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NET CHG.

%CHG.

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SPX

S&P 500 Index

6816.52

6816.52

6816.52

6861.30

6801.50

-10.89

-0.16%

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DJI

Dow Jones Industrial Average

48416.55

48416.55

48416.55

48679.14

48283.27

-41.49

-0.09%

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23057.40

23057.40

23057.40

23345.56

23012.00

-137.76

-0.59%

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USDX

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97.800

97.880

97.800

97.930

97.780

-0.090

-0.09%

--

EURUSD

Euro / US Dollar

1.17591

1.17598

1.17591

1.17638

1.17442

+0.00060

+ 0.05%

--

GBPUSD

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1.34126

1.34135

1.34126

1.34152

1.33543

+0.00363

+ 0.27%

--

XAUUSD

Gold / US Dollar

4276.21

4276.55

4276.21

4317.78

4271.42

-28.91

-0.67%

--

WTI

Light Sweet Crude Oil

55.711

55.741

55.711

56.518

55.559

-0.694

-1.23%

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Russia-Ukraine Conflict
Middle East Flashpoint

Euro Holds Steady After the ECB Decision

N Faiszah Ishak

Traders' Opinions

Summary:

After a recent decision, there has been a notable upsurge in risk appetite, which has led to a widespread sell-off of the US Dollar. The Euro experienced a noteworthy uptick of more than 100 pips, which led to fresh two-week highs that settled just above 1.0900.

On Thursday, the Euro (EUR) exhibited a positive trend, surpassing the 1.0900 level, mainly due to the weakness of the US Dollar (USD). Such a decline in the USD's strength resulted from the European Central Bank's (ECB) decision to maintain the interest rates unchanged at 4.5%.

On Wednesday, the Federal Reserve delivered a strong and confident message to investors. While the bank left interest rates unchanged, as anticipated, Fed Chair Jerome Powell clarified that interest rates peaked, with 17 out of the 19 policymakers forecasting rate cuts in 2024. This surprise move demonstrates the Fed's unwavering commitment to supporting the economy and ensuring sustainable growth for the future.

The bank has issued a warning regarding the potential rise in inflation in the upcoming months. The economic projections indicate an acceleration of the region's economy from an average of 0.6% in 2023 to 0.8% in 2024, followed by a growth of 1.5% in 2025.

After a recent decision, there has been a notable upsurge in risk appetite, which has led to a widespread sell-off of the US Dollar. The Euro experienced a noteworthy uptick of more than 100 pips, which led to fresh two-week highs that settled just above 1.0900. The pair appears to have stabilized at this range as traders await the European Central Bank's (ECB) decision, which is expected to be announced later today.

• The Euro maintained stability above 1.0900 after the European Central Bank's decision.

• The dollar is still struggling after the Federal Reserve's recent shift towards a more accommodative monetary policy.

• Investors are eagerly anticipating the press release from President Lagarde.

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Latest News on the Israeli-Palestinian Conflict (December 19)

Palestinian-Israeli conflict

Latest news on the Israeli-Palestinian conflict

0:01

Israeli media reported that six of the world's largest oil transport ships have stopped working in the Red Sea due to continued attacks and kidnappings by the Houthi armed forces. There are now a large number of warships from Western countries in the Red Sea, including the United States, Britain, Japan, South Korea, etc.

The coalition is expected to take military action in the coming days.

Latest News on the Israeli-Palestinian Conflict (December 19)_1

0:59

Oil majors Evergreen, Euronav and BP have temporarily suspended all shipping through the Red Sea, a move that joins several other prominent shipping lines that are changing routes.

1:02

Of Israel's 12 active Iron Dome fortifications, eight are currently dedicated to northern Israel, with only two remaining in Gaza.

1:03

Egypt says it will not join any military or security alliance/organization that takes military action against the Houthis. This is in line with Egypt's policy of de-escalating the situation through diplomacy and civil discussions.

1:11

Knesset President David Azoulai has drawn criticism from the Auschwitz concentration camp museum when he advocated for Gaza to be permanently evacuated and turned into an uninhabited museum.

The museum later condemned the proposal by Israeli officials, equating it to terrorism and objecting to comparisons with the former Nazi concentration camp Auschwitz.

1:35

At a joint press conference with the US Secretary of Defense today, Israeli Defense Minister Galante said that if Hezbollah does not move north of the Litani River through diplomatic efforts, Israel "will not hesitate to take action (military )".

Latest News on the Israeli-Palestinian Conflict (December 19)_2

2:23

US Defense Analyst: "Iran is now the first and only country in the world to develop and successfully use anti-ship ballistic missiles in active combat" This is a reference to this week's incident, when the "Palatium- lll" ship was hit by an Iranian anti-ship ballistic missile in the Red Sea, launched from Yemen by Ansarullah.

