Oil Prices Fall 1% On Israel-Hamas Ceasefire Talks, US Inflation Concerns

Economic

Commodity

Summary:

Oil prices were down 1% on Monday, erasing gains from Friday as Israel-Hamas peace talks in Cairo eased fears of a wider conflict in the Middle East and US inflation data further dimmed the prospects of interest rate cuts anytime soon.

Brent crude futures fell by as much as 98 cents, or 1.09%, to US$88.52 a barrel by 0644 GMT. West Texas Intermediate (WTI) futures were down 83 cents, or 0.99%, at US$83.02 a barrel.

Stepped-up efforts to mediate a ceasefire between Israel and Hamas moderated geopolitical tensions and contributed to the weak opening on Monday, IG market analyst Tony Sycamore said. A Hamas delegation will visit Cairo on Monday for peace talks, a Hamas official told Reuters.

Israel's foreign minister said on Saturday a planned incursion into Rafah, where more than one million displaced Palestinians are sheltering, could be put off in the event of a deal that involves the release of Israeli hostages.

A White House spokesperson said Israel had agreed to listen to US concerns about the humanitarian effects of the potential invasion.

Markets are also on watch for the US Federal Reserve's (Fed) May 1 policy review.

"Also playing a part are some nerves ahead of this week’s Federal Open Market Committee meeting which is expected to come with a more hawkish tone," Sycamore said.

US inflation rose 2.7% in the 12 months through March, data on Friday showed, above the Fed's target of 2%. Lower inflation would have increased the likelihood of interest rate cuts, which would stimulate economic growth and oil demand.

"The sticky US inflation sparks concerns for 'higher-for-longer' interest rates", leading to a stronger US dollar and putting pressure on commodity prices, independent market analyst Tina Teng said.

The dollar strengthened on the prospect of higher-for-longer interest rates. A stronger dollar makes oil more expensive for those holding other currencies.

Further weighing on the outlook for oil demand, China's industrial profit growth slowed down in March, official data showed on Saturday, in the latest sign of frail domestic demand in the world's second largest economy.

Cumulative profits of China's industrial firms rose 4.3% to 1.5 trillion yuan (RM990 billion) in the first quarter from a year earlier, compared to a 10.2% rise in the first two months.

But oil prices could swing higher again if US inventory data and China's PMI index show improvements this week, Teng said.

Brent had settled up 49 cents and WTI up 28 cents on Friday on concerns about disruptions to supply from events in the Middle East.

The market brushed aside potential supply disruptions stemming from Ukranian drone strikes on the Ilsky and Slavyansk oil refineries in Russia's Krasnodar region over the weekend. The Slavyansk refinery had to suspend some operations after the attack, a plant executive said.

Source:Reuters

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Ukadike Micheal

Economic

Forex

Japan's top currency official chose not to disclose whether Tokyo intervened in the currency market following a sharp move that saw a 2% drop in the dollar-yen exchange rate on Monday. Masato Kanda, vice minister for international affairs, simply stated, "No comment for now," when asked by reporters about any intervention actions taken. The yen's slip beyond the 160 mark against the dollar marked its first occurrence since 1990, contributing to losses exceeding 10% for the year. Despite briefly rebounding to 155.06 during lunchtime, the yen later reached 154.54.

The rapid appreciation of the yen, particularly a 4 yen increase within an hour, raised eyebrows among economists and market observers. Takahide Kiuchi, executive economist at the Nomura Research Institute, noted that such movements are uncommon in normal trading conditions. The yen's continued weakness is attributed to the significant interest rate gap between the US and Japan. Despite the Bank of Japan's rate hike in March, expectations of Federal Reserve rate cuts have diminished, further pressuring the yen.

Last week's decision by Japan's central bank to maintain its stance and Governor Kazuo Ueda's comments during the press briefing exacerbated the currency's decline. The yen's depreciation, now worth less than half its value against the dollar compared to 2012, has led to rising import prices and inflation, impacting households and businesses.

However, Japanese currency officials face constraints in taking action. They must navigate between stabilizing the yen's decline and adhering to international commitments to market-determined exchange rates. Moreover, any intervention carries the risk of being perceived as a failure, potentially fueling further speculation in the market.

