Neoliberalism's Final Stronghold

Some theorists have long speculated that any switch in the pricing of oil away from the dollar would represent an intolerable threat to the U.S.-dominated international order. But what if the currency of the world's most important commodity changed and would it matter if it did?

Headlines certainly suggest the greenback is under pressure. Brazilian president Luiz Inacio Lula da Silva called for a Brics currency two weeks ago, grouping his country, Russia, India, China and South Africa.

Last year, Saudi Arabia's Finance Minister Mohammed Al Jadaan said that his country was considering pricing its oil sales to China in yuan. In February, Iraq's central bank announced its intention to allow trade with China in yuan.

In March, TotalEnergies sold a cargo of liquefied natural gas from the UAE to China National Offshore Oil Company, settled in the Chinese currency. The deal was arranged through the Shanghai Petroleum and Natural Gas Exchange, whose chairman, Guo Xu, said it was, "a meaningful attempt to promote multi-currency pricing, settlement and cross-border payment in international LNG trading".

The U.S.'s addiction to sanctions, and its freezing of Russian foreign exchange reserves, strengthen the incentive for Russia — a leading oil and gas exporter — and China, the world's biggest oil and gas importer, to cut dependence on the dollar.

The use of the dollar in energy trade is seen as a key part of its role as the global reserve currency — the "exorbitant privilege", as Valery Giscard d'Estaing, then French finance minister, called it in 1965. This enables the U.S. to run huge trade deficits and to earn more from its overseas investments than foreigners earn from lending to the U.S. government.

Proponents of "de-dollarisation" often mix up three different things. There is the currency a transaction is settled in, the currency in which a commodity is priced, and the currency in which exporting countries hold the resulting reserves.

Certainly, China's growing economic weight will result in more transactions being conducted in its currency. The yuan's share of trade finance grew sharply, from less than 2 per cent in February 2022 to 4.5 per cent a year later. But it remains minor, and the gains came mostly from the redenomination of Russian dealings with China. The euro accounts for 6 per cent of world trade; the dollar for 84 per cent.

The currencies of the most important global oil exporters — the GCC countries and Iraq — are pegged to the dollar. A wholesale shift to another currency would expose them to exchange rate risks. They often run sizeable trade surpluses with China, so there is a limit on how much bilateral trade could be yuan-settled.

When India looked for another currency for oil purchases from Russia, it chose the UAE dirham — precisely because of its peg to the dollar.

International oil is, in round figures, a $2 trillion annual market. International gas — much of which is denominated in euros — adds another $400 billion. The value of all global trade last year was estimated at $32 trillion. So even a complete, and implausible, switch in energy trade from the dollar would only dent, not end, its dominance.

Which currency is used to price energy is more strategic. We know what the oil price is in dollars per barrel — who can quickly recall the price in yuan, roubles per tonne, or the Japanese favourite, yen per kilolitre?

In March 2018, after years of delays, the Shanghai International Energy Exchange (INE) began trading a yuan-denominated crude oil futures contract, which allows mostly Middle East grades, including the UAE's Murban and Upper Zakum, to be delivered.

But INE still attracts mostly Chinese retail investors, with the convertibility of the yuan a key risk for international players, along with other concerns such as exposure to U.S. sanctions via the import of Iranian oil. Chinese buyers are glad to pay in yuan for Russian oil and gas, but extract hefty discounts.

The Middle East continues to rely on the well-known global dollar benchmarks, Brent and Dubai-Oman, as well as the contracts for Murban and Upper Zakum recently launched on ICE Futures Abu Dhabi. It is far preferable for their economic lifeline to be in the invisible hand of the market than an iron fist in Beijing.

When it comes to foreign currency holdings, the caprice of U.S. policy is certainly a worry. But the U.S.'s share of the world total, 57 per cent, has hardly budged since 2014. Other Western-bloc currencies — mainly the euro, plus the pound sterling, the Japanese yen, Swiss franc and the Australian and Canadian dollars — comprise another 37 per cent. The yuan is just 2.5 per cent.