3:20

"Hamas has established a branch in Syria and plans to escalate attacks on Israel from the Golan Heights" - Cann.

3:45

Jordan's foreign ministry now claims that Iranian militias are behind attempts to infiltrate Jordan.

Earlier today, the Jordanian military announced that they had repelled an attempt by heavily armed fighters to infiltrate into Jordan from the north from Syria in what they called a "plot against the sovereignty of the Kingdom of Jordan." Infiltrators carry machine guns, explosives, rocket launchers and anti-personnel mines. A Jordanian FM spokesman now says "Iranian militias" were behind the infiltration attempt and that he spoke to Iran's foreign minister.

5:56

Breaking news: The United States officially announced the launch of the "Prosperity Guardian" military operation in the Red Sea, planning to collectively attack the Houthi armed forces.

Official participating countries are:

Europe: United Kingdom, France, Italy, Netherlands, Norway, Spain

Americas: United States, Canada

Middle East: Bahrain

Africa: Seychelles

6:37

Now, after leaving the Philippines, the "Carl Vinson" aircraft carrier battle group is heading towards the Middle East.

At present, the US military and allied forces are officially at war with the Houthi armed forces in the Red Sea, which will inevitably lead to the complete closure of the Suez Canal.

A large number of merchant ships sailing around Africa to reach Europe will inevitably lead to rising prices in Europe and cause Europe to suffer serious losses.

7:43

Israel's "Haaretz" broke the news that the United States and European governments are putting pressure on Israel to end the widespread fighting in Gaza. and demanded that Israel replace the war in Gaza with concentrated attacks and assassinations of Hamas leaders.

9:47

At around 4 a.m. this morning, the British Maritime and Trade Office received a report of two drones attacking ships in the Gulf of Aden.

9:52

Yesterday, it was reported that Hezbollah used Iranian-made Bashir precision-guided artillery shells to destroy two Israeli Iron Dome systems.

10:06

The United Arab Emirates and Saudi Arabia rejected a U.S. request for a joint attack on the Houthis out of fear that their oil fields would be destroyed by Houthi missiles.

10:11

After the United States announced the launch of the "Prosperity Guardian" military operation, the Chief of Staff of the Iranian Revolutionary Guards said: Iran will stand with the Yemeni people until the end.

10:16

Iranian analysts said that the Houthi armed forces successfully used anti-ship missiles with a range of 300 kilometers to attack moving targets at a speed of 25 knots, setting a historical record for Yemeni anti-ship missiles to attack warships.

10:33

Satellite images show that the USS Eisenhower aircraft carrier is 283 kilometers away from the nearest Houthi armed area today.

The anti-ship missiles owned by the Houthis have a range of 300-500 kilometers. The Houthi armed forces launched anti-ship missiles and successfully destroyed moving targets across the sea.

10:45

Israel has informed the Biden administration that as part of a diplomatic deal, they want Hezbollah to be pushed about 6 miles from the border or the Israel Defense Forces will take military action.

14:07

Yemen's Houthis say they are capable of confronting any U.S.-led coalition in the Red Sea.

14:24

The Jordanian military stated: More than a dozen sneak attack militants from Syria crossed the border carrying rocket launchers, and the army destroyed the vehicle filled with explosives.

16:06

The Royal Navy's stealth cruise missiles used to fight the Houthis have been deployed on warships.

Stealth cruise missiles provide UK Navy frigates and destroyers with modern anti-ship capabilities and the ability to engage land targets.

16:13

Now, the US military and coalition forces have deployed heavy forces on the front line: five guided missile destroyers, each with 90 launch units, and a cruise missile nuclear submarine equipped with 154 Tomahawk cruise missiles.

Latest News on the Israeli-Palestinian Conflict (December 19)_3

16:46

Yemen’s Houthi defense minister reacts to U.S.-led Operation Prosperity Guardian: “The Red Sea will be your graveyard, we have weapons to sink your aircraft carriers and destroyers.”

He also called on Bahrain's Sunni and Shia Muslims to rebel and overthrow their king.

Potential losses to Europe and the United States could include economic impacts such as higher oil prices, disruption to Red Sea trade routes, a potential refugee crisis, and potential military involvement or casualties.

17:07

Why is maintaining free and safe navigation in the Bab el-Mandeb Strait near Yemen so important to international maritime trade?

Latest News on the Israeli-Palestinian Conflict (December 19)_4

Because 11% of world trade passes through there. Alternative routes around the Cape of Good Hope would add significant costs.

17:12

Senior Yemeni official Mohammed Abdul Salam responded to the US military and coalition forces:

They will not change their stance on the Gaza war following the US-led coalition's operations in the Red Sea.

There is no need for this alliance because the waters off Yemen are safe for everyone except Israeli ships or ships heading to Israel.

