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Bear Market Rally Back On?

Strong US Retail Sales and Michigan Consumer Sentiment on Friday saw Wall Street rally impressively

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

It says something about the level of confusion in the markets right now (American markets anyway), that having wrung their hands all last about inflation, 100 basis point rate hikes by the Fed, and an impending recession, that strong US Retail Sales and Michigan Consumer Sentiment on Friday saw Wall Street rally impressively. If that data had come out on Tuesday or Wednesday last week, we would probably have had a meltdown. And yet here we are, Wall Street’s S&P 500, Nasdaq and Dow Jones booking roughly 2.0% gains on Friday.

Last Fridays Wall Street price action was enough to spark risk sentiment rallies on forex markets, led by the usual suspects, the Euro, and the Australian Dollar, although not much love permeated into the Asian currency space. Oil held steady, but gold found no solace and remains near $1700.00. We also saw a modest rally in commodity prices. Bitcoin has wound its way back to $21,000.00 this morning in the crypto space, although it has been grinding higher all last week. Even US yields fell slightly on Friday after that US data; go figure?

My bear market rally theory postulated on Wednesday, got a beating on Thursday, and now looks quite clever again this morning after another day where Wall Street forgot to take their medication. I’ll stick my neck out again and say that with a relatively thin US data calendar this week, the FOMO gnomes of Wall Street may enjoy a week in the sun. This morning missive is heading into its last two full weeks of life before I head off to pastures new, and one thing I won’t miss, is trying to find something intelligent to explain Wall Street’s short-term price actions.

I suspect that Europe and its travails will be front and centre this week, with a smattering of China covid zero and property market nerves thrown in for good measure. The European Central Bank meets on Thursday to decide whether to hike its policy rates for the first time in 11 years, by a mighty 0.25%… That would take the Refinancing Rate to an inflation-fighting 0.25%, and the Deposit Rate to -0.25%, which I am sure will leave the Eurozone CPI quaking in its boots. We should also get some insight into its antifragmentation tool, intended to keep Eurozone sovereign spreads “on message,” but is really their there to support Italy’s debt, because they clearly can’t do it themselves if one glanced at the weekend news. Europe is a classic example of the perils of easy monetary policy and QE; it’s easy to take it out of the box, but as you get the financial system addicted to a zero per cent cost of capital, it’s hard to put it back. Europe isn’t alone here of course, and at least they can say “look at Japan.” High fives mes Ami’s.

The reason we can discount a 0.50% hike from the ECB when that is the minimum clearly needed, is something far more important for Europe. Thursday the 21st is gas-mageddon day for the Nord Stream 1 gas pipeline from Russia to Germany. Scheduled annual maintenance is due to finish that day, and the gas is supposed to start flowing again. I’ll give it another day because it’s Russia. But if flows don’t resume on Friday, that bear market rally by the Euro and European equities could well evaporate like the pipeline flows.

About energy, it is pleasing to see that sense is prevailing somewhere, and that Japan is restarting several mothballed nuclear power stations in preparation for the winter. Nations everywhere should be looking at this solution right now. Especially as North America looks as far away as ever from getting its act together on gas and oil, pipelines to move it, and refineries to make it into energy and fertiliser etc for the world. Japan’s moves are likely to bear more fruit than US President Biden’s visit to Saudi Arabia for a fist pump with MBS this weekend. Mr Biden emerged confident that Saudi Arabia and the UAE would pump more oil; Saudi Arabia emerged and said that’s up to OPEC+. Oil prices are sharply unchanged today in Asia, which tells you who the market believes.

China officials from the PBOC promised more support for the economy over the weekend. And it appears that behind the scenes, the wheels are turning to engineer a funding vehicle for beleaguered property developers to continue and complete the construction of residential projects. The alleged Chinese mortgage payment strike by homebuyers seems to have been the catalyst to spur faster action. Conversely, covid-19 cases appear to be creeping higher around the Mainland, with Macau’s full lockdown extended by four days. The threat of covid-zero Part Deux in Shanghai and other large urban centres will temper bullish spirits among China equity investors. Robust loan demand, and decent economic data last week, should mean that Wednesday’s one and five-year Loan Prime Rates remain unchanged.

