VIX Index Lifted at Lows, Will Risk Aversion Rise Again?

Summary:

In early December, the BlackRock Real Estate funds suddenly appeared with significant negative news, which caused market concern. Following the night of December 7, Putin's speech about the nuclear war risk is rising triggered a rekindling of risk aversion in the market, with bonds and gold-based safe-haven assets rising and crude oil stocks risk assets plunging. Is risk aversion going to rise again? Will it cause a domino effect?

The market is heading for the worst

The $125 billion BlackRock Real Estate fund suffered a redemption run in early December, sparking great concern in the market. On the night of December 7, Putin's nuclear threat ignited the market's risk aversion. The 10-year US bond yield fell sharply by 10bp to 3.44%, while the two-year 10-year yield curve continued to be deeply inverted - 82bp, with growing signals of recession. However, the U.S. dollar index weakened under the influence of falling U.S. bond yields and short-side congestion, instead pulling up gold, which was originally going to weaken, while WTI crude oil futures, a risk asset, continued to plunge 3%.

The hottest U.S. real estate market in the pandemic is experiencing a sharp cooling. The U.S. S&P/CS 20-City Composite Home Price Index slipped from a high of 21.23 in April to 10.43 in September (see chart below). The average U.S. 30-year fixed-rate mortgage rate fell for four consecutive weeks to 6.29% from 7.22% on Oct. 27, while real estate sales also saw a sharp decline, with many even experiencing declines. With the continuous interest rate increase and anti-inflation in the U.S., a recession is inevitable, and U.S. housing prices are likely to continue to decelerate. The last few major economic crises in the U.S. were opened with the bursting of the real estate bubble, what will happen this time? The real estate bubble is also gradually showing signs of bursting. Recently, there have been many real estate fund redemptions in the U.S., BlackRock is just the biggest case. BlackRock has now started to sell assets to meet investors' redemption requests and limit the maximum redemption amount to 2% per month. After this event is exposed to the public, will it trigger more redemptions and further trigger the domino effect? If the sale of real estate assets continues, given the volume of real estate now, it will be as powerful as the two major crises (subprime mortgage crisis and bankruptcy of the Lehman brothers) since 2000.

VIX Index Lifted at Lows, Will Risk Aversion Rise Again?_1

Market volatility index quietly rises at lows

Recently, the U.S. has cooled down its interest rate hike. Non-U.S. currencies, non-ferrous metals, and precious metals are all reveling. Even the long-suppressed black building materials have started to rise sharply under the optimization of China's pandemic prevention and control policies. The most striking one is iron ore, which has risen by 36% from the low as of today's close. London copper has also risen by 15% from the low, which is also a barometer of the global economy. This does not fully consider the embarrassment of its "big brother" crude oil, which plummeted by 10% in a week, from $92/barrel in early November to a minimum of $72/barrel, a drop of nearly 22%. What has the market done? Let's just say crude oil is a "good bully".

One piece of data that is quietly changing and may have been overlooked is the VIX Index, as shown below: The VIX has moved up for 3 consecutive days from its absolute low for the year. In terms of the cycle, perhaps this wave of upward movement is just beginning. Maybe it will only come into the public's view after several consecutive days of upward movement. Can risk aversion raise its head? It probably will be seen at the next U.S. inflation data release time.

VIX Index Lifted at Lows, Will Risk Aversion Rise Again?_2

Let's talk about the recent market bets on downward inflation. The Fed will slow down interest rate cuts and cut interest rates in 2023. What's next for the market? I can tell you that it's hard to predict. Let me tell you a story. The situation now is perhaps very similar to the economic stagflation of the 1970s and 1980s, with high inflation and low growth. Paul A. Volcker, then chairman of the Fed, had cut interest rates in 1980 because of the U.S. recession. Later, he had to start raising interest rates again under the pressure of inflation, even to double digits. It was only two years later that he managed to keep inflation down to 5%, which is still far from the current 2%, but he paid the price of two economic recessions. President Carter probably hated Volcker because he lost his re-election opportunity for this. Powell was slapped once for underestimating inflation at the beginning of the pandemic when inflation was very light, and will it continue now? If monetary policy is relaxed too early, the inflation problem will only become more entrenched and the higher the price to be paid to manage inflation in the future. Therefore, don't underestimate Powell and the determination of the Fed to tighten the currency. It is better to suffer short-term pain than long-term pain.