The US-led alliance was formed to militarize the sea.

Just as the United States has allowed itself to support Israel, Yemen has also proactively supported the legitimate cause of Palestine.

17:23

Britain has confirmed that a ship near Djibouti was attacked by Yemeni Houthi rebels.

This is part of its strategy to prevent goods from reaching Israel and disrupt oil and grain trade routes.

17:37

Breaking: The Islamic Revolutionary Guard Corps announced the formation of a maritime militia!

The Navy Basij, which performs maritime missions, has large ships that can sail on the high seas as far as Tanzania.

The militia includes 55,000 volunteer troops and 33,000 ships, and the second phase will be established in the Caspian Sea.

The ship is equipped with weapons such as 107mm rockets and can launch attacks when necessary.

18:07

Swedish shipping company Linnaeus Wilhelmsen has suspended all shipping in the Red Sea until further notice!

19:05

Yemen's Houthi armed forces threaten the US military: "We have weapons that have not been used so far."

20:13

U.S. Institute of War Briefing: Israel’s cleanup operation in the northern Gaza Strip appears to be nearing its final stages.

Latest News on the Israeli-Palestinian Conflict (December 19)_5

20:24

U.S. Defense Secretary Austin tweeted that he was meeting with the King and Crown Prince of Bahrain.

20:34

Norwegian shipping and logistics company Wilhelmsen halted activities in the Red Sea after Norway joined the U.S.-led coalition against Yemen.

21:29

Yahya, spokesman for the Houthi armed forces in Yemen, responded strongly: They have tried us for nine years, and if they want to do it again, we are ready. If the United States and Israel attack us, they will commit something stupid they have never done before, and the reaction will be violent.

21:52

US Defense Secretary Austin tweeted that he was meeting with Qatari leaders in Doha, the capital of Qatar.

Austin said: "We look forward to having a productive dialogue based on the strong defense partnership between the United States and Qatar, which includes Qatar hosting U.S. troops at Al Udeid Air Base."

21:56

The Houthis threaten the United States and Israel with mines: "We will turn the Red Sea into your hell."

Mohammed Al-Bukhaiti, member of the Yemeni Politburo: Even if the United States succeeds in mobilizing the world, our military operations will not stop unless the genocide in Gaza stops.

22:23

Israeli President Herzog stated: We are ready to implement another humanitarian truce in Gaza to rescue the hostages.

22:41

The UAE newspaper "Al Ain" reports: In addition to missiles and drones, Yemen's Houthi armed forces will also use ships carrying explosives to attack ships in the Red Sea and the Gulf of Aden (targeting Israel).

The article also pointed out that Yemeni professional experts are debugging and improving unfinished technical equipment to use anti-ship ballistic missiles more effectively and reduce hit errors.

23:57

A Houthi official told Iran's Al-Alam TV: Any country that takes action against Yemen will target its ships in the Red Sea.

Source of the article: "Gift from the Beautiful Fairy" WeChat public account

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

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Big Oil Generated $613bn in Cash After Covid on High Energy Prices

Economic

Stocks

Energy

The record profits and cash flows of the world's biggest oil companies have enabled shareholders to reap significant return while driving a rise in mergers and acquisitions activity, a report has said.

BP, Chevron, ExxonMobil, Shell and TotalEnergies, collectively known as Big Oil, generated a combined operating cash flow of $613 billion between January 2021 and September 2023, Moody's said in a report last week.

Brent crude, the benchmark for two thirds of the world's oil, soared to about $140 a barrel after Russia's invasion of Ukraine last year.

Oil prices have since nearly halved amid demand concerns and an ease in supply restrictions.

The big energy companies increasingly opted to return surplus cash flow to shareholders via dividends and share buybacks.

Last year, share buybacks reached a record $57 billion, which was more than the total combined amount from 2015 to 2021, Moody's said.

For the nine months to September 2023, share buybacks already stood at $48 billion.

Moody's expects the "sharpened focus" on shareholders to persist.

The rating agency said it viewed that as a "credit negative" because it directs cash flow away from the companies' balance sheets and investments.

Meanwhile, the combined capital expenditure of the five companies rose by 19 per cent between 2020 and 2022, but still only represented around half of what they invested during the last peak investment cycle a decade ago, Moody's said.

"Total investment may grow in the coming years but will likely remain well below historical peaks," the rating agency said.

"This investment discipline is driven by investor demands but also greater focus on low costs, more stringent emissions criteria, and desire for quick return on assets."

Since 2020, Big Oil has also used the record cash flow to reduce debt.

Debt have fallen by 28 per cent, or $134 billion, since the end of 2020 to its lowest in eight years, the report said.

Record profits have also triggered a rise in M&A activity in the oil and gas sector.

