It’s here: The thing investors across markets and the world have been dreading. The week of the U.S. Federal Reserve’s September rate hike. If anything, the next 72 hours could lead to some of the most topsy-turvy turns in prices of oil, gold and other key energy and metals that contribute to the macro trade.
Higher-than-expected US inflation numbers for August have cemented expectations for another jumbo rate increase from the Fed at the conclusion of its monthly policy meeting on Wednesday.
Markets have priced in a 75 basis point rate increase, but some investors are bracing for a full percentage point hike—a move unthinkable just a short time ago.
'Hedging in commodities'—meaning buying into oil and gold in anticipation their prices will rise, after all, from inflation has been one classic investor defense in the past. That seemed to be in play as well on Monday as crude prices rose even as gold prices slid further.
Crude gained ground in Monday’s Asian trading as the dollar briefly weakened after its resurgence last week, and supply concerns built ahead of the European Union’s December embargo on Russian oil. There may be another six weeks to go before that embargo so volatility seems to be the name of the game till then.
By 01:00 ET (05:00 GMT), New York-traded West Texas Intermediate crude was up 37 cents, or 0.4%, to $85.13 a barrel. WTI lost almost 2% last week, adding to the near 7% loss over two prior weeks.
London-traded Brent crude rose 56 cents, or 0.6%, to $91.91. It was down 1.6% last week, adding to the near 9% slump over two previous weeks.
Crude prices rose partly on China’s easing of COVID curbs in Chengdu, a southwestern city of more than 21 million people, which helped soothe concerns about demand in the world's second largest energy consumer. China's gasoline and diesel exports also rebounded, easing high local inventories, after Beijing issued fresh quotas.
Despite questions about the future of the world economy, Kuwait Petroleum Corporation's chief executive said on Sunday its customers still demand the same volumes with no change.
The Gulf state currently produces more than 2.8 million barrels per day of oil in accordance with its OPEC quota.
Elsewhere, oil loading and exporting operations from Iraq's Basrah oil terminal are back to their normal rates on Saturday, Basrah Oil Company said, a day after being halted due to a spillage which has now been contained.
In Nigeria, Shell's (NYSE:SHEL) 200,000 barrels per day Bonga deep water storage and offloading vessel is scheduled for maintenance in October, a spokesperson said on Sunday.
Market watchers will be on high alert for how the U.S. central bank views the current pace of monetary tightening, the strength of the economy, and how likely inflation is to persist—as well as signs of how the balance sheet unwind is proceeding.
Some worry the process, in which the Fed cut its balance sheet by $95 billion per month, could hurt market liquidity and weigh on the economy.
Volatility in oil and metals aside, U.S. stocks could see massive gyrations as well, with a bias to the downside, just like last week amid fears that higher interest rates will see the economy run into trouble.
David Carter, managing director at JP Morgan in New York, told Reuters toward the end of last week:
"While the market is expecting a big bump in the Fed’s rates next week, there is tremendous uncertainty and concern about future rate increases. The Fed is doing what it needs to do. And after some pain, markets and the economy will heal themselves."
In gold, the benchmark futures contract on New York’s COMEX, December, was down $7.80, or 0.5%, to $1,675.70. Last week, December gold fell 2.6% for its fourth week in the red out of five.
The spot price of bullion, which is more closely followed than futures by some traders, was down $7.68, or 0.5%, to $1,667.74.
Sunil Kumar Dixit, chief technical strategist at SKCharting, said gold’s drop below $1,681 over the past week has shaken the confidence of market bulls as the plunge corresponded with a 38.2% Fibonacci retracement of the long-term rally in bullion that went from $1,046 to $2,073.
“With this phenomenal drop that pushed the metal below the 200-week Simple Moving Average of $1,676 and the 50-month Exponential Moving Average of $1,670, there is a growing possibility of gold dropping further down to the next leg lower. We’re talking about the 50% Fibonacci level of $1560 over the Fed's rate hike spree that can add to the Dollar Index strength and Treasury yields.”
But, as per 'old school,' gold is also likely to retrace upward towards the broken support-turned-resistance zone of $1,700-$1,710 before resuming the drop towards $1,560.
“Long story short, the metal has become extremely undervalued over the last six months as it accumulated a massive $420 loss,” Dixit noted.
With another 72 hours before the announcement of the Fed’s September rate number, there’s room for things to get a little more uncomfortable for gold bulls before they get better.
The Fed isn’t the only one considering higher rates—central bank policymakers in the United Kingdom, Switzerland and Japan will also meet during the week as the global fight against inflation intensifies.
The Bank of England meets Thursday, after last week’s BOE meeting was delayed by Queen Elizabeth II’s funeral. Policymakers are expected to hike UK rates by another 50 basis points to 2.25%. Like the Fed, the U.K. central bank could also opt for a 75 basis point hike.
It will be the BoE’s first meeting since the announcement of a government price cap on energy prices, which is expected to see inflation peak lower than it would have done, but the injection of money into consumers’ pockets is likely to keep it high for longer.
On Friday, new Chancellor of the Exchequer Kwasi Kwarteng will deliver a “fiscal event”—his first statement on how he plans to deliver new Prime Minister Liz Truss' pledge to make the U.K. a low tax economy, which risks stoking inflation.
The seemingly opposing directions of monetary and fiscal policy underline the challenges facing the U.K. economy, which has the highest inflation rate among the world's major economies but is also at risk of tipping into a recession.
The Swiss National Bank meets on Thursday with officials expected to deliver a 75 basis point rate hike, matching the European Central Bank’s recent move even though inflation in the Eurozone is far outstripping Switzerland.
Elsewhere in Europe, Norway’s central bank is expected to hike rates at its meeting on Thursday as inflation continues to exceed forecasts.
The Bank of Japan also meets on Thursday amid speculation that Japanese authorities are close to intervening in the foreign exchange market to support the weak yen, which hit a 24-year low against the dollar earlier this month.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.