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Filling the Void

Oil prices are bouncing back as OPEC+ members continue to reject reports of an output hike at the next meeting.

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

As was to be expected, it’s been a choppy week so far in financial markets with Europe a very mixed bag on Tuesday while US futures are marginally higher after making marginal losses on Monday.

On the one hand, we could be seeing investors warily waiting for the FOMC minutes and taking in all of the speeches from various Fed officials in the meantime. On the other, this week may just be a void in an otherwise turbulent year thanks to a lack of major catalysts and the US Thanksgiving bank holiday at the end of the week.

Saudi Arabia has gone some way to filling that void, with so much attention now likely to be on the Gulf over the coming weeks. It goes without saying that it came as quite a shock as everything unfolded as it wasn’t what anyone was expecting, quite the opposite in fact. And it could have a major impact on the outcome next month.

But the 2-1 win over one of the tournament favourites, Argentina, was a monumental victory and undoubtedly one of the biggest shocks in World Cup history. It’s blown Group C wide open and cast serious doubt over whether Lionel Messi will ever get his hands on the trophy.

In other news, Saudi Arabia also rejected reports that OPEC+ is considering increasing output on 4 December.

OPEC+ speculation drives oil market volatility

Oil prices are bouncing back as OPEC+ members continue to reject reports of an output hike at the next meeting. An announcement from the G7 around the Russian oil price cap is due any day now and could complicate the group’s mission to balance supply and demand in the market, especially if the Kremlin responds by slashing exports to participating countries, as they’ve threatened.

That Russia is a key member of the alliance seriously complicates matters. I do wonder whether members could consider reconfiguring output targets, rather than boosting them, in order to account for lost Russian crude. Of course, that would likely require the backing of Russia which may not be forthcoming.

Oil prices will likely remain highly volatile over the next couple of weeks against this backdrop, with the EU embargo and potential price cap scheduled to start the day after the OPEC+ meeting on 4 December. If the cap agreement goes to the wire, OPEC+ may opt to delay the meeting given the uncertainty it would generate.

Gold rebounds off the prior resistance level

The slight recovery in risk appetite today is coinciding with a pullback in the US dollar and a rebound in gold. The yellow metal has held onto the bulk of November’s gains over the last week, seeing support around $1,730 on Monday where it met firm resistance on multiple occasions in September and October.

The key level to the upside remains $1,780 where it peaked around last week and saw substantial support around in the first half of the year.

Another dead cat bounce?

Bitcoin is trading higher on Tuesday, but for how long? The knock-on effects of the FTX collapse are still being uncovered, with more names being added to the exposure list every day. Confidence in the markets has been shattered and it may take time to rebuild.

There remains considerable uncertainty around the full consequences of the FTX collapse and as long as that remains the case, any rallies we see in cryptos may simply become dead cat bounces, as opposed to market bottoms. The latest occurred around $15,500, where it rebounded off a couple of weeks ago, and a break of this could trigger another sharp decline.

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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Markets

Wind Out of the Sails

UK consumer spending remains subdued, with BRC reporting a 4.1% annual increase

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

Stock markets are making small losses on Tuesday, while US futures are relatively unchanged ahead of the open.

The recovery rally has lost momentum in recent sessions which is understandable after that jobs report. That’s not to say optimism can’t and won’t return but that wages component was a huge body blow. Investors are a little winded and it may just take a little time to get their breath back.

The PPI data on Friday could offer a helping hand on that front but even then, it will be hard to ease the concern Fed policymakers will undoubtedly have about the pace of wage growth, consumer resilience and the still large savings buffer. None of this aligns with a swift and relatively pain-free return to 2% inflation.

RBA maintains flexible approach

The key takeaway from the RBA meeting today was flexibility. There is no pre-set path and while policymakers expect to need to raise rates at upcoming meetings, the data will dictate if so and by how much. That doesn’t help investors gage exactly what we can expect from the central bank but in such uncertain times, that makes a lot of sense. And you can see that reflected in the interest rate probabilities for the first quarter of next year. As it stands, no change or 25 basis points in February is a coin toss, while 3.35% in March (25bps above the current rate) is seen as being 50% likely with 25bps either side around 25% each. Clearly the RBAs communication strategy is going to plan.