The big oil companies stepped up acquisitions in 2022 and 2023 but some of the larger deals announced in October were funded from shares and not cash.

Between 2021 and September of this year, the companies received $52 billion from the sale of investments or assets, while only spending $27 billion on acquisitions, Moody's said.

In October, Exxon Mobil said it would buy Pioneer Natural Resources in a deal valued at $59.5 billion. Meanwhile, Chevron agreed to acquire smaller rival Hess in a $53 billion deal.

"Acquisitions made since 2022 have often been to support low-carbon and growth businesses in areas such as renewable energy, bioenergy, distribution networks or carbon capture," the rating agency said.

Growing uncertainty

Despite the industry's recent gains, oil and gas companies face major long-term uncertainties around the evolution of energy demand.

Stricter regulations and increased taxes on oil and gas companies can strain their cash flows, operations and fossil fuel production, Moody's said.

Policies such as the US Inflation Reduction Act are also encouraging the transition to a low-carbon economy and newer growth markets, such as hydrogen, according to the International Energy Agency.

Meanwhile, the UK and the EU have levied windfall taxes on the profits that oil and gas companies made during the Covid-19 recovery.

"However, the taxes shouldn't be a major issue for the Big Five because their cash-flow generation remains strong," Moody's said.

Outlook for 2024

Oil prices have trended lower since mid-October amid concerns of lower global demand, higher supply from non-OPEC+ sources and doubts over whether some OPEC+ members would comply with the pledged cuts in output.

The Institute of International Finance expects Brent to average $80 a barrel in 2024, down from $83 a barrel in 2023.

However, the international benchmark will trade at $83 a barrel in the first quarter of the coming year, driven by OPEC+ cuts, the IIF said, adding that oil may resume its decline after the first three months.

On November 30, OPEC+ members agreed on 2.2 million million barrels per day of crude oil production cuts, which includes the extension of Saudi Arabi's voluntary cut of one million bpd through to March 2024.

OPEC expects oil demand to grow by 2.2 million bpd next year, about double the International Energy Agency's estimate of a growth of 1.1 million bpd.

"Global oil demand growth will slow in 2024 as overall economic activity cools. The absence of a strong demand story like the return of China from Covid-19 will limit upside risk to demand," Emirates NBD said in a research note.

"Supply from outside of the OPEC+ alliance will expand by more than 1 million bpd [next year], led by North and South American production."

Source: The National News

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

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Bank of Japan Leaves Rates Unchanged, EU CPI Set to Be Confirmed at 28-Month Low

Forex

We saw a negative start to the week for European markets yesterday, as we head towards the last few trading days before Christmas with the FTSE100 managing to buck the negative trend largely due to a rebound in the energy sector and a strong performance from telecoms.

A rebound in oil and gas prices over the ongoing uncertainty in the Red Sea and Suez Canal, due to attacks on shipping by Houthi rebels from Yemen, which prompted the likes of Maersk and BP to suspend travel through this route, does have the potential to exert upwards pressure on inflation and in so doing act as a price shock in global supply chains if sustained.

We aren't there yet however especially since oil prices are still near 5-month lows with talk of soaring petrol prices in the leadup to Christmas rather alarmist at this early stage.

The rest of Europe slid back modestly mainly on the back of profit taking, having come off the back of a series of weekly gains, and after further evidence of economic weakness in Germany, Europe's largest economy after a weak IFO business confidence survey.

This economic weakness combined with poor manufacturing and services data these past few months makes it all the stranger that a few days ago, the European Central Bank while taking the decision to leave rates unchanged and then insisting that they had no intention of cutting rates in the near future.

We have been here before with the ECB, a refusal to see the evidence in front of their faces that the economy is struggling, in 2008 and then again in 2011, so perhaps it could be argued that 3 times is a charm.

ECB President Lagarde came across as very hawkish, insisting that rate cuts had not been discussed which in itself is very revealing given that the US Federal Reserve has discussed cutting rates against a backdrop of 5.2% GDP growth, unemployment of 3.7%, and CPI at 3.1%.

Apparently, the ECB would have you believe that they aren't with headline CPI at 2.4% and an economy on its knees.

The reality is the data speaks for itself, and the region appears to be heading for recession if not already in one.

With the flash CPI numbers slowing sharply to 2.4% at the start of this month, down from 2.9%, today's final CPI numbers are expected to come in unchanged from the flash numbers, while core CPI is slowing as well, albeit at a slower rate, coming in at 3.6%.

Lagarde did place greater emphasis on the core numbers when it came to any decision on rate cuts, however when other data is taken into consideration it's hard to argue against the prospect that headline inflation could be back at 2% by the start of next year, thus making it even less credible that the ECB should be pushing back against imminent rate cuts.

While the ECB is reluctant to countenance rate cuts the Bank of Japan has the opposite problem and a refusal to countenance rate hikes with a headline rate of -0.1%.