Finally, I got a bold idea: How crazy the market is now, how sad it will be later. Since the market is now crazy about short oil and long copper and iron, maybe it's time to go against the trend.

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Cohen

Commodity

Crude oil futures spent much of 2022 surging, as demand for transportation fuels to travel returned while Russia's invasion of Ukraine and production cuts from the world's largest oil-producing nations and their allies (OPEC+) squeezed supply.

Brent crude futures rose above $139 per barrel in March as Russia invaded Ukraine, and then later rose again as buyers reckoned with the bottleneck of two years of refinery closures during the pandemic.

As the year winds to a close, both U.S. and Brent crude futures have given up all of the year's gains. Here is why:

Depressed Demand for Fuels

China is the world's largest crude importer and second- largest oil consuming nation, second only to the United States. But in 2022, strict government intervention to contain coronavirus cases starkly reduced industrial and economic output as well as demand for travel. China's measures depressed oil demand by as much as 30% to 40% in China, according to analyst estimates.

Europe's winter started off mild, curbing demand for different fuels, including distillates like heating oil, used for power generation and heating homes.

Overall economic activity also declined across the globe, most notably in China but also in the United States.

Higher Rates and The Dollar

To combat rising inflation across the world, central banks enacted a series of interest rate hikes intended to cool off the economy and the labor market.

Rising interest rates increased the value of the U.S. dollar, which pressured oil prices as a strengthening dollar makes the greenback-denominated commodity more expensive for other currency holders.

Supply Fears Were Overblown

OPEC+, which comprises the Organization of the Petroleum Exporting Countries (OPEC) and allies including Russia, angered the United States and other Western nations in October when it agreed to cut its targeted output by 2 million barrels per day (bpd), or about 2% of world demand, from November until the end of 2023.

OPEC+ said it cut output because of a weaker economic outlook, but the move did not shore up prices. About half of OPEC's cut was on paper only, as the producing group has been routinely falling short of its targets.

Meanwhile, U.S. production has picked up. Domestic output has grown slowly, but it recently hit 12.2 million barrels per day, the highest since the first wave of the coronavirus pandemic in March 2020.

The market's rally was also built-in part on fears that a series of sanctions imposed on Russia by European nations and the United States would throttle that nation's supply. While production in Russia has declined, it has not fallen as fast as anticipated.

Earlier this week, G7 democracies and Australia imposed a $60-per-barrel price limit on seaborne Russian crude to hamper Russia's ability to fund the military offensive in Ukraine.

However, Russian oil is already trading at a discount, making it less likely that the move will disrupt markets.

Speculators Flee

Hedge funds and other money managers built big positions in crude contracts in the wake of Moscow's invasion, but have swiftly exited the market, removing some of the support for oil's rally.

U.S. data shows that hedge funds' net long position in Brent crude contracts is near its lowest level over the past 10 years, and the ratio of long positions to short positions is at its lowest since November 2020.

Source: Reuters

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Thomas

The pursuit of clean energy and upholding of a rules-based international order are key issues for European and Southeast Asian leaders, as the two blocs mark 45 years of diplomatic relations.

The connectivity between the two regions is another focus, said Mr. Igor Driesmans, European Union (EU) ambassador to the Association of Southeast Asian Nations (ASEAN), on Wednesday (Dec 7).

He was speaking to CNA ahead of a special EU-ASEAN summit on Dec 14 in Brussels, Belgium to mark the milestone.

Mr. Driesmans added that the EU will lend its support to Indonesia as it assumes the chairmanship of ASEAN next year. Issues on the horizon include addressing the situation in Myanmar.

Clean Energy Transition Among Key Issues

When European and Southeast Asian leaders meet in Brussels, there will be three key issues to discuss, said Mr. Driesmans.