The uncertainty surrounding Japan's stance on currency intervention may persist, contributing to market volatility. While some attribute the currency movements to jittery market players and trading algorithms, others speculate on deliberate actions by the finance ministry. Japan's Finance Minister Shunichi Suzuki's recent meeting with Treasury Secretary Janet Yellen in April hinted at concerns over currency volatility, although joint intervention remains unlikely.

Yellen emphasized that market intervention should occur sparingly and under specific conditions, aligning with Group of Seven agreements advocating for market-determined exchange rates. As the yen's movements continue to attract attention, market participants remain vigilant, with uncertainty prevailing over the ministry's potential intervention tactics.

Source: Bloomberg

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ING

Energy

Commodity

Energy - Specs dump oil

After a relatively strong end to the week the oil market has started the week under pressure. ICE Brent is trading back below US$89/bbl at the time of writing. Geopolitical risks appear to have eased considerably, removing some of the risk premium priced into the market.

However, there are still signs of tightening in the physical market with prompt timespreads continuing to strengthen. The Brent Jun/Jul spread traded to a high of $1.34/bbl on Friday, after trading closer to a backwardation of US$0.70/bbl at the start of the week. The strength in spreads is aligned with our oil balance which continues to show a deep deficit over the second quarter of the year. The outlook for the year's second half is less clear and depends on OPEC+ policy.

The easing of geopolitical risk in the market has resulted in speculators heading for the exit. The latest positioning data shows that speculators reduced their net long in ICE Brent by 39,101 lots to 295,831 lots as of last Tuesday. This move was exclusively driven by longs liquidating. NYMEX WTI saw a similar move with speculators cutting their net long by 24,251 lots to 179,646 lots over the reporting week. There were also big reductions in positioning in ICE gasoil. Speculators reduced their net longs by 31,589 lots to 49,536 lots - the smallest position speculators have held in gasoil since January.

The fundamentals in middle distillates have shifted significantly in recent weeks and the market looks increasingly bearish. Inventories have been building at a good pace, and in Europe, gasoil stocks in the ARA region increased by 52kt last week to 2.18mt, taking stocks above the 5-year average for this time of year. The prompt ICE gasoil spread has been trading in contango since mid-April, while the prompt gasoil crack is trading at its weakest since June last year.

While middle distillate fundamentals are more bearish, there are still lingering risks in the market. There were reports over the weekend of another Ukrainian drone attack on Russian refining capacity. The Slavyansk oil refinery in Krasnodar was the latest to be attacked, and reportedly led to a halt in its operations. The refinery has a capacity of around 1m b/d.

There is not much on the energy calendar this week. We could get the latest Saudi official selling prices later in the week. In contrast, there is a lot on the macro calendar this week, which will also be important for energy and commodity markets. The Fed will meet on Wednesday, where no change in interest rates is expected, while the April US jobs report will be released on Friday.

Metals – Copper hits $10,000/t

Copper hit $10,000/t for the first time in two years on Friday on expectations for a global recovery in demand this year, especially from the green energy sector, and tightening supplies after setbacks at global mines. However, in the short-term, there are still signs of weak demand. In China, copper inventories remain elevated while premia for imported metal in China has sunk to zero. In addition, the higher-for-longer narrative from the US Fed could put some downward pressure on copper prices. We believe, in the short term, the upside to copper prices might be capped by macro drivers, including ongoing demand concerns in China and lingering uncertainty over US monetary policy.

Agriculture – Specs reduce bearish positioning

The latest CFTC data shows that money managers reduced their net bearish bets in CBOT wheat by 20,219 lots over the last week to 76,184 lots as of 23 April. The move was predominantly driven by falling gross shorts. Similarly, the speculative net short in CBOT corn decreased by 41,024 lots to 238,546 lots, after reporting gains for four consecutive weeks. Meanwhile, for soybeans, speculators reduced their net shorts by 18,861 lots, leaving them with a net short position of 149,014 lots over the last reporting week, following a decrease in gross shorts by 16,705 lots to 196,259 lots.

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FOREX.com

Forex

Market positioning from the COT report - as of Tuesday April 23, 2024:

Large speculators flipped to net-short exposure to EUR/USD futures for the first time since September 2022.
GBP/USD futures traders flipped to net-short exposure to GBP/USD futures for the first time this year.
Large speculators pushed net-short exposure to USD/JPY futures to its second most bearish level on record at -179.9k contracts.
They also pushed net-short exposure to CHF/USD futures to a 5.5-year high.
Positioning for gold futures remained net-long but essentially flat among large speculators and managed funds.
Large speculators pushed net-long exposure to WTIU crude oil futures to a 4-year high.