In recent days there have been rumblings that this might change with this morning's decision by the Japanese central bank, the final big macro event of 2023.

Having teased the markets about their intentions over rates as well as yield curve control over the past few weeks and months the Bank of Japan kept interest rate and monetary policy unchanged this morning. The central bank didn't offer any further guidance as to their future intentions with today's press conference by Governor Ueda set to be keenly scrutinised for the central bank's future policy intentions.

Against this backdrop and another strong finish for US markets, European stocks look set to open modestly higher.

EUR/USD – while below the recent peaks at 1.1015/20 the bias remains for a move back to the 200-day SMA at 1.0830. A break above 1.1030 has the potential to target the July peaks at 1.1275.

GBP/USD – last week's failure at 1.2795 has prompted further weakness with the potential for a move back to the 200-day SMA at 1.2520. The bias remains for further gains while above the 200-day SMA at 1.2520. We also have support at the 1.2590 area.

EUR/GBP – has rebounded back to the 100-day SMA at 0.8640, with a break targeting the 0.8700 area. Support at the 0.8570/80 area. A move below 0.8580 targets 0.8520.

USD/JPY – having slipped below the 200-day SMA at 142.50 last week, we've squeezed back above it and could move up to 146.00 in the short term before running out of steam. While below 146.00 the bias remains for a move below 140.00.

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

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JPY Strength Remains Intact Ahead of BoJ

Forex

Central Bank

Economic

In December, the JPY was the best performer among the major currencies against the US dollar where it soared by +4.85% as of 19 December at this time of the writing.

The recent JPY strength has been attributed to two factors; the US Federal Reserve's dovish pivot where it guided market participants by projecting three cuts on the Fed funds rate in 2024. In contrast, hawkish guidance from top BoJ officials made two weeks ago where Governor Ueda and Deputy Governor Himino's remarks have dialled up speculations that the current short-term negative interest rate policy in Japan in place since 2016 is likely to be scrapped sooner than expected and may come as early on the 23 January 2024 monetary policy meeting where BoJ releases its latest economic outlook report on the same day.

Today, the Bank of Japan (BoJ) will conclude its last two-day monetary policy meeting for 2023 while the consensus expectations are expecting no change to the current monetary policy setting, BoJ can still potentially lay the groundwork for its upcoming shift away from short-term negative interest rates via its policy statement and BoJ Governor Ueda's press conference at 3.30 pm after the close of the Japan's stock market.

BoJ faced mounting pressures from the public and private sectors

Interestingly, ahead of today's monetary policy decision outcome, it seems that mounting pressure from the public and private sectors has arisen, prominent Jaan business lobby Keidanren head Tokura said yesterday that BoJ must normalize monetary policy as early as possible. Also, today's meeting outcome will be attended by Economy Minister Shindo as a representative from the Cabinet Office who cannot vote on monetary policy decisions.

It is rare for a cabinet minister to attend BoJ monetary policy meetings as such "attendee roles" are usually assigned to deputy ministers. In the past meetings that cabinet ministers attended had resulted in major monetary policy changes such as the launch of the mega quantitative asset-buying programme in April 2013.

USD/JPY is hovering around the 200-day moving average

Fig 1: USD/JPY medium-term trend as of 19 Dec 2023 (Source: TradingView, click to enlarge chart

The medium and short-term downtrend phases of the USD/JPY in place since a test on its 151.95 major resistance on 13 November 2023 remain intact as price actions remain below its downward sloping 20 and 50-day moving averages without a bullish divergence condition seen on its daily RSI momentum indicator at its oversold region.

Short-term momentum has turned bearish

Fig 2: USD/JPY short-term minor trend as of 19 Dec 2023 (Source: TradingView, click to enlarge chart

In the shorter term as depicted on the hourly chart, the RSI momentum indicator has staged a bearish breakdown below its parallel ascending support after it hit overbought status yesterday, 18 December.

Watch the 143.30 short-term pivotal resistance and a break below the recent 140.95 low printed last Thursday, 14 December may expose the next intermediate support at 139.20 in the first step (also the close to the 50% Fibonacci retracement of the prior medium-term uptrend phase from 16 January 2023 low to 13 November 2023 high).

On the other hand, a clearance above 143.30 negates the bearish tone for a potential minor countertrend rebound to see the next intermediate resistances coming in at 144.80 and 146.70 if 144.80 is taken out.

