Oil prices are more than 8.50% higher this morning in panicked early buying in futures markets after weekend reports that the US was looking at completely banning Russian oil imports, and the Russians themselves inserted some hefty last-minute demands on the US in the small print of the almost-finished Iran nuclear deal. With the latter in jeopardy, and the former sure to lead to higher domestic prices, it is no surprise that Asian traders, a region heavily reliant on imported energy, pushed the panic button.
My charts are suggesting the Brent crude traded briefly at $138.00 a barrel this morning, but I’ll take that with a grain of opening-panic, salt. They definitely traded above $130.00 a barrel though and are currently lying around $128.00 a barrel. To be clear, Iranian oil can’t replace Russian oil, and certainly not at the touch of a button. Nor with OPEC+ compliance above 100%, is there much capacity within the grouping to immediately pump more. Those that can, namely Saudi Arabia and the UAE, are well and truly in the box seat though and I expect the phones to be ringing in Riyadh and Abu Dubai today, with President Biden wanting “a chat.”
Today’s price action will probably be another temporary death-knell for the “energy transition” in the short to medium term, although in the long-term, it will speed it up. The uncomfortable truth is resilience in supply chains has taken the front seat over saving the planet, and I am expecting nuclear, coal, shale and gas to get a new lease on life as the price of bringing Russia to heel and isolating them. Europe, I believe, is rapidly learning this lesson, but countries such as New Zealand (it banned exploration and instead imports Indonesia coal and offshore gas), and even the US will have to face this uncomfortable reality. We are going to hear a lot more of the term “supply-chain resilience” over the next few years. Russia-Ukraine has delivered that lesson in spades before China ever had to play the rare earth elements card. I believe peak-NIMBYism is upon us, I won’t miss it.
Of course, it is not just oil prices that are flying into space. Food, industrial metals, and other energy prices are at escape velocity as well. The price action in Asia is telling this morning in early trading. While the US dollar is rising on haven sentiment and the fact that most oil is priced in greenbacks, both the Australian and New Zealand dollars have also risen, while the Malaysian ringgit is unchanged, even as most Asian currencies are lower. You can add in Indonesia later today. The premise is quite simple, if you pump, dig, or grow stuff out of the ground that the rest of the world needs right now, you are in the driver’s seat. You might also want to add previous basket cases, Brazil, Argentina, and South Africa to that list as well. Canada and the United States and the Middle East, are well-placed, and I can actually see China making good on its US-China trade deal targets in the months ahead.
I remain highly concerned about the stagflationary wave sweeping the world though. Spare a thought for the poor countries of the world who will suffer the most. The saying goes that the best cure for high prices is high prices. Unfortunately, in a stagflationary environment, that doesn’t hold true. I suspect growth projections for 2022 around the world will need to be sharply revised lower, and it will be interesting to see what the central banks of the world will do. I believe Europe and Asia will halt thoughts of monetary policy normalisation, and with Europe on the front lines, I can’t blame them.
Things will be different in what I will politically incorrectly describe as the Anglo-Saxon world. Friday’s US Nonfarm Payrolls was another monster, printing at 678,000 jobs, with 90k+ revisions upwards for December and January. The US is now just 2 million jobs short of early 2020, and you can probably account for that with early-retiring boomers. With CPI now over 8.0%, worker shortages and wage pressures, the Fed shall hike and keep hiking. Ditto Canada, and New Zealand, where the RBNZ has made a dog’s breakfast of the economy, and I expect the RBA in Australia to blink as well.
Interestingly, China’s Two Sessions’ meeting over the weekend set the lowest GDP target since 1991, at 5.50%. It has signaled it will roll out the infrastructure spending playbook to soften the blow of lower growth, but looking at oil prices this morning, I would say 5.50% is ambitious. We have an election in South Korea this week, another country where wealth has been transferred to the rich from poor and newly non-homeowners. It will be interesting to see if voter anger results in a lot of politicians losing their jobs. I will be a strong signal to a number of countries around the world this year with elections, as to whether incumbents should start packing up their personal effects.
If there are any macro-investors left that haven’t been replaced by robots, 2022 will probably be the best conditions for macro in two decades. Once the world adjusts to the new normal of Russia, are we going to see yield curves moving higher? Certainly, in the US this is possible. My guess is we will see inverted curves becoming much more common. The buy-everything rally in equities is well and truly over. The zombie army of mouse-clicking day traders will need to use more brains and less mouse-clicking going forward. Even Reddit won’t save them.
Still, there is always cryptos. They are a store of wealth in tumultuous times apparently. As for me, when I married Mrs Halley, my mother-in-law gave me a gold bar (it's an Asian thing dear readers). Mrs Halley immediately took it for “safe-keeping,” but I’m going to ask Mum is she has some more hidden around the house.
Oil prices sink Asian equity markets
The massive oil-price spike this morning, has sunk equity markets across Asia, coming after a weak finish on Friday in New York despite a monster Nonfarm Payrolls print. With most of Asia being massive net energy importers, it is hard to construct a bullish case right now, and with the stagflationary wave coming sure to hit Asia hard, any rallies will probably be measured in days and not weeks.
On Friday, US equities finished on a weak note as markets watched oil prices rise and worries mounted that the Fed would enact more hikes this year than expected. Bond yields actually fell on Friday, but mostly at the long end of the curve. Part of this would be weekend risk-hedging purposes, but part may also be markets pricing in recessionary outlooks, flattening the curve on its way to inversion. That was another reason not to be bullish equities.
The S&P 500 closed 0.79% lower, the NASDAQ retreated 1.66%, while the Dow Jones fell by 0.66%. US futures have collapsed in Asia as oil spiked. S&P 500 futures are down 1.65%, NASDAQ futures by 2.05%, and Dow futures by 1.35%.