EUR/USD, GBP/USD Flip to Net-Short, JPY Shorts Near Record High: Cot Report_1

EUR/USD, GBP/USD Flip to Net-Short, JPY Shorts Near Record High: Cot Report_2

US dollar positioning (IMM data) – COT report:

Asset managers have been on the right side of the ‘long US dollar’ trade all year, with net-long exposure moving in lockstep with prices. Large speculators took the brave (and ultimately wrong) approach of being net-short, in a rare divergence between the two sets of traders. Yet their net-short exposure has diminished to just -213 contracts short, which is surprising given EUR/USD and GB/USD has now flipped to net-short exposure. But with odds favouring no cuts form the Fed this year, and even some making noises of a hike – it seems probable that large speculators may be forced to admit defeat and flip to net-long exposure.

EUR/USD, GBP/USD Flip to Net-Short, JPY Shorts Near Record High: Cot Report_3

EUR/USD (Euro dollar futures) positioning – COT report:

This has been a long time coming, but large speculators finally flipped to net-short exposure to EUR/USD futures last week. I have noted more than a few times this year that gross longs have been trending higher since Q4 and that long bets have been diminishing for both asset managers and large speculators. And with the ECB set to cut a couple of time this year and the Fed likely hold steady, a lower euro accompanied with more bearish exposure seems feasible. Asset managers remain long by a factor of 3.9 bulls to 1 bear, but that ratio could move a lot lower as the year progresses.

EUR/USD, GBP/USD Flip to Net-Short, JPY Shorts Near Record High: Cot Report_4

GBP/USD (Euro dollar futures) positioning – COT report:

Large speculators flipped to net-short exposure last week, for the first time this year. We’ve seen a notable culling of long bets alongside a rise in shorts, helped by expectations of two rate cuts this year. But what really clinched the deal was that the BOE (like the ECB) effectively announced that they’re happy to decouple from Fed policy of ‘higher for longer’.

However, net-short exposure among asset managers reached a record high. It is difficult to say whether this likely marks a sentiment extreme given the BIE have not even begun to cut rates yet. But asset managers certainly saw this move coming a lot sooner as they flipped to net-short exposure since September.

EUR/USD, GBP/USD Flip to Net-Short, JPY Shorts Near Record High: Cot Report_5

JPY/USD (Japanese yen futures) positioning – COT report:

There seems to be no fear in shorting then yen, given large speculators pushed net-short exposure to the second highest level on record last week. And who can blame them? The BOJ and MOF have made feeble attempts to jawbone the currency and remained suspiciously quiet when USD/JPY pushed above the supposed 152 and 155 glass ceiling following strong US inflation reports.

Perhaps the real game here is the ‘race to the bottom’ in regards to their exchange rate. The BOE and ECB effectively confirmed ‘Fed independence’ and are happy to decouple from the Fed’s trajectory and begin cutting sooner. In that light, perhaps the BOJ are more than happy to let the US dollar rip, send the yen broadly lower and win the race to the bottom, even at the risk of inflation.

The risks of a sentiment extreme remain in place, but only if the BOJ get serious about tightening their policy and backing up words of intervention with the real thing. And if they’re going to at all, perhaps today’s test of 160 might given them the green light.

EUR/USD, GBP/USD Flip to Net-Short, JPY Shorts Near Record High: Cot Report_6

USD/JPY spiked to 160 during low-liquidity trade

It looks like some deep pockets decided to take advantage of low-liquidity trade with Japan on a public holiday, by driving USD/JPY 170 pips higher and tapping 160 for the first time since 1990. The move seems purely speculative - and one that will surely catch the eye of the MOF and BOJ. The question remains as to whether they will actually intervene, give their reluctance to do so despite a relatively volatile bout of yen weakness this year.

EUR/USD, GBP/USD Flip to Net-Short, JPY Shorts Near Record High: Cot Report_7

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Warren Takunda

Economic

Forex

Although it fell 0.80% against the Pound, the Dollar ended the week on a stronger footing thanks to a strong PCE price index reading and follow-through buying that followed Thursday's impressive consumer spending data.