Source: MarketPulse

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

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Gold Price Could Struggle to Gain Traction – Here's Why

Commodity

Gold Price Technical Analysis

Gold failed to continue higher and corrected lower sharply below $2,050 against the US Dollar. It even dived below the $2,000 support before the bulls appeared. Gold Price Could Struggle to Gain Traction – Here's Why_1

Gold Price Could Struggle to Gain Traction – Here's Why_1

The 4-hour chart of XAU/USD indicates that the price traded as low as $1,972 and recently there was a recovery wave. There was a move above the $2,000 resistance zone. The price cleared the 100 Simple Moving Average (red, 4 hours) and the 200 Simple Moving Average (green, 4 hours).

However, the bears seem to be active near the 38.2% Fib retracement level of the downward move from the $2,145 swing high to the $1,972 low.

There is also a key bearish trend line forming with resistance near $2,036 on the same chart. An upside break above the $2,036 level could send the price soaring toward the $2,0600 resistance. The next major resistance is near the $2,080 level, above which Gold could test $2,120.

If not, the price could start a fresh decline. Initial support is near the $2,000 level. The first major support sits at $1,995 and the 200 Simple Moving Average (green, 4 hours).

The next major support could be $1,970. Any more losses might call for a move toward the $1,960 level in the coming days.

Looking at crude oil, there was a recovery wave above the $71.20 level, but the bears might appear near the $75.00 zone.

Economic Releases to Watch Today

US Housing Starts for Nov 2023 (MoM) – Forecast 1.360M, versus 1.372M previous.

US Building Permits for Nov 2023 (MoM) – Forecast 1.470M, versus 1.498M previous.

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

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A Retrospective Perspective: How the Global Economy Has Changed in 35 Years

Economic

I wanted to focus on three themes which played a major role in driving economies and markets over the last 35 years. The first is a big theme which ran through the entire period and may now have come to an end, the second is one that started as an economic trend but has become more geo-political and the third is an old theme, one that has challenged economies for decades.

These three themes are the great disinflation, the rise of China, and the rise and rise of government debt. There are other trends, but these three have been the most important in my view and have often been at the root of the crises we have experienced over the period. How they play out will be key to the outlook for the next 35 years.

Theme 1: The great disinflation

In 1988, when I started as a UK economist at Schroders, the inflation rate in the UK had just risen above 6%, the highest for six years and interest rates were high and rising. The economic debate was on how inflation had managed to come back after the deep recession of the early 1980s when three million people became unemployed. The market debate was on how far monetary policy would have to be tightened to tame inflation.

Today, the Bank of England (BoE) and central banks around the world along with the markets are asking the same question as they endeavour to bring inflation back down to target amidst another cost-of-living crisis.

Yet, despite book-ending my career at Schroders, accelerating inflation has not been the theme of the past 35 years. Instead, the period can be characterised as the great disinflation where inflation has steadily fallen year after year (see chart 1). This culminated in a period after the global financial crisis of 2007-08 (the GFC) when the concern shifted from disinflation to outright deflation with central banks ultimately printing money and embarking on quantitative easing. Economists asked if the world economy was about to follow the Japanese experience of falling prices.

A Retrospective Perspective: How the Global Economy Has Changed in 35 Years_1

Falling inflation helped drive returns, but also bouts of “irrational exuberance”

The big trend of falling inflation and interest rates had important consequences for markets and brought significant returns from both equity and bond markets.

A Retrospective Perspective: How the Global Economy Has Changed in 35 Years_2

Until 2021 government bonds had matched equity returns, but putting aside the question of whether we are moving to a new more inflationary regime, it is clear that those stellar return figures flatter to deceive. As can be seen from chart 2, market returns have been volatile and were punctuated by a series of bull and bear markets.

Many of these fluctuations were a consequence of the fall in inflation itself which released liquidity into real assets, primarily equity and property, as interest rates fell, and investors shifted from the safety of cash. This drove asset values higher, fuelling the bull market. However, the liquidity also flowed for longer and to places where it probably should not have gone.

Rising markets can develop a momentum of their own as they draw in capital from investors fearful of missing out. The incentive to keep up with the competition and participate is intense and as a result market prices can continue to travel beyond what might be justified by the fundamentals.

Some economists point this out at the time, but more often than not are run over by the herd chasing the bull market.

As John Maynard Keynes noted back in the 1930s – “markets can stay irrational longer than you can remain solvent”.

Underlying this is the difficulty of knowing when markets have gone too far, as former Federal Reserve chair Alan Greenspan said: “Clearly sustained low inflation implies less uncertainty about the future, and lower risk premiums imply higher prices of stocks and other earning assets… But how do we know when irrational exuberance has unduly escalated asset values which then become subject to unexpected and prolonged contractions…”

History went on to prove his point: Mr Greenspan made those remarks in 1996 just as dot-com stocks were getting going and although there was already talk of a bubble, the bull market ran on until March 2000.

An unforeseen consequence of the great disinflation was a series of investment bubbles where markets became detached from fundamentals. These often proved to be the best and worst of times to be an economist: the best due to the surge in interest and media attention, and worst because the economics became irrelevant to the market.

