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A Dovish Shift From the Fed

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

Equity markets in Europe opened a little lower on Thursday following a very mixed session in Asia and some heavy selling on the other side of the pond on Wednesday.

While investors have been relieved that this week has brought no new instability in the banking sector (yet), they are a little concerned by what they heard from the Fed and Treasury Secretary Janet Yellen yesterday.

The central bank hiked interest rates by 25 basis points, in line with expectations, but the language that accompanied it was far less hawkish than before, reflecting the uncertainty that the recent mini-banking crisis has created.

Jerome Powell and his colleagues are clearly concerned about the impact of recent events on credit conditions which may impact lending to households and businesses, slow the economy, and weigh on inflation. While this would do some of its job for it, in bringing inflation back to target, it won’t do so in the way that it will have wanted.

What’s more, the risks of further fallout have left investors nervous and while the Fed is not pricing in any rate cuts this year, markets very much are. We may not see those risks reflected in Fed forecasts and the dot plot but they are evident in the language used, as they were with the ECB last week.

BoE left with little wiggle room

The Bank of England is up next and it also finds itself left with little option but to raise rates again despite the events of the last couple of weeks. Regardless of yesterday’s inflation data, the MPC may have opted for another 25 basis points anyway as its counterparts in the US and euro area have stuck to their plan without any negative repercussions.

But the February CPI readings removed any flexibility they may have thought they had and now markets are pricing in a higher terminal rate of around 4.5% as a result. This makes the language that accompanies the decision key and I expect it will use the same playbook as the Fed and ECB in highlighting the uncertainty around the outlook and the need to take it one meeting at a time and be data-dependent.

Signs of permanent damage in oil?

Oil prices are a little lower today after gradually recovering in recent days. While no one can say with confidence that a banking crisis has been averted, there is growing confidence that the actions taken by central banks, regulators, and governments have significantly reduced the odds of one, particularly a severe scenario, and that is ultimately good for the economy and crude demand.

So while we saw Brent and WTI plunge to late-2021 levels amid the panic of the various collapses, they have bounced back almost 10% in recent days. That said, they remain below the range lows that preceded the sell-off and have even run into resistance around those lows over the last couple of days. A move back above here may suggest confidence is returning while a failure to do so may indicate some more permanent damage to expectations.

Gold shining once more?

Gold has been buoyed by the less hawkish stance from the Fed and the market perception that the central bank will swiftly reverse course on interest rates. While Powell pushed back against this, markets have other ideas and that’s enabled the dollar to soften, yields to pull back, and gold to rally.

Throw in some risk-aversion on the back of Yellen’s comments on the government not considering blanket insurance for bank deposits and gold is beginning to shine once more. It now has $2,000 in its sights once more – a level it has rarely ever traded above – and record highs are not that far above either. This could potentially become a very favourable environment for the yellow metal.

Crude Oil

Global Oil Prices Appreciate to $77.85 After Saudi Announces Plan to Cut Production

Global oil prices appreciated on Monday morning following Saudi Arabia’s announcement that it will cut crude oil production by 1 million barrels per day (bpd) from the month of July to curb global economic headwinds weighing on the market.

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Crude Oil - Investors King

Global oil prices appreciated on Monday morning following Saudi Arabia’s announcement that it will cut crude oil production by 1 million barrels per day (bpd) from the month of July to curb global economic headwinds weighing on the market.

Brent crude oil, against which Nigerian oil is priced, rose by $1.72, or 2.3%, to $77.85 a barrel by 10:48 am Nigerian time while the U.S. West Texas Intermediate crude also climbed by $1.72, or 2.4%, to $73.46.

Both crude oils gained more than 2% on Friday after the Saudi energy ministry announced that the top exporter would reduce output from 10 million bpd in July to 9 million bpd in May 2024. The biggest of such reduction in years.

The voluntary cut is on top of a broader deal by the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia to limit supply into 2024 as the OPEC+ producer group seeks to boost flagging oil prices.

OPEC+ pumps about 40% of the world’s crude and has cut its output target by a total of 3.66 million bpd, amounting to 3.6% of global demand.

“Saudi remains keener than most other members in terms of ensuring oil prices above $80 per barrel, which is essential for balancing its own fiscal budget for the year,” said Suvro Sarkar, leader of the energy sector team at DBS Bank.

“Saudi will probably continue doing whatever it takes to keep oil prices elevated … and take calculated pre-emptive steps to ensure the macro concerns potentially affecting demand are negated.”