Households feeling the squeeze this festive season

It will come as a surprise to no one that UK consumer spending remains subdued, with BRC reporting a 4.1% annual increase. With inflation running at 11.1%, spending is falling well behind, as is the case with wages, which suggests people are buying less and being more selective with what they do this festive season. Again, what can you expect when the economy is probably already in recession amid a terrible cost-of-living crisis that hurts those worst off most. The road to recovery for the UK is going to be long and painful, it seems.

The only guarantee for oil markets

It’s been a volatile start to the week in oil markets, continuing in much the same way we ended last, with traders still working through the announcements from the G7 and OPEC+, as well as the latest Covid moves from China. In many way, none of the above improve visibility in the crude oil space; they arguably actually make the outlook more uncertain.

But the intial response to the above has seemingly been negative for crude prices, with the loosening of Chinese Covid curbs not enough to offset the $60 price cap and unchanged OPEC+ decision. The cap is probably viewed as a business as usual for now, with Russia reportedly selling below these levels already and improving its ability to get around the sanctions. Which means output remains broadly steady.

The move from OPEC+ was probably driven by the lack of visibility on China and Russia but as the group has warned in the past, should prices fall too far and the market become imbalanced, it won’t wait until the next scheduled meeting to respond. It seems that the only thing guaranteed in the oil market for now is volatility.

Gold paring losses

The dollar recovered strongly on Monday as trade became increasingly risk-averse, hitting gold and forcing it back below $1,800 where it briefly traded above. It’s attempting to pare those losses today, up around half a percent on the day but it may struggle in the short-term. It’s been an incredible recovery until now but Friday was a massive setback. We now have to wait for PPI on Friday for some good news, with Fed policymakers in the blackout period ahead of the final meeting of the year, next week.

Stabilising?

The risk-reversal trade on Monday took the wind out of bitcoins sails, not that it would have taken much in the circumstances. It’s trading back around $17,000 where it has spent most of the last week, which the community will probably be relieved about. Anticipating what’s going to come next for cryptos feels incredibly difficult and dependent on the ongoing fallout from FTX. To reiterate what I’ve said recently, silence is bliss.

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Markets

A Nervy Start to the Week

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

What could have been a really positive week for equity markets is off to a much more nervy start, with stocks in Europe treading water and US futures slightly lower.

The inflation report on Friday was red hot once more, extinguishing any hope that investors could hop aboard the Fed pivot train and ride stock markets higher into year-end. Perhaps it’s not quite so dramatic but it was a real setback, something we should be used to by now.

The wages component was the killer blow. That was not just a beat, it obliterated expectations and came in double the forecasted number. It may be a blip, but it’s a huge one and it will almost certainly take more than one much cooler report in January to comfort those that still fear inflation becoming entrenched.

That’s ultimately where we’re now up to in the inflation story. Many accept that base effects and lower energy prices will drive the headline inflation figure much lower next year, among other things, while a slower economy – maybe recession – will eventually hit demand and contribute to the decline. But what the Fed fears now is fighting entrenched inflation and these wage numbers won’t make for comfortable reading.

An economic victory for China amid gloomy PMIs

Chinese stocks were the clear outperformer overnight as authorities continued to work towards a softening of the country’s zero-Covid stance with the end goal seemingly being the end of it altogether. It’s thought that it will be downgraded to category B management as early as next month with officials claiming it’s less threatening than previous strains, a huge move away from the rhetoric and approach of the last few years.

This came as the Caixin services PMI slipped to 46.7, much lower than anticipated. That said, I’m not sure anyone will be shocked given the record Covid surge, but the more targeted – albeit seemingly confused – approach being taken has ensured less disruption, as evidenced by how much better the PMI has performed compared with earlier this year.

And it’s not just China that’s seeing surveys underperforming and, in many cases, putting in sub-50 readings. Europe is either already in recession or heading for it and the surveys highlight just how pessimistic firms are despite the winter getting off to a warmer start.