Not surprisingly, illiquid financial markets, strict currency controls, exchange rate manipulation and exposure to Beijing's political imperatives make it unattractive to park most national savings. China shows no inclination to rethink these policies.

Since both leading oil-exporting countries and China usually run large balance of payments surpluses, an accumulation of yuan reserves by the GCC would have to be matched by more Chinese reserves in a major capital importer — the only candidate being the U.S. And with much of their overseas wealth held in dollars, the main oil exporters have little interest in doing anything that would damage its value.

World energy trade will indeed become more fragmented. But this will primarily affect settlement currencies and purchases from some U.S. adversaries, not benchmark prices. Any diminution of the dollar's global role in favour of the yuan or another currency will be gradual, and will lead, not follow, the oil market.

How much extra would you pay for a product that's less harmful for the planet? Porsche wants future customers to pay a 10 to 15 per cent premium for electric versions of its Cayenne and Macan sports utility vehicles. European steelmakers forecast a roughly 20 per cent boost to prices from low-carbon steel.

It's a vital question for business leaders and investors to contemplate, as companies will have to spend trillions of dollars over the next couple of decades to eradicate carbon emissions. A so-called green premium for goods and services can help make those massive investments financially viable while giving companies an incentive to decarbonise sooner.

Of course, green surcharges can be controversial: They may keep inflation uncomfortably high, there's a risk of greenwashing, and lower-income consumers may not be able to afford them. Air fares, for instance, must rise due to the high cost of purchasing carbon offsets and using sustainable jet fuel, a UK aviation industry group warned last week, saying this could discourage some people from flying.

Another risk is green price premiums are quickly competed away, as we've seen recently with Tesla slashing what it charges customers. A price war is great for consumers, but rivals may slow the pace of EV investments.

Green premiums exist due to the additional cost of rolling out clean technology in its infancy before scale economies are achieved. One approach to tackle the price gap between clean and dirty products is simply to hand companies billions of dollars in subsidies, as the US is doing with the Inflation Reduction Act. Reshoring and associated US labour shortages may, however, prove to be inflationary in the short term.

Europe is taking a carrot and stick approach. Alongside subsidies, it's making polluting more expensive. The soaring cost of EU carbon credits, a curtailment of free carbon permits for heavy industry, the extension of carbon trading to road transport and buildings, plus a new tax on dirty imports will together erode the price advantage that fossil fuels currently enjoy and make investment in lower-carbon products more appealing.

Companies are growing more confident about being able to charge high prices for low-emission products without worrying they'll be displaced by cheaper, dirtier alternatives. And corporate and public-sector customers are signaling a willingness to pay extra to eradicate emissions in their supply chains.

For example, the First Movers Coalition encourages member companies - among them Apple and Maersk - to sign advance purchase agreements for lower-carbon materials to make such projects easier to finance. Meanwhile, the Biden Administration's buy-clean initiative directs the federal government to prioritise purchases of low-carbon steel, asphalt, glass and concrete.

Cement is responsible for around 7 per cent of global emissions and is one of the hardest sectors to fully decarbonise. Yet Swiss cement giant Holcim has sounded giddy lately about the money-making potential of lower-carbon products. The soaring cost of carbon permits has constrained European cement production and contributed to skyrocketing prices.

Meanwhile, Holcim's ECOPact lower-carbon concrete (the claimed pollution reduction is at least 30 per cent) accounted for 16 per cent of global ready-mix sales in the first three months of this year. (Amazon used it to construct US data centers.)

Any price premium is small so it doesn't remain a niche product, management said in February. The next step is fitting cement plants in Germany and Poland with carbon capture, which Holcim expects to be very profitable due to a combination of EU subsidies, the price premium charged and the money saved not having to buy as many carbon allowances.

Sustainability is "a new unique selling proposition, and of course, there is a premium price," CEO Jan Jenisch boasted last week. "Investments in sustainability have super high returns."

Demand isn't just coming from corporate do-gooders. Offices able to demonstrate green credentials enjoy a sales price premium compared with older, less energy-efficient workplaces that will require retrofitting.