Asian markets are in full retreat, led by Japan’s Nikkei 225 which has plummeted by 3.35%. South Korea’s KOSPI is 2.35% lower. In Mainland China, the Shanghai Composite is down by 1.10%, while the CSI 300 has fallen by 1.90%. Hong Kong markets have also plummeted, the Hang Seng is down by 3.35%.
In regional Asia, the picture is just as grim. Singapore is 0.80% lower, but Taipei has retreated by 2.90%. Kuala Lumpur and Jakarta are down 1.0%, while Bangkok has fallen by 1.20%. and Manila by 2.45%. Australian markets are also lower, the ASX 200 and All Ordinaries have fallen by 1.10%.
If the early price action is saying anything, it is the Asian markets with a higher beta to the tech story are suffering more than those markets which are more commodity and traditional industry-centric. Nevertheless, Brent crude at $130.00 has negative ramifications, even for commodity producers.
European markets will draw the go directly to jail Monopoly card when they open later this morning, and look set to endure an extended period of pain, sandwiched between Ukraine’s front line and the massive jump in energy and commodity prices. US markets will probably open more nervous than Joe Biden’s mid-election hopes later today. If oil prices correct sharply lower, they may gain temporary respite. Although Ukrainian and Russian officials are scheduled to meet again, none of the rhetoric from the Kremlin suggests Mr Putin is in any mood to compromise and thus, a respite from that direction will once again, be temporary at best.
US dollar rises on geopolitical/economic nerves
The US dollar rose into the end of the week on Friday as investors loaded up on weekend risk protection. Nothing has changed over the weekend to alter the need to hold US dollars, if anything with the US seemingly about to ban Russian oil imports, and no good news from Ukraine, the situation has hardened.
The Dollar Index has risen by 0.57% this morning to 99.06, but the US dollar pain has been unevenly spread. European and Asian currencies have borne most of the pain, with news circulating that the Bank of Korea has been intervening to sell the US dollar today versus the won. EUR/USD has tumbled by 0.80% to 1.0850, and is, ominously, not far from long-term support at the 1.0800 region I mentioned last week. A weekly close below 1.0800 potentially signals a move well below 1.0000. GBP/USD has fallen by 0.30% to 1.3200 and is eyeing support at 1.3150, failure of which will see GBP/USD retest 1.3000.
Elsewhere, the commodity-centric Australian and New Zealand dollars have actually rallied, rising 0.45% to 0.7410 and 0.6890 respectively, while the Canadian dollar is unchanged versus the greenback. High commodity prices and expectations of higher interest rates are combined to lift the Three Amigos, nullifying their risk-sentiment status. The technical picture is especially constructive for AUD/USD and NZD/USD and suggests at least another 100-150 points of gains in the sessions ahead.
The Asian currency sell-off is also uneven. The won, baht, New Taiwanese dollar, and Philippine peso are sharply lower, as is the Indian rupee, with the BOK intervening this morning. The Indonesian rupiah and Malaysian ringgit, both major commodity exporters, are holding firm with the Singapore dollar finding support by association. There appears to be a major split developing in the Asian currency grouping along the lines of short commodity importers/long commodity exporters. Of this grouping the Indian rupee is probably the most vulnerable, being also at the mercy of hot-money inflows and outflows from the equity market. A retest by USD/INR of 77.40 seems inevitable.
Oil prices, I don’t know what to say……
Panic has been seen again in oil markets in Asia today, with Brent crude spiking to nearly $140 on the open before settling at $128.00 a barrel. A combination of toxic factors over the weekend has combined to induce more panic buying in Asia. The US is apparently preparing to ban Russian oil exports, President Putin showed no signs of softening his Ukraine stance as the war proceeds onwards, and finally, Russia made last-minute demands of the US over the Iran nuclear deal, jeopardizing it and the return of Iranian oil to official markets.
Brent crude and WTI prices have risen by around 7.0% anyway on Friday leaving markets on edge this morning. The weekend developments saw panic hit oil markets at the open as I mentioned, and at the time of writing, Brent crude is 8.50% higher at $128.00 a barrel, and WTI is 7.90% higher at $124.00 a barrel.
With oil buying at such extremes, both contracts have the potential to stage aggressive corrections lower at the first glimmer of some good news, no matter how tenuous. Brent crude has a gap on the charts today and thus, could potentially correct back to $120.00 a barrel, dragging WTI back to $177.00 a barrel.
Having met my stretch price target of $130.00 a barrel, I am unsure where Brent crude goes from here. All I know is that high prices are here to stay and that the oligarchs of Londongrad will probably be replaced once again, by spoiled brats from the Middle East drag racing expensive European hypercars through the streets of Knightsbridge. Harrods will be the winner.
If pushed, I would say that Brent crude will potentially trade in a $120.00 to $130.00 a barrel range now, and WTI between $116.00 and $126.00 a barrel.
Gold is loving stagflation
Gold managed to nibble at $2000.00 an ounce this morning, rising with oil on stagflation fears after weekend developments. It has since backed off that level as oil prices moved lower but remains 0.85% higher at $1987.50 an ounce. On Friday, gold enjoyed another powerful session as investors loaded up on weekend risk hedging, rising 1.80% to $1970.00 an ounce.
There is likely to be plenty of barrier option-related selling around the $2000.00 region initially, making gains challenging initially. Additionally, gold appears to be following oil prices today, so if oil corrects lower again, the fast-money longs are likely to quickly retreat.
Although gold has burnt many a bullish trader intraday of late (including the author), its price action remains underlyingly contractive. The present situation in the world is as good a bullish case for gold as I can recall in a long time. Once $2000.00 an ounce is cleared, the path to $2100.00 will be laid open. Intraday support lies at $1970.00 and $1940.00 an ounce.