The first will be the transition to cleaner energy, something which is a "top priority in Europe", said the ambassador.

"I think it's a good conversation to be had because we can only achieve climate neutrality if we're all in this together," he said.

Mr. Driesmans noted that climate change is "the biggest global challenge" now.

The EU will increase its investments in sustainable infrastructure in Southeast Asia, and hold more discussions at the political level on how to reduce carbon emissions.

Mr. Driesmans noted that "without any significant decarbonisation, the energy-related CO2 emissions in ASEAN will double in the next 20 years", underscoring the need for urgent action.

"We look forward to working with ASEAN in many different ways at a technical level (and) stepping up our expert exchanges," he said, adding that a clean energy dialogue will be launched at the Brussels summit.

Secondly, the connectivity between Europe and Southeast Asia will be on the cards, with the two regions being each other's third largest trading partner, said Mr. Driesmans.

He added that there remains "a lot of untapped potential" to boost trade, especially with the expected growth of Southeast Asia.

Mr. Driesmans cited the signing of the Comprehensive Air Transport Agreement in October, the first of its kind between the two regions, as a step towards this goal.

The agreement, which involves 37 countries, is "a very big deal for our airline industry", and also benefits customers travelling between Europe and Southeast Asia.

The third thing on the Brussels summit agenda is the upholding of a rules-based international order, said Mr. Driesmans.

He said that both Europe and Southeast Asia are facing issues over security, and can work together to address them.

"If we work together jointly, we can be anchors of stability, of multilateralism, of a rules-based international order," he said.

Indonesia as Asean Chair

The EU is "delighted" that Indonesia will take over as chair of ASEAN next year, said Mr. Driesmans, as the country is seen as a "like-minded partner" in multiple areas.

Indonesia forms a third of Southeast Asia's population and a third of its gross domestic product, the ambassador said.

Mr. Driesmans said there are overlaps in the Indo-Pacific strategies of ASEAN and the EU, such as creating an inclusive region with cooperation among all players, while upholding ASEAN centrality.

Describing Indonesia as "the mother or the father" of ASEAN's vision on the wider region, Mr. Driesmans said its chairmanship provides an opportunity to deepen both blocs' cooperation "both at the principal and on the concrete level".

There are also heavy expectations on Indonesia to act on Myanmar, said the ambassador.

"They have the political will (and) the political clout to do something about this situation, which is now with us for almost two years," he said.

"I think we count on Indonesia to really push for a solution on this crisis, which is threatening not just the country, but the regional stability, so that we can have a return to democracy."

Mr. Driesmans said that finding a solution to the Myanmar situation is "not easy", but the EU will lend its fullest support to Indonesia.

On Myanmar

Although ASEAN abides by a principle of non-interference, it has taken a "rather strong position" in the Myanmar crisis, said Mr. Driesmans.

The bloc has excluded Myanmar's junta leaders from official meetings, including the upcoming summit.

Mr. Driesmans said although the Five-Point Consensus provides a "solid framework" to return Myanmar to democracy, it has not been implemented so far.

"The fault of that lies squarely within the junta's unwillingness to commit to implement any of the five points. So we need to ramp up the pressure on the junta as well," he said.

Challenges Remain

Mr. Driesmans said the world is currently facing "huge geopolitical tensions" and superpower rivalry, which is leading to increased polarisation.

He said that countries "tend to forget the importance of the multilateral system, which is currently so much under attack".

"But we, as regional organisations, understand by our own making how important it is to work together and to have a cooperative global order," said Mr. Driesmans.

He said the two blocs can work together to push for a world where countries respect basic international rules, such as on maritime security or territorial integrity.

"That's no small objective but I think that we as EU and ASEAN can make a difference on that," he said.

Source: CNA

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Cohen

Central Bank

Although the RBA both hiked rates to the highest level since 2012 and at the sharpest rate since 1989, the decision was as expected. Short Term Interest Rate Markets were expecting a 25-bps hike and the RBA hiked by 25 bps. The main standouts from the meeting were the RBA's mention of a wage-price spiral, monetary policy lag, high inflation, and the need to keep hiking interest rates.