Thursday also sees the Bank of Japan’s latest policy decision. With USD/JPY finding a cap ahead of 140.00 for now, some pressure will ease on the BOJ, which will also be watching the country’s supply/demand energy balance and the spiralling Covid-19 caseload with concern. With the FOMC meeting not until the end of the month as well, there is little incentive for the BOJ to spring a shock and markets to change any monetary settings.

The policy decision from Bank Indonesia, also on Thursday, is far more interesting. With Singapore and the Philippines announcing unscheduled rate hikes last week, and South Korea, Malaysia, and Taiwan hiking rates at recent meetings, it is going to get harder for BI to stand against the wind. With the FOMC expected to hike by at least 0.75% at the end of the month, and Asian currencies wilting under US Dollar strength, the uber-dove BI is likely to hike by at least 0.25%. BI is clearly capping USD/IDR at 15,000.00 now, and despite a surging current account surplus as palm oil exports resume, currency pressures are going to force BI’s hand. The question is, is 0.25% enough? I have my doubts.

Like North America and Europe, Asia’s data calendar is fairly thin once you strip out the discussion points above. With the FOMC in a pre-meeting news blackout, markets will be left to the tender mercies of headlines and geopolitical developments. One benefit is that, excluding any shocks and a lack of Fed speaker rate-hike bombs, and annoying data that has to be ignored when it doesn’t tell the story the FOMO gnomes want to hear, it could give the aforementioned bear market rally, room to breathe.

Asian equities track Wall Street higher.

Wall Street staged an impressive rally after better than expected retail sales and consumer sentiment data from the US on Friday, as markets focused on a still-robust US consumer while ignoring its ominous warnings for the trajectory of Fed monetary policy. With a dearth of tier-1 data this week, and the FOMC in a pre-meeting media blackout, the equity rally could potentially extend throughout the week. Looking at the S&P 500 chart today, the technical picture certainly suggests that. The S&P 500 could rally back to 4,050.00, its March downtrend line, and still, be in a bear market. To start saying the worst was over for equity markets would require a sustained break of that level and preferably, the 100-day moving average (DMA) at 4,140.00.

Friday, saw the S&P 500 rally by 1.92%, the Nasdaq rally by 1.79%, with the Dow Jones the session’s outperformer, leaping higher by 2.15%. US futures are performing well in Asia today. S&P 500 futures are up 0.40%, while Nasdaq futures have jumped 0.95% higher, with Dow futures gaining 0.20%. Banking heavyweights, Bank of America and Goldman Sachs are releasing earnings today, although I believe it would take nightmare results and outlooks from both to give markets pause for thought.

Asian markets are content to track Wall Street this morning, helped along by hopes of more aggressive stimulus measures in China to resolve its property market wobbles. Japan’s Nikkei 225 is 0.55% higher, with South Korea’s tech-centric Kospi leaping 1.75% higher. In China, The Shanghai Composite has leapt 1.50% higher, with the CSI 300 rallying by 1.20%, and Hong Kong’s Hang Seng gaining an impressive 2.55%.

Across regional markets, better Singapore NODX data has lifted the Straits Times 0.65% higher, with Taipei adding 0.60%, while Kuala Lumpur is lagging at unchanged. Jakarta added 0.20%, Bangkok 0.25%, and Manila eased by 0.25% as the Peso remains under pressure. Australian markets are also higher after the Wall Street rally, the All Ordinaries rising by 0.90%, and the ASX 200 gaining 0.85%.

European markets also enjoyed a very positive session on Friday. But with the ECB looming on Thursday and the scheduled resumption of Russian gas deliveries, European equities may struggle to replicate Friday’s gains this week.

Wall Street rally pushes US Dollar lower.

The US Dollar fell heavily on Friday, versus the developed market space, as Wall Street’s impressive rally spilt over into a broader sentiment rally in other asset classes. That saw the dollar index make a long-overdue correction lower. The dollar index fell 0.60% to 107.98 on Friday, easing another 0.17% lower to 107.80 in Asia as US Dollar weakness continued. Resistance is at 109,30, the overnight highs, and then 110.00. Support is at 107.50 and then the 1.0585 breakout point, followed by 1.0500. ​ The relative strength index indicator (RSI) has moved out of the overbought territory, but the technicals suggest the US Dollar correction could continue through the week.

