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Uncertain Times

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

Equity markets are back in the green on Friday after a choppy week in which the recovery rally has stalled.

Efforts by Fed policymakers to manage market expectations have cooled the sense of immense relief that has delivered a strong rebound over the last month. The S&P was up more than 15% at one point while the Dow jumped more than 18%. Not bad on the back of what was ultimately one good inflation month.

James Bullard unleashed a flurry of hawkish views on Thursday which didn’t get a warm reception in the markets initially. But then they did rebound and are higher again today so it seems investors are still taking them with a pinch of salt. The Fed is clearly concerned that “dovish pivot” speculation could be undermining its tightening efforts which could explain why it’s being so steadfast in its hawkish message.

There will also be a concern that the labour market and household spending are showing little sign of weakening despite interest rates rising at an extraordinary rate over the past year. I don’t think that will stop the central bank from slowing the pace next month, especially if we see another drop in inflation just before, but it could cause the Fed to persevere for longer which is a concern for investors.

UK retail sales blip no reflection of what lies ahead

No one in the UK will be fooled by the latest retail sales report into thinking all is not as bad as it seems, not after yesterday’s Autumn Statement. The OBR expects living standards to decline by 7.1% over the next two years, the sharpest drop in six decades, as the country battles a cost-of-living crisis, severe fiscal consolidation, higher interest rates, and a recession. Against that backdrop, it’s hard to get remotely excited by an expectation-beating 0.6% jump in sales in October. Needless to say, it is not the start of a promising trend.

BoJ still unlikely to change course

Japanese inflation data may on the face of it give the impression that the Bank of Japan has achieved its inflation goals and can afford to soften its grip on the bond market but the reality is quite different. What is believed to be unsustainable factors like a weak yen, and high imported energy and food prices, are behind the increases, which the BoJ has been very willing to look through and will likely continue to do so. Especially with the pressure of yen devaluation far less intense after the US dollar’s correction over the last month.

Brent below $90 ahead of December OPEC+ gathering

Oil prices are continuing to retreat against the backdrop of increasingly gloomy economic prospects and surging Covid cases in China which risk further restrictions and lockdowns, threatening demand in the world’s second-largest economy. Brent crude has broken back below $90, testing the mid-October lows and, if sustained, the patience of OPEC+.

The group was heavily criticized for its two million barrel per day output cut and yet oil prices are now not far from the September lows that preceded the decision. Could OPEC+ go even further if the outlook continues to deteriorate when it meets again in a couple of weeks?

Gold holding onto gains

Gold is flat on Friday after paring gains over the last couple of days. The yellow metal has recovered strongly over the last month, around 10% from its lows, as risk appetite has improved and interest rate fears abated. It’s not out of the woods yet but its resilience after hitting resistance at $1,780 is encouraging. This is a major obstacle, having been such a substantial level of support from January to July.

Crypto volatility subsides for now

Bitcoin volatility is subsiding which will no doubt come as a relief to the crypto industry as the fallout from the FTX collapse continues. We’re continuing to learn who exactly is exposed to the collapse, to what extent, and what the ripple effects will be. One obvious impact is that of confidence in the space which could take time to repair in already challenging markets. I’m not sure anyone can be confident that the worst of the rout is behind us which means bitcoin is vulnerable to another plunge, with $15,500 being the first test of support and then potentially $14,000 below that.

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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A Promising Response to Protests

Stocks in China soared after a difficult start to the week, on the hope that the country’s zero-Covid policy stance may be relaxed further.

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Crude oil

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

Investors in Europe remain in a cautious mood on Tuesday as they await a huge influx of economic data in the coming days, while US futures are also pointing to modest gains ahead of the open.

Stocks in China soared after a difficult start to the week, on the hope that the country’s zero-Covid policy stance may be relaxed further. That had been the expectation in recent weeks, with a modest softening recently seen being followed by a more substantial shift in the spring.