The same is true of housing, where a premium for energy-efficient homes is emerging. The UK and Germany are among countries phasing out gas heating in favour of heat pumps that have higher upfront costs; homes that already have such kits installed are potentially worth more.

Maersk's Eco-delivery shipping option, which involves a surcharge for biodiesel, currently accounts for just 2 per cent of its ocean volumes, but it aims to increase this to 25 per cent by 2030, while extending it to air freight and its truck network. It thinks consumers won't notice the difference: Green shipping would add only a few cents to the price of a US$100 pair of running shoes, it calculates.

Last month, Austria's Voestalpine followed other European steelmakers in outlining massive decarbonisation investments and quantifying a possible price premium for "green steel" produced without fossil-powered blast furnaces. It thinks a 10 to 20 per cent price uplift is possible. "There is appetite for buyers to pay a premium while green steel is scarce," UBS analysts told clients.

Green premiums feature in startup H2 Green Steel plan to raise more than 1.5 billion euros (US$1.7 billion) in equity funding for a hydrogen-powered steel plant in northern Sweden. H2GS has pre-sold steel to Mercedes-Benz, which is also an equity investor, and the luxury carmaker has committed to using the low-carbon material from 2025.

Steelmakers that don't make such investments will see their carbon compliance costs steadily increase. "Companies that decarbonise the fastest are more likely to generate and retain economic rents, while laggards will see their competitiveness, market share and earnings power erode," Morgan Stanley analysts concluded in a report last week.

An imbalance between demand for eco-friendly products and their supply may well cause inflation to linger in coming years, but doing nothing about climate change is worse: Droughts like Spain's are already contributing to soaring food prices.

"Greenflation" can at least be cushioned by government support for those least able to pay, and surcharges will disappear as manufacturers scale up clean production and polluting becomes more expensive.

In other words, green premiums are a price worth paying, until one day soon we won't have to.

Three US benchmark indices managed to finish higher in April as better-than-expected big tech companies' first-quarter earnings defended regional banks' turmoil. The Dow Jones Index rose 2.48%, the S&P 500 was up 1.46%, and Nasdaq was only 0.04% higher. The economic data, however, did not paint a rosy picture, with GDP growth slowing down and inflation sticking, pointing to a stagflation chapter. Given that the regional banking crisis is slowly spreading into the wider banking system through takeover deals, the Fed may have to capitulate in its battle against inflation. The Fed is expected to raise the interest rates for another 25 basis points before hitting a peak, which may be a catalyst for a further market rally. However, it is skeptical for how long the bull can sustain as a rate-cut cycle usually commences when there is an imminent economic threat. Plus, inflation fights may not be done just yet if the upcoming CPI data disappoints market players.

The ASX 200 rose 1.83% in April, snapping a two-month losing streak as Wall Street's risk-on lifted broad sentiment, with all 11 sectors finishing higher for the month, particularly the information technology stocks, up 7.48%. A strong rebound in banking sectors has also fueled a broad rally, thanks to easing worries over the US banking system after a slew of positive earnings of the big financial institutions. Miners' stocks, however, lost steam as China's economic recovery seems to be tepid. The demand outlook for iron ore stayed gloomy and pressed on resource stocks, such as BHP and Rio Tinto. On a positive note, Australian inflation has finally shown signs of peaking, strengthening bets for the RBA to pause rate hikes for the second consecutive time this month. With labour markets staying tight and wage growth sticking at a high level, cost-of-living may not be solved easily. Hence, the wage price index, employment data, and monthly CPI will still be on the radar this month. Also, China's economic development and government policies should also be on watch.