EUR/USD rallied by 0.67% to 1.0088 on Friday, rising another 0.17% to 1.0115 in Asia. ​ The technical picture suggests a correction back towards 1.0200 is possible, but only a sustained break above 1.0360 would suggest a longer-term low is in place. EUR/USD has support at 1.0000 and 0.9900/25. The single currency faces serious event risk in the latter half of the week, firstly from the ECB policy decision, and secondly, from Russian natural gas flows which are due to resume after pipeline maintenance.

GBP/USD followed the Euro overnight, finishing 0.37% higher at 1.1870, rising 0.23% to 1.1895 in Asia. It has support at 1.1800 and 1.1760, with resistance at 1.1965, followed by 1.2060 and 1.2200. A rise above 1.2060 suggests a larger rally to the 1.2400 regions, but it would take a sustained break of 1.2400 to call for a longer-term low by sterling.

USD/JPY fell on Friday by 0.38% at 138.50, easing another 0.15% to 138.30 in Asia. Thursday’s high around 139.40 is initial resistance, followed by 140.00. Support is at 137.40 and 136.00. Given the sentiment in the market this week, a fall in US yields this week could finally translate to a meaningful downside correction by USD/JPY, which is a crowded trade.

AUD/USD and NZD/USD rallied on Friday as investor sentiment ended the week on a high note. NZD/USD leapt higher on higher-than-expected inflation data today, but those early gains have since been eroded. AUD/USD and NZD/USD are both 0.25% higher at 0.6810 and 0.6175. Both currencies are showing falling wedge formations. A sustained break above 0.6850 or 0.6200 signals more gains ahead this week by the antipodeans.

Asian currencies had another noisy session on Friday, but as the dust settled, were mostly unchanged versus the US Dollar. The price action merely reversed their intraday losses from earlier in the session. The positive news headlines from China over the weekend on stimulus to support the property sector has allowed Asian currencies to book modest gains in Asia. However, despite a slew of recent policy tightenings in the region, fears of a widening interest rate differential with the US continue to cap gains by Asian currencies. That suggests markets will continue to call Asian central bank’s bluffs, the first being Indonesia on Thursday. Notably, the Philippine Peso and Indian Rupee continue to remain under pressure, USD/PHP rising 0.15% today to 29.913, with USD/INR rising 0.10% to 79.770. Across the rest of the region USD/Asia has fallen modestly by between 0.10% and 0.20%.

Oil prices edge higher.

Both Brent crude and WTI rose modestly on Friday as they continued to unwind the mid-week slump. In Asia, hopes of more China stimulus, and a lack of concrete production promises from President Biden’s Middle East visit have seen Brent crude prices climb in Asian trading.

Brent crude finished Friday’s session 1.25% higher at $100.80, having tested $102.50 intraday. In Asia, it has added another 1.25% to 101.80 a barrel. WTI rose by 1.17% to $97.60 on Friday, edging 0.3% to $97.90 a barrel in Asia today.

Brent crude has resistance at $102.50, and then 104.00 a barrel, followed by a now distant $106.00 a barrel. It has support at $98.30 and then 97.00, the 200-DMA. WTI has support at $94.30, the 200 DMA, and then $90.60 a barrel. Resistance is at $99.00, followed by 101.00 a barrel.

Supply risks remain evident in international markets, and futures curves remain in backwardation. Despite the ructions in the speculative futures markets, the real-world dynamic remains as supportive of oil prices as ever. If Russian doesn’t switch gas exports back on to Europe at the end of the week, Brent crude could once again, find itself back near $110.00 a barrel.

Gold’s remains unimpressive.

Gold was notable on Friday; it felt no positive spillover impact from the risk sentiment rally that swept other asset classes. Gold finished Friday’s session 0.15% lower at $1707.50 an ounce. In Asia, continued US Dollar weakness has allowed it to show some belated gains, rising 0.50% to $1715.70 an ounce in yet another quiet Asian session.