But protests in recent days on the back of record Covid cases and tighter restrictions could have gone either way and that made investors extremely anxious on Monday. While I can imagine the path from zero-Covid to zero restrictions will be long and full of potholes and hurdles, the response to the unrest has appeared more promising than feared.

It may well be that the leadership had already been gauging the public mood on restrictions and had, as has been rumoured, already been planning its exit strategy which recent comments align with. Either way, it appears zero-Covid has reached a crossroads and the direction of travel now will determine investor appetite toward Chinese stocks going into 2023. Today’s rebound suggests there’s some optimism.

So much uncertainty in the oil markets

It’s already been a very volatile week in oil markets and that’s unlikely to change over the coming days given the immense uncertainty over the Russian price cap, China’s Covid stance, and the OPEC+ meeting. The market is being led by speculation and leaks, of which there have been plenty and will likely be much more, which makes for very lively conditions given the wide array of possible outcomes.

And as you’d expect, all of the above are linked to varying degrees. A record surge in Covid cases is leading to tightening restrictions weighing on activity, spurring protests, and forcing a rethink of the country’s zero-Covid policy. They’ve also weighed heavily on prices with China being the world’s second-largest economy which will impact the demand forecasts from OPEC+ unless the group opts to hold on and await more clear signals and data.

Also influencing the group’s analysis will be Russian sanctions, most notably the price cap which is yet to be fully agreed upon. The latest rumours suggest the cap could be agreed to as low as $62 which is much lower than the $65-70 previously leaked and could therefore have a bigger impact on Russian output. And of course, Russia itself is a key member of the OPEC+ alliance, just to complicate matters further and could throw its weight around in those discussions and make an agreement harder and more uncertain.

Oh and the EU does have a tendency to make full use of deadlines, with the next sanctions due to come into force the day after OPEC+ meets, which is of course on a Sunday for some reason. Not that the alliance always comes to quick agreements and on this occasion, you could easily forgive them for not. Needless to say, this is certainly a recipe for volatile trading conditions.

Volatile and awaiting key US data

Gold is rallying again on Tuesday on the back of a softer dollar but has only largely wiped out Monday’s losses leaving it basically net even on the week. I expect to see plenty more volatility in the coming days given the amount of US economic data that are being released including inflation, GDP, and the jobs report. That sets us up nicely as we move into the final month of the year with only a couple of weeks to go until the hotly anticipated CPI inflation report and Fed meeting.

Choppy and vulnerable

Bitcoin has also reversed its Monday losses, rallying 1.5% so far today. The cryptocurrency has remained volatile in the aftermath of another plunge following the FTX collapse and now trades more than 75% from its highs just over a year ago. Even now it remains vulnerable as we continue to discover what the full contagion effect will be and what else will be uncovered.

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Crude Oil

Oil Drops on Monday During Asian Trading Session Amid Chinese Covid-19 Protest

Brent crude oil, the international benchmark for oil Nigerian oil, declined by $2.16, or 2.6% to $81.47 a barrel during the Asian trading session after previously hitting $81.16 per barrel.

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Crude oil opened lower on Monday as citizens of the world’s largest importer of the commodity, China protested over tough COVID-19 restrictions.

Brent crude oil, the international benchmark for oil Nigerian oil, declined by $2.16, or 2.6% to $81.47 a barrel during the Asian trading session after previously hitting $81.16 per barrel.

U.S. West Texas Intermediate (WTI) crude oil also dipped by $2.08, or 2.7% to $74.20  per barrel, paring losses from $73.

Last week, Brent crude oil lost 4.6%, its 10-month low while the WTI closed 4.7% lower as global uncertainty continues to dictate commodity prices.

“On top of growing concerns about weaker fuel demand in China due to a surge in COVID-19 cases, political uncertainty, caused by rare protests over the government’s stringent COVID restrictions in Shanghai, prompted selling,” said Hiroyuki Kikukawa, general manager of research at Nissan Securities.