That said, signs of fatigue are creeping into the Dollar's 2024 rally, with markets demanding ever-hotter figures to keep the train moving forward. This makes us confident we won't see fresh lows below 1.23 in the next five days.

The risk for Dollar bulls in the coming week is that U.S. data disappoints, and a portion of the bloated long USD positioning is closed out of the market, prompting a deeper retracement in the Greenback.

These data are based on the spread surveyed in a recent survey conducted for Pound Sterling Live by The Money Cloud.

This outcome would allow the Pound-Dollar exchange rate to capitalise on last week's recovery in the coming days and we look for any rally to take in 1.2566, which is the 38.4% Fibonacci retracement of the October-March rally.

Gains could initially stall here owing to the historical support-resistance levels located in the vicinity. Hot U.S. Job Report Would Deal a Killer Blow: The Pound to Dollar Rate Week Ahead Forecast_1

Hot U.S. Job Report Would Deal a Killer Blow: The Pound to Dollar Rate Week Ahead Forecast_1

Above: GBP/USD at daily intervals with the Fibonacci retracement of the late-2023/early-2024 rally indicated.

We note, however, that all manner of momentum indicators are negative and continue to point to further Pound-Dollar weakness. For instance, the exchange rate trades below its 50-, 100- and 200-day moving averages.

We would only turn more bullish on various timeframes when we see these levels pierced and held.

From a technical perspective, therefore, we look for any further Pound-Dollar upside to be regarded as a relief bounce in a broader downtrend. Ultimately, strength will be sold into and we would suggest to those looking to sell Sterling to be nimble as we do not see the making of an uptrend at this point.

But, there are some important dates on the U.S. calendar that could really set the tone for early May in the coming week and offer tactical opportunities for those watching this market.

With market expectations for the first rate cut at the Federal Reserve having receded to December following last week's hot consumer spending figures, the coming week's figures will determine whether a 2024 rate cut is even on the cards or whether we will have to wait until 2025.

Wednesday's Federal Reserve policy update will be the first key test for the Dollar as investors will be interested to know whether the Fed is ready to validate market expectations for the first rate hike to come in December.

Recall, the Fed's most recent dot plot forecasts showed policymakers expect three rate cuts in 2023. The Fed will have to concede this is a tad ambitious in the face of the incoming data which shows the economy is starting to generate heat again.

The Dollar will strengthen if the Fed cautions its previous expectations look to generous.

The big data event of the week will be Friday's job report: weakness here will signal that finally a turning point is coming. We would expect a sizeable stock market rally and a drop in the Dollar if the headline non-farm payroll figure undershoots the 210K the market expects.

But, this is an economy that seems to perpetually surprise to the upside, so we wouldn't hold our breath. Another beat would send the Pound-Dollar rate below the 1.25 level once more.

Source: Poundsterlinglive

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Ukadike Micheal

Forex

Economic

The Federal Reserve's upcoming policy committee meeting, scheduled for Tuesday and Wednesday, is poised to affirm a cautious approach to interest rates for the remainder of 2024. Investors are keenly anticipating insights into the Fed's balance sheet strategy, which may take center stage during the discussions.

As the Federal Open Market Committee (FOMC) concludes its two-day meeting on Wednesday, financial markets will await the announcement of the policy decision, followed by a press conference featuring Chairman Jerome Powell. Market expectations for any rate adjustments are minimal, with futures markets indicating a mere 2% implied probability of a rate cut.

Recent statements from several Fed policymakers underscore the importance of gathering additional evidence to ascertain whether inflation trends are on a sustainable path toward the central bank's 2% annual target. This cautious approach reflects a data-dependent stance, with policymakers emphasizing the need for further clarity on the inflation outlook before considering any adjustments to interest rates.

Jake Schurmeier, a portfolio manager at Harbor Capital Advisors, highlights the evolving language surrounding the inflation outlook. While the Fed previously acknowledged potential "bumps in the road" regarding inflation, Powell's recent remarks suggest a recognition that inflation hasn't progressed as anticipated.