The NZX 50 was up 1.14% in April and 3.73% year-to-date as the country is slowly recovering from inflation shocks and the RBNZ's aggressive rate hike campaign. The renewable energy stocks and construction sector showed a steady pace on its rise and led the local equity market's gains. However, the negative growth in its first-quarter GDP suggests that the county is on the edge of falling into a technical recession if the current quarter extends the economic decline. The most cheerful economic data is that inflation has finally cooled in the first quarter, igniting hopes for the RBNZ to scale back rate hikes. The reserve bank will hold its 2023's third policy meeting later in May. Hence, market moves will be most likely to follow through its Trans-Tasman peer ASX and Wall Street's moves. And the New Zealand dollar may face downward pressure amid bets for a slowdown RBNZ.

Chinese stocks lagged the global market performance as reopening optimism faded off in April. The Hang Send Index declined 2.48% in April, the only major index that finished lower compared with its Asia, US, and EU peers. While China reported better-than-expected first-quarter GDP growth, its April manufacturing PMI unexpectedly contracted for the first time in four months, suggesting the country's economic recovery lost steam. With the US-China geopolitical tensions intensifying, the US-listed Chinese ADR shares, including Alibaba, JD.com, and Baidu, all slumped between 15% and 20% throughout the month. The first-quarter earnings of these Chinese conglomerates will be on close watch to provide clues to these companies' development at the back of Beijing's relaxation on tech crackdowns.

Crude oil tumbled below $80 per barrel as the US banking rout sparked recession fears early in the month, and China's economic recovery seems to be tepid, renewing the demand concerns. Though the outlook darkened for oil markets in April, some positive signs may lead to a rebound in the second quarter. With Northern Hemisphere entering summer, oil demand is expected to pick up, particularly in China and the US. OPEC forecasted global demand would rise by 101.6 million barrels a day in the second and third quarter, and China may account for about 40% as refineries usually enter their peak annual maintenance at the same time, which reduces fuels' supply. Nonetheless, OPEC+ will not allow oil prices to crash again with possible further output cuts to stabilize oil markets.

Despite wide swings in the US bond yields, gold endured well, nearing an all-time high level. The Fed may do the precious metal a favor if it indicates a pause in rate hikes in the coming month, as the gold price is negatively correlated with the treasury yields. There might be a chance for the metal to pop again and reach a fresh high if this happens, though a near-term pullback is expected as gold may have been overbought.

Speculators' views in Chicago-traded soybeans and soybean meal last week fell to the least bullish levels since November, while funds cranked up bearish bets in CBOT wheat and returned to the short side in corn.

Money managers' net longs in beans, meal and Kansas City wheat as of April 25 still outweighed the net shorts in CBOT and Minneapolis wheat, corn and soybean oil, but the combined net long dipped below 30,000 futures and options contracts for the first time since August 2020.

August 2020 was also the last time funds held a combined net short in U.S. grains and oilseeds. Since then, the combined net long hit an all-time high near 840,000 futures and options contracts in April 2022.

CBOT futures faced significant pressure in the week ended April 25. In the July contracts, soybeans and soymeal fell 5%, corn and soyoil shed around 6% and CBOT wheat plunged 8%.

Money managers flipped to a net short position in CBOT corn futures and options of 15,297 contracts as of April 25, compared with their net long of 49,434 a week earlier. That move was almost evenly split between new gross shorts and the reduction of longs, and it snapped funds' five-week corn buying streak.

On the commercial side, net buying in corn futures and options among producers, users and other merchants exceeded 65,000 contracts during the week, equivalent to around 325 million bushels. Gross shorts in that category fell to the lowest levels since June 2020.

Money managers through April 25 increased their net short in CBOT wheat futures and options to 113,012 contracts from 102,983 a week earlier as new shorts continued to pile on.

The only period in which funds were more bearish toward CBOT wheat was between July 2016 and January 2018. Open interest in CBOT wheat futures and options as of April 25 was the date's lowest since 2009, and open interest is 37% lighter now than in January 2018.

In the week ended April 25, money managers reduced their net long in CBOT soybeans by nearly 48,000 to 87,208 futures and options contracts, a 22-week low. Most of that was long liquidation, and although funds added nearly 9,000 gross shorts, they remain historically light on bearish soy bets.