Consultancy Rystad Energy said the additional Saudi cut is likely to deepen the market deficit to more than 3 million bpd in July, which could push prices higher in the coming weeks.

Goldman Sachs analysts said the meeting was “moderately bullish” for oil markets and could boost December 2023 Brent prices by between $1 and $6 a barrel depending on how long Saudi Arabia maintains output at 9 million bpd over the next six months.

“The immediate market impact of this Saudi cut is likely lower, as drawing inventories takes time, and the market likely already put some meaningful probability on a cut today,” the bank’s analysts added.

Many of the OPEC+ reductions will have little real impact, however, as the lower targets for Russia, Nigeria and Angola bring them into line with their actual production levels.

In contrast, the United Arab Emirates (UAE) was allowed to raise output targets by 200,000 bpd to 3.22 million bpd to reflect its larger production capacity.

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Crude Oil

Global Oil Prices Surge as US Lawmakers Suspend Debt Ceiling

Global oil prices appreciated on Friday after the United States lawmakers voted to have the country’s debt ceiling suspended for the next two years.

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Global oil prices appreciated on Friday after the United States lawmakers voted to have the country’s debt ceiling suspended for the next two years. On the final vote, 149 Republicans and 165 Democrats backed the measure, while 71 Republicans and 46 Democrats opposed it.

Brent crude oil, against which Nigerian oil is priced, rose by 77 cents, or 1% to $75.05 a barrel by 9 am while U.S. West Texas Intermediate crude (WTI) was up 69 cents, or 1%, at $70.79.

Markets were reassured by a bipartisan deal to suspend the limit on the U.S. government’s $31.4 billion debt ceiling, which staved off a sovereign default that would have rocked global financial markets.

Earlier signals of a potential pause in rate hikes by the Federal Reserve also provided support to oil prices, not least by weighing on the U.S. dollar , making oil cheaper for holders of other currencies.

Investor attention is now fixed on the June 4 meeting of the Organization of the Petroleum Exporting Countries and allies including Russia, collectively called OPEC+.

OPEC+ in April announced a surprise cut of 1.16 million barrels per day in April, but the gains from that move have since been retraced and prices are below pre-cut levels.

But signals on any fresh cut have been varied, with Reuters reporting and bank analysts indicating that further output cuts are unlikely.

On the demand side, the U.S. Institute for Supply Management (ISM) said its manufacturing PMI fell to 46.9 last month, the seventh-straight month that the PMI stayed below 50, indicating a contraction in activity.

Manufacturing data out of China painted a mixed picture. Thursday’s better-than-expected Caixin/S&P Global China manufacturing PMI contrasted with the previous day’s official government data that reported factory activity in May had contracted to the lowest level in five months.

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Crude Oil

Weak Chinese Data Weighs on Oil Prices Today

Oil prices declined by 2% on Wednesday as weak Chinese data and a stronger United States dollar dragged on commodity prices.

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Crude Oil - Investors King

Oil prices declined by 2% on Wednesday as weak Chinese data and a stronger United States dollar dragged on commodity prices.

Brent crude oil, against which Nigerian oil is priced, dipped by $1.75, or 2.37%, to $71.96 a barrel at 3:46 pm while U.S. West Texas Intermediate crude (WTI) shed $1.90, or 2.74%, to $67.56.

The decline in prices was caused by weak Chinese manufacturing activity. The data released by the Chinese government showed that activity in the sector contracted faster than expected in May with the official manufacturing purchasing managers’ index declining from 49.2 posted in April to 48.8 in May, below the 49.4 predicted by economists.

Also, the strong U.S. dollar is another factor impacting the purchase of crude oil as buyers holding foreign currencies found it too expensive.

The U.S. dollar index, which measures the greenback against six major peers, saw support from cooling European inflation and progress on the U.S. debt ceiling standoff, which will advance to the House of Representatives for debate on Wednesday.

Market players are preparing for the upcoming June 4 meeting of OPEC+ – the Organization of the Petroleum Exporting Countries and allies including Russia.

Mixed signals by major OPEC+ producers on whether or not the group will decide to further cut oil production have sparked recent volatility in oil prices.

Despite the latest pullback in prices, HSBC and analysts do not expect OPEC+ to announce further cuts in the upcoming meeting.

HSBC said on Wednesday that stronger oil demand from China and the West from the summer onwards will bring about a supply deficit in the second half of the year.

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