In addition to interest rate decisions, the focus may shift towards the Fed's balance sheet plans, particularly its impact on the repo market and quantitative tightening (QT). Since June 2022, the Fed has been gradually reducing its balance sheet by allowing securities to mature without reinvestment. Powell's indication of a potential slowdown in the balance sheet runoff signals a forthcoming formal plan, possibly in May.

The reduction of the Fed's balance sheet, which has decreased from nearly $9 trillion in 2022 to approximately $7.4 trillion, aims to normalize monetary policy and manage liquidity in the financial system. This strategic shift is significant and could influence market dynamics and investor sentiment, particularly in the repo market and short-term interest rates.

Furthermore, attention is on the overnight reverse repurchase (RRP) facility, which has been declining over the past year, contributing liquidity to the banking system. However, as QT is expected to impact bank reserves directly, its implications for market liquidity and monetary policy normalization are closely monitored.

The outcome of the FOMC meeting and discussions on the Fed's balance sheet strategy hold substantial importance for understanding the central bank's monetary policy trajectory and its implications for financial markets. As investors await guidance from Powell and other Fed officials, the focus will be on potential shifts in interest rate expectations and the trajectory of balance sheet normalization, shaping market sentiment and dynamics in the coming months.

Source: Barron's

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Thomas

Economic

Forex

Powell hinted at a prolonged timeline, stating, "Recent data have not given us greater confidence and instead indicate that it will likely take longer than expected to regain that confidence" in inflation returning to target levels. This suggests the Fed may hold off on rate cuts until at least two consecutive weaker inflation reports, dispelling notions of a rate cut as early as June. Simultaneously, the Fed is expected to announce plans to halve the pace of reducing the balance of U.S. Treasury securities from $60 billion to $30 billion per month.

This week, keep an eye on the economic indicators. These include the latest U.S. Employment Cost Index (ECI) for Q1, New Zealand's first-quarter labour market report, April's non-farm payrolls report, and ISM manufacturing and services surveys for April. Additionally, watch out for the Eurozone CPI report for April. The U.S. ECI release for Q1 holds particular importance, serving as a litmus test for the Fed to assess whether wage growth is indeed moderating as anticipated. Expect U.S. NFP data and ISM surveys to further solidify indications of robust domestic demand early in the year.

Market sentiment leans heavily toward no change, with 97% of the market anticipating such. Several FOMC participants have expressed no urgency in cutting the FED Funds rate, citing the overall strength of the economy, giving the FOMC time to await more data for greater confidence in inflation returning sustainably to 2%. While some participants still anticipate rate cuts later this year, recent data suggest it may take longer than expected to gain such confidence, possibly necessitating rates to remain unchanged longer than previously thought.

FEDWatch Toll

Credit Agricole forecasts continued downward pressure on EUR/USD due to divergent monetary policies between the European Central Bank (ECB) and the Fed. Despite potential inflationary pressures from a weak euro and high commodity prices, the impact of exchange rate movements on eurozone inflation is deemed limited.

Amidst the monetary policy divergence between the ECB and the Fed, the EUR/USD stands as a pivotal focal point. The currency pair's trajectory hinges significantly on the Fed's stance and the ECB's ability to align with it.

Christine Lagarde, head of the ECB, has raised concerns regarding potential euro depreciation and its repercussions, particularly in the face of soaring commodity prices. Despite her apprehensions, Credit Agricole expresses doubt about market reactions, hinting at possible challenges to Lagarde's resolve.

Recent data shed light on the exchange rate pass-through effect (ERPT), revealing a waning impact of a weaker euro on inflation in the eurozone compared to previous years. For instance, a 10% devaluation of the euro's nominal effective exchange rate (NEER) is now projected to elevate overall CPI by merely 0.2-0.3% over four quarters, a decline from the 0.5% observed previously.

Despite the EUR/USD's weakness, the euro's NEER has shown remarkable resilience, suggesting a containment of direct inflationary impacts.

Looking ahead, the release of the Eurozone's preliminary Harmonized Index of Consumer Prices (HICP) for April is anticipated to underscore ongoing disinflationary trends. This reinforces expectations of an ECB rate cut in June, followed by additional easing measures later in the year.

Based on these factors, EUR/USD is expected to remain a sell on rallies this week, with any upward movements likely to be short-lived. The net speculative position for the EUR has shifted to a sell position of 9,989 contracts, marking the first net sell position since September 2022, after being bought at 12,224 contracts in the previous week.