High Inflation

The RBA once again repeated that inflation was too high. The headline level is at 7.3% y/y and the core is at 6.1% y/y with both measures showing a steady uptrend with no obvious signs of peaking.

The RBA committed to re-establishing the 2-3% inflation target, so this indicates there are most likely more rate hikes to come.

Monetary policy lag

The RBA referred to a monetary policy lag and expected to hear more of this from central banks. There is a natural delay from an interest hike working its way through the economy. So, as more and more mortgages are renewed that will slowly cool demand as households have less disposable income. This is why the RBA said, 'Household spending is expected to slow over the period ahead although the timing and extent of this slowdown are uncertain'.

Wage price spiral

The RBA is concerned about the possibility of a wage-price spiral. Remember the strong NFP last Friday? That is likely to be a theme for central banks' concerns. Once inflation is in wages it gets 'hard baked' into the economy. Central banks fear it and wages are growing in Australia. The RBA won't like it if that continues and will mean they will need to keep hiking rates.

Conclusion

These are the main reasons the RBA says that: 'It is closely monitoring the global economy, household spending, and wage and price-setting behaviour. The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board's assessment of the outlook for inflation and the labour market.'

What does this mean for the AUD right now? Not much. This is because much of what the RBA is doing has been expected. But it does mean incoming inflation and wage data will be crucial for the path of interest rates. A good pair for trading any significant shifts is generally the AUD/NZD as a way of trading central bank divergences from the RBA and the RBNZ.

Source: HYCM

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Alex

Commodity

Forex

Stocks

Equity markets look a little flat on Thursday, perhaps a sign that we've entered into a waiting period ahead of some major data releases and central bank meetings.

This month was always effectively split into two dominant weeks, the first of the month which included the jobs report that proved extremely impactful. And then next week when we get a flurry of interest rate decisions and some big data releases. This week was always going to be the void in the middle and that's how it's largely played out, with the ripple effects from Friday's jobs data continuing to dictate sentiment.

Of course, developments in China have a big role to play, although as we're seeing once again, Covid-related moves are almost exclusively impacting stocks in domestic markets. We can see that again overnight, with reports of looser mask and isolation requirements in Hong Kong lifting the Hang Seng and making it the clear outperformer in the region, while most other indices tread water.

There is, of course, US PPI to come tomorrow which could give investors a welcome boost ahead of the main event next week. That said, while probably indicating lower price pressures in the pipeline, it doesn't alleviate the concerns thrown up by the jobs report last week of strong wage growth and the threat of entrenched inflation. So it will be interesting to see how investors react to the PPI report, coming so close to next weeks CPI release and Fed decision.

A floor in oil prices?

Oil prices remain under pressure as traders continue to price in a slower global economy next year and the prospect of deeper recessions. China's efforts to reduce restrictions are probably preventing a much steeper decline in the oil price, although this won't be without disruption as Covid spreads like wildfire throughout the country after such a long period of zero-Covid measures.

Then there's also the pledge by the White House to restock the SPR once oil falls to around $70 a barrel, only a couple of dollars below where it is now, which could in theory put even a temporary floor under the price considering how much it's been drawn down this year.

Gold awaiting the Fed meeting

Gold appears to be steadying ahead of the inflation data from the US and, of course, the Fed meeting next week. The jobs report was a setback and one that could stand in the way of another break higher before the Fed meeting. The inflation data tomorrow and on Wednesday could given the yellow metal a boost but it's the fear of entrenched inflation that could nudge the terminal rate higher. Investors will want to hear what the Fed has to say on the nasty wages surprise last week.

No making up for lost time

With risk appetite not improved, bitcoin continues to trade below $17,000 and await upcoming data. The headlines haven't been favourable recently although the FTX fallout has cooled somewhat. Unfortunately for bitcoin, the timing means it never participated in the last risk rebound and there isn't much appetite to make up for lost time.

Source: MarketPulse

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Devin

Egypt has seemingly turned into a future green hydrogen powerhouse overnight.