More importantly, alongside financial losses, the bursting of those bubbles always had significant economic consequences.

The end of the sub-prime mortgage bubble in 2007 led to the collapse of the global banking system and the Great Recession - the worst since the Great Depression of the 1930s. East Asia suffered a similar fate following the 1997 crisis, particularly after the IMF rescue plan imposed austerity on the region. The euro was another victim as the unwind of capital flows post-GFC led to the crisis of 2012 with the Greek economy experiencing massive losses of jobs and output.

One factor which helped drive theme one is the emergence of China as an economic power, the subject of theme two.

Theme 2: The rise of China

“Let China sleep, for when she awakes, she will shake the world” – attributed to Napoleon.

Napoleon may or may not have said this, but whoever did was right. The emergence of China as a significant economic player over the past 30 years has certainly shaken the world economy. If there was one chart that captures this, it would be chart 3 which shows the increase in China's share of global trade.

Starting at 1% in 1982 this has now risen to 12% and was briefly higher in 2021 at the height of the lockdown-related boom in stay-at-home goods trade. The acceleration really began after China's ascension to the World Trade Organisation at the end of 2001 which opened up access to international markets.

A Retrospective Perspective: How the Global Economy Has Changed in 35 Years_3

Today, China has the highest share of any country in global trade. The chart also shows the corresponding decline in trade share of the US, Germany, and the UK. The arrival of China has had consequences not just for international trade and investment but also for inflation, growth, inequality, and politics in the rest of the world.

Economic effects

The opening up of China was a positive supply shock for the world economy, increasing the supply of goods and labour. The effect was to help contain global inflation by weighing on prices and wages and contributing to the fall in inflation. This could be seen most clearly in the west with the decline in goods price inflation which actually turned to deflation during most of the decade before the pandemic.

Chart 4 shows the picture for the US whereby the softness in goods prices helped offset more rapidly rising service sector prices and enable inflation to stay close to its 2% target. Note how the recent re-opening of supply chains after the pandemic has brought goods price inflation back down and contributed to the fall in inflation in 2023. The same pattern can be seen in CPI indices in the UK and eurozone.

A Retrospective Perspective: How the Global Economy Has Changed in 35 Years_4

As a consequence, for much of the period the rise of China was seen as a positive economic benefit. Alongside lower inflation, multi-nationals invested in China, their supply chains grew exponentially and by reducing the costs of production this directly contributed to the rise in the profit share on income. Meanwhile, consumers benefitted from the supply of cheaper goods.

However, it has also become clear that the counterpart to higher profits - the squeeze on labour income in the West – has become a source of discontent with the economy which has spilled over into political unrest. Those declines in trade share shown in chart 3 reflected the hollowing out of industry in the OECD economies with the loss of many well-paid manufacturing jobs.

There is considerable debate as to how much of this should be attributed to the rise of China and globalisation. For example, new technologies have played a role. Nonetheless, as with the fall in inflation and boom in asset prices it has tended to exacerbate inequality in the West. Populists have seized on the opportunity to exploit this discontent with a mix of nationalism and protectionism.

Tipping point?

The change in attitudes toward China may, however, have been when business in the West realised that China was evolving from being a supplier to a competitor. Chinese firms were beginning to compete head on with their OECD counterparts. This was of course inevitable: as a country increases its living standards it will look to move its production towards the higher value-added end of the range.

Nonetheless, by the middle of the last decade China had overtaken the US as the economy with the largest trade share (see chart 3). This also coincided with the publication in 2015 of Made in China 2025 by the Chinese government – a 10-year plan to update China's manufacturing base by focusing on 10 key high tech sectors. The report crystalised fears that China would take market share from western companies and acted as a catalyst for a protectionist response.

Source of geo-political tension

Today, the need to stymie Made in China 2025 is one of the few issues that has bi-partisan support in the US Congress. The move toward increasing tariffs and restricting trade in technology has been given added impetus by the security threat from China that many in the US and Europe now perceive. The situation has not been helped by China's support for Russia in Ukraine which has opened up a fault line with the West, although in practice this may prove to be a moderating factor on the Russian leadership.

Going forward many see geo-political tension as a threat to globalisation and a potential reversal of the disinflationary trend in goods prices which has helped contain inflation. In our view this remains to be seen as firms have tended to react and re-configure supply chains to other countries rather than cut them altogether.

Even on the US-China axis there are questions as to whether the US and China can successfully ringfence security sensitive areas of activity whilst otherwise continuing to trade and invest as usual. The recent meeting on 15 November between Presidents Biden and Xi suggests there is still considerable mutual interest between the two superpowers.

We may not get back to the deflation in goods prices seen in the last decade, but China has a strong interest in maintaining and increasing export volumes against a backdrop of weakness in its domestic economy as a result of the downturn in the property sector. Prices will stay competitive as a result.