Japan is among the few recording a growth reading, although having slipped from 53.2 in October to 50.3 last month, you have to wonder for how long. Input prices are punishing firms, with some now raising prices in order to pass those higher costs on. That won’t help activity or convince the BoJ to declare victory, as higher energy and food costs are also hitting domestic demand. The one major outlier is India where the services PMI accelerated higher to 56.4 buoyed by domestic and external demand. An impressive feat in this global environment.

Oil higher as China looks to ease Covid restrictions

Oil prices are higher on Monday, rallying 2%, after the G7 imposed a $60 price cap on Russian oil and OPEC+ announced no new output cuts. Both bring a degree of uncertainty, with the details of the cap and the impact on Russian sales still unclear.

From the OPEC+ perspective, it can’t be easy to make reliable forecasts against that backdrop and the constantly evolving Covid situation in China, which currently looks far more promising from a demand perspective. The decision to leave output unchanged was probably the right one for now and there’s nothing to stop the group from coming together again before the next scheduled meeting should the situation warrant it.

A major setback

It goes without saying that the jobs report on Friday was a big setback for gold as it leaves huge uncertainty around where the terminal rate will land. Of course, we should be used to bumps in the road by now, having experienced many already this year. There’s no reason why the path back to 2% should be any smoother.

But the yellow metal did recover those jobs report losses and even hit a new four-month high today. Perhaps the big difference now is momentum. It’s run into strong resistance around those August highs around $1,810 and simply doesn’t have the momentum it would have had the report been cooler. We’re now more than four weeks into the recovery rally in gold and a corrective move of some kind may be on the cards.

Silence is bliss

Bitcoin continues to enjoy a mild relief rally and has even moved above $17,000 to trade at its highest level in almost a month. It’s probably too early to celebrate yet though as these are very cautious gains that could be quickly and easily wiped out by more negative headlines related to FTX. Silence is currently bliss for the crypto community.

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Crude Oil

Nine Oil Producing States Pocket N625bn in 2 Years

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Oil - Investors King

The federal government has revealed that Nine oil-producing states pocket N625.43 billion as 13 percent oil derivation, subsidy, and SURE-P refunds in just two years.

This was made known in a statement released on Friday by the Senior Special Assistant to the President on Media and Publicity, Garba Shehu.

According to the statement, the states that benefited from the refunds include Abia, Akwa-Ibom, Bayelsa, Cross River, Delta, Edo, Imo, Ondo, and Rivers States. Garba Shehu, however, added that the states still have about N1.1 billion as outstanding benefits due to them. He added that the refund has been accumulated since 1999.

Making reference to the comments made by the Governor of Rivers State, the Presidency noted that the Buhari-led regime will continue to render equal service to all the states regardless of affiliation, Investors King learnt. 

Between October 2, 2021, and January 11, 2022, the presidential spokesman disclosed that the states were paid in eight instalments, while the ninth to 12th instalments are still outstanding. 

Meanwhile, Garba recalled that data obtained from the Federation Account Department, Office of the Accountant General of the Federation,  showed that a total of N477.2 billion was released to the nine states as a refund of the 13 percent derivation fund on withdrawal from Excess Crude Account (ECA), without deducting derivation from 2004 to 2019, leaving an outstanding balance of N287.04 billion.

“Abia State received N4.8 billion with an outstanding sum of N2.8 billion, Akwa-Ibom received N128 billion with an outstanding sum of N77 billion, Bayelsa with N92.2bn, leaving an outstanding of N55 billion”.

“Cross River got a refund N1.3 billion with a balance N792 million, Delta State received N110 billion, leaving a balance of N66.2 billion, Edo State received N11.3 billion, with a balance of N6.8 billion, Imo State, N5.5 billion, with an outstanding sum of N3.3 billion, Ondo State, N19.4 billion with an outstanding sum of N11.7bn while Rivers State was paid 103.6 billion, with an outstanding balance of N62.3 billion” the statement read. 

According to the presidential spokesperson, states also got N64.8 billion as a refund of the 13 percent derivation fund on deductions made by Nigeria National Petroleum Company Limited without payment of derivation to Oil Producing states from 1999 to December.

Garba concluded that the president has approved the outstanding payment of N860.59 billion from the refunds which will soon be released to the benefiting states. 

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