains following yesterday’s reversal. As expected, OPEC+ stuck to its planned 648,000 barrel increase in August and refrained from any decision beyond then which could add an element of uncertainty to future targets, particularly given recent reports that even Saudi Arabia and UAE are running near capacity.

The global economic uncertainty doesn’t make planning ahead any easier, either. The prospect of a recession has created more two-way price action in recent weeks, preventing any unsustainable surges in the price of crude as China reopened and the OPEC+ deficit increased. ​

Gold slightly buoyed by inflation data

Gold has been trending lower over the last couple of weeks but remains in its early summer range between $1,800 and $1,870. It’s really struggled for direction over the last couple of months despite the volatility in the broader financial markets. It has been like a deer in the headlights, unable to process and respond to the wicked combination of higher inflation, faster monetary tightening and recession fears.

It received a boost from the slightly softer PCE reading from the US, a rare bit of good news when it comes to inflation data. It’s not exactly a massive win, especially when paired with weak spending but it could be worse. Yields fell a little after the data, enabling gold to get back into positive territory for a while.

Bitcoin crumbling

Bitcoin has been hanging on in there around $20,000 but its resilience may finally be crumbling under pressure, with the cryptocurrency sliding more than 5% today to trade at around $19,000. This could be really bad news for the crypto space and may even trigger much more severe declines in the coming weeks.

The forced liquidation of Three Arrows Capital may have contributed to the latest decline as traders are left to wonder what other leveraged firms will follow in its footsteps. The fear alone could deliver another hammer blow to crypto valuations before the dust settles.

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Crude Oil

Oil Prices Sustain Bullish Run for Fourth Consecutive Session

Global oil prices appreciated for a fourth consecutive session after it became clear OPEC and allies can not meet their production targets any time soon.

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Crude Oil - Investors King

Global oil prices appreciated for a fourth consecutive session after it became clear OPEC and allies can not meet their production targets any time soon.

Brent crude oil, against which Nigerian oil is priced, appreciated to $120 a barrel as of 3:20 pm Nigerian time on Wednesday. Representing an increase of $12 from $108 a barrel traded a week ago.

The U.S. West Texas Intermediate (WTI) rose to $112.37 per barrel, up from $99.33 per barrel a week ago.

The increase in prices was a result of sanctions imposed on about 1/5 of global supply by western nations. Russia, one of the world’s largest crude oil producers, was sanctioned for waging war against Ukraine, and eventually, disrupting the global economy.

“Given that almost 1/5 of global oil producing capacity today is under some form of sanctions (Iran, Venezuela, Russia), we believed there is no practical way to keep these barrels out of a market that was already exceptionally tight,” JP Morgan said in a research note.

This concern over global supply outweighed worries about a weaker global economy ahead of the projected economic recession in developed nations, especially with developed economies raising interest rates to curb escalating inflation numbers.

“Investors made position adjustments, but remained bullish on expectations that Saudi Arabia and the United Arab Emirates would not be able to raise output significantly to meet recovering demand, driven by a pick-up in jet fuels,” said Hiroyuki Kikukawa, general manager of research at Nissan Securities.

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