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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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Markets

Steady After Fed Minutes

The European session is off to a mixed start after both the US and Asia posted small losses overnight.

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

The European session is off to a mixed start after both the US and Asia posted small losses overnight.

The Fed minutes on Wednesday didn’t really offer anything we didn’t already know. Even those that leapt at the opportunity to buy the supposed “dovish pivot” are aware that this isn’t quite the case and the minutes really back that up. Not that they needed to as the Fed commentary that has followed has made that perfectly clear.

The central bank did stress the need to slow the pace of rate increases as monetary policy tightened further which most expected would be the case anyway. Of course, that is ultimately dependent on the inflation data allowing for such a move and the July reading was certainly the first step towards that.

It also referenced the risk of monetary policy being tightened more than necessary to restore price stability which could be read a couple of different ways. While it doesn’t suggest it will over tighten intentionally, the Fed is clearly determined to get inflation back to target and ensure the public believes it will.

The statement could therefore suggest it will act in a more aggressive manner than markets expect in order to deliver on that. Alternatively, it could indicate that the central bank is aware of the risks and may therefore ease off the break as soon as the opportunity arises in order to avoid tightening too much. ​

It also raises the possibility of a swift u-turn from hiking rates to cutting them as markets have indicated recently and policymakers have pushed back against. Needless to say, there are many more twists and turns to come.

A cause for concern or merely a blip?

The Australian jobs data looked pretty shocking on the face of it. Not only did employment fall by 40,900 – against an expectation of a 26,500 gain – but the drop in full-time employment was considerably worse at 86,900 which was then partially offset by a rise in part-time workers. All told, it looks pretty grim but as is so often the case, there’s a caveat.

This data was not in keeping with the trend that we’ve seen in the labour market data in recent months and there are numerous possible explanations for why the dip has happened. With the labour market still very tight and unemployment at a record low – helped there last month by a drop in participation – this report will probably be viewed as an anomaly albeit one that will draw more attention to the data in the coming months. Ultimately, it’s unlikely to deter the RBA from raising rates at the next meeting, with markets currently favouring a 25 basis point hike.

Oil steady after inventory boost

Oil prices are treading water following Wednesday’s rally which came on the back of the EIA inventory data. The surprising and substantial drawdown alongside record crude exports provided a boost just as the price was testing multi-month lows. There are numerous factors at play right now and we may be seeing traders taking a more cautious approach considering how close a decision on the Iran nuclear deal appears to be.

There remains plenty of doubt that it will get over the line but if it does, that could be the catalyst for another move lower and perhaps even take the price to levels not seen since before the invasion.

Gold struggling amid resurgent dollar

Gold is a little higher after slipping once more on Wednesday. It failed to get a sustained lift from the Fed minutes with the dollar quickly recovering its initial losses and wiping out any gains for the yellow metal. The US 2-year is not too far from its recent highs and the 10-year has also made moves higher over the last couple of days which could continue to pressure gold.

The inversion very much remains in play though which means there’s still seemingly a disconnect between what bond traders expect and what equity traders do. If the recession narrative starts to weigh more heavily on financial markets, gold could make another run at $1,800 and maybe even have more success this time.

Steady post-Fed minutes

Bitcoin is relatively flat on the day after losing more ground on Wednesday. It’s now suffered four consecutive days of losses and has fallen around 7% from its peak at the start of the week. By its standards, that’s not really anything to write home about and the trend of the last couple of months still looks positive. The difficulty is that the rally that brought it back to $25,000 has lost considerable momentum and that could begin to weigh more heavily on the price. A move below $22,500 may suggest the rally has run its course for now.

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Markets

Mixed Ahead of Fed Minutes

A mixed start to trade in Europe after a more promising session in Asia overnight where stocks may have been boosted by talk of more pro-growth policies in China.

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

A mixed start to trade in Europe after a more promising session in Asia overnight where stocks may have been boosted by talk of more pro-growth policies in China.

That followed disappointing data late last week and early this from the world’s second-largest economy so the comments came at a good time. Still, we’re not seeing investors getting too carried away by comments alone, action needs to follow and small rate cuts from the PBOC don’t really fall into that category.

More misery for the UK as prices rise by the most since the early 80s

UK inflation hit its highest level in 40 years last month, with the annual CPI jumping 10.1% and the core reading 6.2%, both faster than expected. Double-digit inflation was inevitable but it has come earlier than expected which will leave households and businesses worrying about what that ultimately means for peak inflation later this year and how sustained it will be.

The data today has probably locked in a 50 basis point hike from the Bank of England as a minimum, especially when combined with yesterday’s wage growth numbers. Real incomes are still falling at a rapid rate but the central bank will have little choice but to persevere regardless and the economy will suffer the consequences.