Overall, gold’s price action continues to be uninspiring with recoveries limited in scope, while the falls, when they do occur, are much larger and faster in scope. Gold’s fate this week rests on the hopes that the investor sentiment rally seen elsewhere, inspires more US Dollar weakness this week.

Gold has initial support at $1700.00, followed by the more important $1675.00 an ounce zone. A sustained failure of $1675.00 will signal a much deeper move, targeting the $1450.00 to $1500.00 an ounce regions in the weeks ahead. Gold has resistance nearby at $1720.00, then $1745.00, now a triple top. That is followed by $1780.00, $1800.00, its June downward trendline.

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

FG to Add Additional 817 MWs to The National Grid to Boost Power Supply

The federal government has revealed plans to add an additional 817 megawatts (MWs) of electricity to the national grid to boost power supply within the federal capital territory (FCT) and its environs.

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The federal government has revealed plans to add an additional 817 megawatts (MWs) of electricity to the national grid to boost power supply within the federal capital territory (FCT) and its environs.

This was disclosed by the Managing Director of Transmission Company of Nigeria (TCN) Mr. Sule Abdulaziz while on a visit to the ongoing projects in the Federal Capital Territory (FCT).

He added that when the project is completed, it would add 1. 465 more transmission lines to the grid, improving and strengthening the FCT’s access to electricity.

In his words, “With the additional lines, TCN capacity of transmission lines will be higher than what is in existence and this means that in future, we can build some sub-stations without upgrading the lines”.

“This is part of efforts to increase transmission wheeling capacity in the FCT and environs. The project is categorized into six lots and is far advanced in execution above 85 percent in total completion by December.

“This will be adequate and it will serve the population of Abuja. The government while making plans for the project has in mind that if the population of FCT increases within five to 10 years, there is a master plan that the station will serve the territory in the next 50 years.

“Construction of complete new 2x60MVA, 132/33 KV substation with 132KV line Bays at Wumba/Lokogoma including about 5km 132 underground XLPE Cable from New Apo Sub Station are ongoing.

“Others are the construction of a 2x150MVA 330/132/33KV substation at New Apo where the managing director frowns at the slow pace of work done by the contractor”.

He also lamented on the recent abysmal supply of electricity, noting that the contracts for all the substations were signed at the same time and wondered why the slow pace of work.

“We have spent a lot of money to clear their containers which entered demurrage and this money is not part of AFD grant but TCN Internally Generated Revenue which could have been used for other projects. We are going to push them to finish the project on time,‘’ he said.

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Energy

Here is Why Otedola is Listing N250 Billion Geregu Power Plant

Otedola listed Geregu to raise additional cash for expansion in the Nigerian energy sector

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power project

Wondering why billionaire Femi Otedola listed Geregu Power? Here is a concise breakdown of what might have compelled the billionaire to run to the capital market after nine years of acquiring the Geregu Power plant via Amperion Power, a company he owns a 99.9% stake in.

In 2013, the year the billionaire first invested in the energy sector. Otedola dumped a total sum of $94 million on Geregu Power through Amperion.

In 2018, Otedola invested an additional $350 million in the sector, saying it was a sign of his commitment to the Federal Government’s plans of addressing the age-long challenges impeding the electrification of the nation.

The huge investment was the billionaire hint of what is to come as shortly after he announced the sale of Forte Oil to Abdulwasiu Sowami, the present owner of Forte. Otedola sold all his 75% stake in Forte Oil in 2019 and immediately announced a shift in his investment direction.

Earlier this year, Amperion Energy was selected by Federal Government to bid for the sales of Geregu II after reporting a reasonable success with Geregu Power in 2021 when the company declared a profit after tax of over N20 billion.

Otedola, who just invested a substantial amount in FBN Holdings Plc, needs to source for funds if he must expand his grip in the energy industry. The billionaire quickly divested N8 billion from his over 7% stake in FBN Holdings and went on to list the Geregu Power plant on the Nigerian Exchange Limited (NGX) at N250 billion to raise an additional fund for Geregu II bidding.