Theme 3: The rise and rise of government debt

“In this world nothing is certain but death and taxes” – Benjamin Franklin, 1789

The third trend is one that like inflation was seen as a problem 35 years ago and is becoming one once again: the inexorable rise in government debt which is currently running at 113% of GDP for the OECD. Figures from the IMF show that both the US and UK now have a government debt to GDP ratio of more than 100%.

Back in 1988 debt across the OECD had risen to 60% of GDP and although nearly half today's figure the concern was that this was a rise of 50% over the last 10 years. Since 1988 there have been two significant jumps in debt, the first as a result of the GFC and the second due to the cost of the pandemic (see chart 5).

A Retrospective Perspective: How the Global Economy Has Changed in 35 Years_5

Like inflation, however, the level of OECD government debt was not a major problem for markets over the past 30 years. This was another consequence of the great disinflation and the fall in interest rates over the period. The cost of public sector borrowing fell, enabling governments to sustain higher debt levels. For countries such as the UK the pandemic period initially saw government interest payments as a share of GDP fall significantly as short rates were cut to almost zero and QE restarted.

However, that changed as interest rates rose and the true cost of the increase in government debt was felt. For the UK, the high proportion of inflation-linked bonds, over one-fifth of outstanding government debt, was also a factor in taking UK interest payments to 4.5% of GDP in Q4 2022, the highest since the end of World War II.

A Retrospective Perspective: How the Global Economy Has Changed in 35 Years_6

We expect inflation to improve and for interest rates to decline in 2024 in the US, eurozone, UK and across the OECD (with the exception of Japan). However, government debt will remain in the spotlight as (a) the decline in interest rates will not take rates back to pre-pandemic levels with equilibrium in the US and UK thought to be around 3.5% for example, and (b) funding budget deficits will require a significant increase in purchases by the private sector and quasi-public institutions such as Sovereign Wealth Funds.

This reflects the high level of current government borrowing at a time when the economy is operating above its normal capacity. Going forward, unemployment will rise further as part of the inflation reduction process, increasing government expenditure and reducing tax revenue. In other words, structural deficits have risen significantly.

Furthermore, central banks are set to continue to reverse quantitative easing. The BoE says it will reduce its holdings of UK government bonds by £100 billion next year and, when combined with expected government borrowing, we can expect supply of some £200 billion of gilts in 2024 (8% GDP). Clearly funding risks will rise especially as a UK general election will need to be held before December 2024. The UK is not alone as the US faces similar arithmetic and a Presidential election in 2024. Both countries also run current account deficits and so rely on overseas buyers (“the kindness of strangers” as former BoE governor Mark Carney put it). However, unlike the UK, the US enjoys the exorbitant privilege of having the world's reserve currency which helps create natural demand for the US dollar.

The combination of higher interest rates and structural deficits means investors will increasingly question the sustainability of the rise and rise in government debt. Clearly, such an outlook implies challenging times for governments who remain committed to spending increases and are reluctant to increase taxes.

Some conclusions and implications for the future

These three trends have shaped the economic and market environment of the past 35 years. They are not the only factors – the impact of technology and climate change have also played a role - but in my view have been the most important over this period. Looking ahead they provide a perspective on how the risks faced by investors will evolve.

The long tailwind from the great disinflation is clearly fading and we are moving to a world where inflation will have adverse as well as positive effects on markets. The implication is that real assets such as equities and bonds will have to rely more on growth in earnings and rents for returns than revaluation effects. Do not expect rates to return to the levels seen between the aftermath of the GFC and the pandemic.

Meanwhile, the negative correlation between equity and bond returns, which has been so helpful for multi-asset portfolios, is already unwinding as bond yields will be more driven by changing inflation rather than growth expectations. That could make traditional balanced equity-bond portfolios more volatile.

If liquidity is tighter then capital should be allocated more carefully as the hurdle rate on investment is higher. Some argue this will mean more financial market stability and fewer bubbles. I doubt this will happen as greed and fear will continue to drive markets and we have had bubbles at higher interest rates than today.

Where I do see a change is in the nature of risk. Inflation and interest rates will always be important, but looking ahead we are set for more political risk. On the geo-political side, the world has to learn to live with the continuing advance of China and how to manage greater economic competition with the OECD countries. Expect more tensions between the US, China, and Europe.

On the domestic side, the deterioration in government balance sheets means that stress will continue to rise between the aims of politicians and economic realities. The next crisis could well be a sovereign debt crisis in an OECD economy.

This does not make me gloomy about markets. There have been many improvements in the world economy over the past 35 years and there are tremendous opportunities and new themes to exploit. Nonetheless, it pays to know where the next set of risks are coming from.

Source: Schroders

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