RBNZ committed to tackling price rises as it raises the cash rate peak

The New Zealand dollar is trading a little lower on the day but the session has been quite volatile. We’ve seen some big swings in response to the RBNZ announcement despite the rate decision itself falling in line with expectations. The central bank now expects the cash rate to peak higher and earlier than previously anticipated, hitting 4.1% in the second quarter of next year, compared with 3.95% in Q3.

The RBNZ still firmly believes though that the actions it’s taken will both return inflation to the midpoint of its 1-3% target range in 2024 and not trigger a recession, although it did caution that the country will likely experience sub-par growth. That all sounds very hopeful but BoE aside, that appears to be the view of central banks still.

Fed minutes eyed as traders seek dovish pivot clues

There’s plenty more to look forward to today but the FOMC minutes naturally stand out. What’s interesting about them is that despite the supposed “dovish pivot” from the Fed, the commentary since has been anything but. Rather than talking up the prospect of falling inflation allowing for slower tightening, the message remains hawkish. What’s more, policymakers are continually pushing back against the policy u-turn next year that markets have been flirting with the idea of.

I expect any hawkish components of the minutes will be overlooked today and instead traders will dissect them for any additional dovish concessions that could further fuel the stock market recovery. That’s very much what we’ve seen in recent weeks and the decline in CPI last week only encouraged it.

Oil rebounds off support as JCPOA talks continue

Oil prices are edging higher on Wednesday, bouncing off technical support over the last 24 hours as Chinese Premier Li pushed for more pro-growth measures from local officials. There are growing downside risks as a result of the growth outlook and ongoing uncertainty around Chinese Covid restrictions.

What’s more, talks between the US and Iran are continuing around the nuclear deal which, if it gets over the line, could be a big positive for oil supply and therefore a negative for prices. There is no shortage of scepticism around the prospects for the JCPOA to be revived though but we may be reaching a point where that will become clear. For now, Brent appears to have decent support around $92.

Gold flat after a pullback

Gold is marginally lower on the day with focus fully on the Fed minutes later in the day. The yellow metal has been knocked back in recent days after briefly breaking through $1,800 resistance. It’s remained quite resilient though against the backdrop of a strengthening dollar and the FOMC minutes later could potentially reward that.

Could Fed minutes be the catalyst bitcoin needs?

Bitcoin rallies have struggled to generate much momentum of late, with $25,000 proving to be a strong barrier to the upside. What’s interesting is how shallow the pullback has so far been from that level which could be a bullish signal. Traders may be struggling to get on board with a break higher but they’re perhaps not keen to cash out either. The FOMC minutes later may be the catalyst it needs, one way or another.

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Crude Oil

Weak Chinese Data Drags on Crude Oil Prices

Oil prices extended their declines on Monday as weak Chinese data suggested possible slow demand

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Oil prices extended their declines on Monday as weak Chinese data suggested possible slow demand for the commodity in the world’s largest importer of crude oil.

Brent crude, against which Nigerian oil is priced, declined by $1.14, or 1.2%, to $97.01 a barrel after shedding 1.5% on Friday. The U.S. West Texas Intermediate crude oil depreciated by $1.06, or 1.2% to $91.03 a barrel, after a 2.4% decline in the previous session.

The unexpected slowdown in the Chinese economy in the month of July weighed on refinery output. Refinery output slipped to 12.53 million barrels per day, the lowest since March 2020.

“The official data suggests that oil demand is weakening as domestic logistics and consumer demand are deterred by the record high oil pump prices,” said Heron Lin, an economist at Moody’s Analytics.

Oil demand could stay on the downtrend for the rest of the year as the threat of COVID-19 restrictions encourages precautionary savings and reduces oil consumption, he added.

Saudi Aramco stands ready to raise crude oil output to its maximum capacity of 12 million bpd if requested to do so by the Saudi Arabian government, Chief Executive Amin Nasser told reporters on Sunday.

“We are confident of our ability to ramp up to 12 million bpd any time there is a need or a call from the government or from the ministry of energy to increase our production,” Nasser said. He added that China’s easing of COVID-19 restrictions and a pickup in the aviation industry could add to demand.

Oil prices rebounded more than 3% last week after a damaged oil pipeline component disrupted output at several offshore Gulf of Mexico platforms and as investors pared back expectations for interest rate increases in the United States.

Producers had moved to reactivate some of the halted production after repairs were completed late Friday, a Louisiana official said.

Energy services firm Baker Hughes Co (BKR.O) reported on Friday that U.S. oil rig count rose by 3 to 601 last week. The rig count, an early indicator of future output, has been slow to grow with oil production only seen recovering from pandemic-related cuts next year.

Global oil markets remained supported by tight supplies in the run-up to EU sanctions on Russian crude oil and refined product supplies this winter. read more

More supplies could come if Iran and the United States accept an offer from the European Union to revive the 2015 nuclear deal, which would will lift sanctions on Iranian oil exports, analysts said.

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