Geregu II Generation Company was put up for sale by the Federal Government amongst other power plants like Benin Generation Company Limited, Omotosho Generation Company Limited, Calabar Generation Company Limited, and Olorunsogo Generation Company Limited for acquisition in July 2022.

The Geregu II Generation Company has a capacity of 434MW. Therefore, by acquiring Geregu II Otedola’s total power-generating capacity would increase to 848MW given Geregu current capacity of 414MW.

Geregu Power Plc was incorporated in November 2006 as one of the unbundled companies from the non-existing Power Holding Company of Nigeria (PHCN).

The power plant began operations in 2007 with a total installed capacity of 414MW at commissioning. Therefore, given the seemingly unplanned method, in which Otedola jumped on FBN Holdings shares following the exit of Otudeko, the billionaire will need extra cash to expand his market share in the energy space. This listing explained how he plans to access or he is accessing that extra cash.

Calvados Global Services Limited, Otedola’s investment company used in acquiring most of his stake in FBN Holdings, owns 95% of Amperion Energy.

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Markets

Relief Rally Already Struggling

Equity markets have erased early gains to trade in the red on Thursday, as investors take a cautious approach ahead of Friday’s jobs report.

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New York Stock Exchange

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

Equity markets have erased early gains to trade in the red on Thursday, as investors take a cautious approach ahead of Friday’s jobs report.

The narrative in recent days of weaker data being positive as it could be a precursor to slower tightening didn’t seem sustainable and it’s already proving to be the case. I think it was more a reflection of the steep sell-off in the markets and the performance of risk assets in general over the six weeks previous, rather than the data. If the Fed wasn’t prepared to jump at the first sign of inflation easing, it certainly won’t on the back of a weaker PMI and decline in job openings.

The recovery did provide some temporary relief and while weaker data is likely to precede a deceleration in rate hikes, I don’t think we’re there yet. Yesterday’s services PMI – which is far more important – was still strong, as was the ADP number and tomorrow’s jobs report is expected to remain hot.

That may put an end to the narrative for now, although any weakness in the labour market data tomorrow, or signs of additional slack, could boost the relief rally once more and see equity markets end the week strong. As I say, it’s all clutching at straws at this point but after weeks of heavy losses, perhaps that’s not overly surprising.

UK facing major headwinds

The UK economy appeared to get some good news from the Construction PMI this morning, which easily beat expectations rising to 52.3 rather than dropping to 48.1 from 49.2. So rather than contracting at a faster rate, the industry posted strong growth in the survey. Unfortunately, the headline number simply doesn’t tell the full story. The improvement was driven by delayed projects and easing supply shortages, while new orders showed the weakest growth since May 2020. That’s a more accurate reflection of the state of play in the UK right now.

As was captured overnight by Fitch downgrading the outlook from stable to negative in light of the mini-budget. The overall rating remained at AA- but that may change once the details of how everything will be paid for are released in the budget. Sterling is down for a second day after recovering over the last week, off around 0.6% against the dollar.

OPEC+ boosts oil prices after large cut

Oil prices are edging lower today after OPEC+ announced a huge production cut on Wednesday of two million barrels per day. With the group failing to hit output targets by a widening margin as the year has progressed, the net cut will be around half that, if not less, but that’s still a substantial reduction in an already tight market.

Of course, the global economy is slowing as a result of an inflation and interest rate shock – which soaring oil prices and underproduction is partially responsible for – and that should weigh on demand over the next year offering some balance. But that is highly uncertain so it’s understandable that the backlash has started as higher oil prices will only compound inflation and cost-of-living issues in the interim.

Gold relief rally over?

Gold is paring gains again today after a strong relief rally earlier in the week. The yellow metal was buoyed by a softening dollar and lower yields but both are bouncing back. It was always likely to face strong resistance above as the rally was driven more by hope than substance. A weaker jobs report tomorrow could give it another boost but even that may prove to not be sustainable.

Choppy ahead of the jobs report

Bitcoin continues to be choppy around $20,000, with trade in the middle of the week having lost the momentum it started with. Traders appear to have one eye on the jobs report now in the hope it’s bad enough to trigger another risk rally. Given the strength of the labour market until now, they may be disappointed once more.

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