Money managers' bullish bets in CBOT soybean meal futures and options hit a 21-week low on April 25 of 86,373 contracts, down from the prior week's net long of 105,682. Like beans, funds were predominantly pulling longs out of meal during the week while gross shorts ticked upward.

As of April 25, money managers' stance in CBOT soybean oil futures and options was the most bearish since August 2019 at 19,555 contracts versus the net short of 15,743 a week earlier. Fund selling has become a recent mainstay in soyoil, occurring in 18 of the last 23 weeks.

The downturn continued for corn and wheat futures between Wednesday and Friday, likely increasing bears' recent momentum in the grains. July corn fell 3.7% over the last three sessions, including the most-active contract's worst one-day loss since July on Thursday as China cancelled more U.S. corn cargoes.

Corn futures finished higher on Friday but had fallen to $5.72 per bushel during the session, the most-active contract's lowest level since July.

Most-active CBOT wheat fell nearly 3% over the last three sessions and featured a dip on Friday to the lowest levels since July 2021. The Kremlin on Friday reiterated that the Ukraine grain export deal's outlook is not good, and Russia may stop cooperating with the initiative from May 18 if its requests go unfulfilled.

Negative sentiment in grains and oilseeds has partially stemmed from Brazil's massive soybean and corn crops creating intense competition for U.S. supplies. The planting pace of U.S. corn and soybeans has been running at an above-average pace despite concerns about widespread cooler weather.

July soybeans added a couple cents between Wednesday and Friday, though CBOT meal futures fell 0.6% and oil dropped 0.9%. Most-active soymeal on Thursday hit five-month lows, and July soybean oil on Thursday and Friday touched 50.57 cents per pound, the most-active contract's lowest since mid-April 2021.

1. The UK's biggest nursing union set out new round of strikes.

2. Railway workers in Italy went on strike.

3. BoJ’s monetary policy normalization will not be achieved overnight.

4. FDIC required four banks including JPMorgan and Bank of America to bid for the First Republic Bank.

5. Core inflation pressures in the US remained high.

6. EU considers export restrictions to close Russian sanctions loopholes.

7. Russia plans to cut $377 million a month in refining subsidies.

At present, inflation remains high in many European countries, the people’s cost of living has increased sharply, and strikes continue. On April 30, members of the Royal College of Nursing, the largest nursing union in the UK, started new round of strikes. The strike began at 20:00 local time on April 30 and lasted until late at night on May 1. It is expected to exacerbate the shortage of healthcare staff in the UK. According to the latest data, the inflation rate in the UK is still as high as about 10% and price rises have put tremendous pressure on all sectors. Recently, personnel from various industries, including railway workers, civil servants, and teachers, are holding strikes to demand higher wages.

According to information from the Italian transport department, railway employees set out strikes on April 30 at 21:00 local time, demanding higher wages. The strike will last until 21:00 on May 1, which affects the whole railway transportation in Italy. In addition, due to unbearable inflationary pressure, many trade unions are scheduled to launch a nationwide strike on the public transport system on May 2. At that time, railway workers in Rome, Milan, Naples, Turin, and many other cities in Italy held strikes for 4 hours at different times.

While the BoJ left policy unchanged at its first monetary policy meeting under Kazuo Ueda, the BoJ's policy has been more about managing expectations than acting for years. With monetary settings stuck in ultra-loose mode, the only path is normalization when the time is ripe for change. Given the looming threat of a US recession, there is no reason for Ueda to disrupt the current status. What the central bank needs is to keep its options open while assessing an exceptionally uncertain global macro outlook. There are three reasons why yield curve control (YCC) is here to stay for the foreseeable future. First, “the work is not done” when it comes to inflation. Second, the risk of maintaining the current policy setting having a negative impact on the JGB market and the yen may diminish over time, as it appears that the peak in US Treasury yields has already occurred. Third, from a financial stability perspective, the SVB turmoil reminds us that the reintroduction of maturity risk into the JGB market should be done gradually and that it would be imprudent to remove the “safety net” provided by the YCC when it is most needed.