WTI’s trading range is expected to fall to $70-$75, he said, adding the market could stay volatile depending on the outcome of the OPEC+ meeting and the price cap on Russian oil.

China, the world’s top oil importer, has stuck with President Xi Jinping’s zero-COVID policy even as much of the world has lifted most restrictions.

Hundreds of demonstrators and police clashed in Shanghai on Sunday night as protests over China’s strict COVID restrictions flared for a third day and spread to several cities in the wake of a deadly fire in the country’s far west.

The wave of civil disobedience is unprecedented in mainland China since Xi assumed power a decade ago, as frustration mounts over his zero-COVID policy nearly three years into the pandemic.

“Bearish sentiment is growing in the oil market with mounting concerns over demand in China and a lack of clear signs from oil producers to further cut output,” said Tetsu Emori, CEO of Emori Fund Management Inc.

“Unless OPEC+ agrees on a further reduction of production quota or the United States moves to reload its strategic petroleum reserves, oil prices may be headed further down,” he said.

The Organization of the Petroleum Exporting Countries and allies, known as OPEC+, will meet on Dec. 4.

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Markets

Black Friday Lull

We’re seeing subdued trading at the end of the week, with the absence of the US leaving markets lacking any notable direction.

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

We’re seeing subdued trading at the end of the week, with the absence of the US leaving markets lacking any notable direction.

This isn’t really unusual and at the end of the week too, it really makes sense. Barring a flurry of big headlines from elsewhere, we could now see equity markets just drift into the weekend with investors already having an eye on next week.

Perhaps today people are trading in their charts for some Black Friday deals, the outcome of which will certainly be on everyone’s radar. Going into the holiday season, we’ll get an early idea of the state of play for household spending in the midst of a cost-of-living crisis.

Of course, it will naturally be difficult to distinguish how much of that bargain hunting will prove to be holiday season shopping brought forward in an attempt to get the “best deals”. But if Black Friday shopping takes a hit this year, it won’t bode well for the rest of the holiday period which is so important to retailers.

PBOC cuts the RRR

The PBOC cut the RRR by 25 basis points this morning in a bid to support the economy which is once more going through a difficult period. How effective that will prove to be when cities are seeing restrictions and effective lockdowns reimposed is hard to say. But combined with other measures to boost the property market and ease Covid curbs, the cut could be supportive over the medium term when growth remains highly uncertain.

Oil pares losses as price cap talks continue

Oil prices are higher on Friday, continuing to pare losses after being hit heavily in recent weeks by surging Covid cases in China and discussions around the price cap on Russian crude.

Lockdowns in all but name appear to be popping up in major Chinese cities in an attempt to get a grip on record cases which will weigh heavily on economic activity once more and in turn demand. It’s now a question of how long they last but clearly investors’ enthusiasm toward the relaxation of Covid restrictions was a bit premature.

Talks will continue on a price cap but it seems it won’t be as strict as first thought, to the point that it may be borderline pointless. That’s hit oil prices again this week as the threat to Russian output from a $70 cap, for example, is minimal given it’s selling around those levels already.

Gold establishing a range ahead of key data releases

Gold is marginally lower today but has been quite choppy throughout the session, and broadly lacked any real direction. We could be seeing a little profit-taking as the dollar edges higher following the relief rally that followed the Fed minutes.

The yellow metal is trading roughly in the middle of what may be a newly established range between $1,730 and $1,780, potentially now awaiting the next catalyst ahead of the December Fed meeting. With another jobs and inflation report still to come, a lot could change between now and when the FOMC next meets.

Bitcoin still extremely vulnerable

Bitcoin is edging lower again today after recording three days of gains. That dragged it off the lows but didn’t really carry it that far from them. It’s trying to stabilize around the $15,500-$17,000 region and weather the storm but I’m not sure it will be that easy. There’s likely more to come from the FTX collapse and the contagion effects, not to mention potentially other scandals that could be uncovered. This may continue to make crypto traders very nervous and leave the foundations supporting price extremely shaky. ​

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