The Federal Deposit Insurance Corporation (FDIC) has asked JPMorgan Chase & Co., PNC Financial Services Group Inc., US Bancorp, and Bank of America Corp. to bid for the First Republic Bank, and the deadline for the four banking institutions to submit final bids is Sunday (April 30). Bank of America is considering whether to formally submit an offer, and spokesmen of the other three banks declined to comment. In addition, Citizens Financial Group Inc. also participated in the bidding.

According to the data of the U.S. Department of Commerce last Friday, the annual rate of core PCE was 4.9% in March, and underlying inflationary pressures remain strong, which may lead the Fed to raise interest rates again in May. At the same time, the Fed will not pause in June if inflationary pressures do not ease at a faster pace, which is not what the market wants.

However, consumer spending is falling, disposable income is declining, and the economy has weakened substantially and may already be in a mild recession. As a result, the Fed may be signaling that it is nearing the end of its tightening cycle.

According to the Financial Times, the EU is discussing restrictions on certain exports to some countries to prevent key components from ending up on the Ukrainian battlefield, and the EU suspects that some countries are re-exporting sanctioned products to Russia. The European Commission has privately studied a legal mechanism that would allow the EU to restrict sales of a small number of products to certain third countries. The move would mark an intensified effort by the EU to crack down on sanctions evasion. It follows months of diplomatic work by the EU and its allies aimed at persuading countries such as Turkey, the UAE, and Central Asian countries to take tougher action.

Russian Finance Minister Siluanov said that the Finance Ministry of Russia plans to halve subsidies to refiners from July 2023. Payments to refineries from the budget will be cut by 30 billion rubles ($377 million) per month. The savings will reduce Russia's budget gap. The subsidies, known as a “damping mechanism”, were introduced in 2019 to prevent excessive exports of fuel and ensure sufficient stocks are available to meet domestic demand.

UTC+8 22:00 U.S. April ISM Manufacturing PMI

Currencies were in limbo on Monday as holidays in most of Asia made for thin trading, while traders braced for a packed week of central bank meetings that would offer the latest guidance on future rate hikes across continents.

Activity in the foreign exchange markets was subdued due to the Labour Day holidays in Singapore, Hong Kong and mainland China. Japan, Australia, and New Zealand are the only centres open in Asia.

The Japanese yen slid 0.2 per cent to 136.67 per dollar on Monday, extending its post-BOJ slump. The Bank of Japan (BOJ) on Friday stood pat on its monetary policy, sending the yen 1.7 per cent lower in the biggest daily drop since early February.

The Australian dollar was also on the defensive on Monday, easing 0.1 per cent to $0.6610. The currency fell 1.1 per cent last week to a seven-week low of $0.6573, but has found strong support at the March trough of $0.6564.

The New Zealand dollar lost 0.3 per cent to $0.6172, giving back some of the impressive rally last week.

The kiwi jumped 2.3 per cent on the yen on Friday as the prospects of higher rates, with the Reserve Bank of New Zealand set to raise rates further this month, attracting some buyers.

Weighing on risk sentiment on Monday was the unexpected contraction in China's manufacturing activity in April and news on the weekend that U.S. major banks including JPMorgan Chase & Co were vying to bid for First Republic Bank.

In the week ahead, the Reserve Bank of Australia is widely expected to extend a rate pause on Tuesday, the Federal Reserve is projected to raise rates by another 25 basis points on Wednesday and the European Central Bank could surprise with an outsized half-point increase on Thursday.

Goldman Sachs expects the Fed to signal a pause in June, after it delivers a quarter-point hike on Wednesday.

"The focus will be on revisions to the forward guidance in its statement," analysts at Goldman said in a note to clients.

"Beyond May, we expect the FOMC to hold rates steady for the rest of the year, though several paths are possible, with much depending on how severely the bank stress affects the economy."

Catching up with their overseas counterparts, Australia's government bonds rallied on Monday.

Three-year yields slid as far as 12 basis points but have since trimmed losses and were last at 3.001 per cent, while 10-years were last down 5 bps at 3.335 per cent.