The North African country finalised nine of 16 green energy agreements worth about $83 billion with international companies at the UN climate summit, Cop27, in Sharm El Sheikh last month.

On Wednesday, it signed seven additional preliminary agreements with local and international companies to study green hydrogen energy projects.

They include Saudi Arabia's Acwa Power, a consortium of US-based Benchmark Energy and Egypt's Chemical Industries Holding Company, China Energy, Germany's DAI, India's Ocior Energy, a consortium of France's Voltalia and Egypt's Taqa Arabia, and British Petroleum.

Now is the time to translate paper into action, the chief executives of Hydrogen Europe and Hydrogen Egypt told The National in a joint interview. The two entities signed a co-operation agreement in Cairo earlier this week.

"The most important time is not the Cop. It is the time in between, because we have agreed on certain elements and now we need to simply implement them," said Hydrogen Europe chief executive Jorgo Chatzimarkakis.

"We need to get the MoUs [memorandums of understanding] into concrete projects and concrete products and concrete jobs," he said.

Hydrogen Europe represents the interests of the European hydrogen industry and its stakeholders. It has more than 400 members, including more than 30 national associations.

The challenges are "on both sides of the Med", said Hydrogen Egypt executive director Khaled Nageib, with the EU still finalising green energy policies and regulations and Egypt facing a tall order to create the necessary infrastructure.

"The investors, the off-takers, everybody's ready," said Mr Nageib, who is also chief executive of the Egyptian Ports Development Group.

Hydrogen Egypt is an association recently formed under the Egyptian Ports Development Group to drive Egypt's hydrogen industry and promote green hydrogen as a way to achieve carbon neutrality.

Green hydrogen is produced using electrolysers powered by renewable energy to split water from oxygen, significantly reducing the carbon dioxide emissions caused by traditional hydrogen production methods that mainly use fossil fuels.

At Cop27, Minister of Petroleum and Mineral Resources Tarek El Molla said Egypt had hastened its strategy to achieve 42 per cent renewables in the energy mix by 2030, compared to the previous goal of 2035. The country only had 11 per cent of renewable energy in 2019.

Egypt is expected to launch its national low-carbon hydrogen strategy — prepared in co-operation with the European Bank for Reconstruction and Development — by the end of the year, Minister of Electricity Mohamed Shaker said.

Meanwhile, the EU has its own European Green Deal, agreed on in 2020. The bloc hopes to reduce its greenhouse gas emissions by 55 per cent (compared with 1990 levels) by 2030 through its Fit for 55 package of legislative proposals.

"Fit for 55 was a major legal and regulatory step," Mr Chatzimarkakis said. "It was the biggest regulatory change since the EU internal market was established. So, 3,000 pages of law and 1,000 mentions of hydrogen."

Its REPowerEU plan aims to achieve 20 million tonnes of renewable hydrogen consumption by 2030. The EU currently consumes about eight million tonnes of hydrogen per year, 98 per cent of which is derived from natural gas.

The Russia-Ukraine war and the ensuing energy crisis in Europe have increased the urgency in reducing the continent's dependence on fossil fuels.

The European Commission signed three preliminary agreements — with Namibia, Kazakhstan and Egypt — on renewable hydrogen on the sidelines of Cop27.

Egypt will "definitely be one of the powerhouses" and is "the prime partner of the Europeans", Mr Chatzimarkakis said.

"If both sides come to clear certifications, clear regulations, then Egypt will deliver much faster than others," he said.

He added that other powerhouses in the Mena region include Saudi Arabia and the UAE.

"Egypt has two very strong geographic ace cards," Mr Nageib said. "One is on the solar wind map … and geographic proximity to Europe is a huge advantage."

The Suez Canal and existing pipelines that have the "immediate possibility to transport the hydrogen carriers — like methanol, ammonia or synthetic methane — to close destinations in the Mediterranean" also give Egypt an edge, Mr Chatzimarkakis said.

As for the funding needed for Egypt's green hydrogen future, the European Commission pledged up to €35 million ($36.8 million) in support of the country's Energy Wealth Initiative.

The EBRD said it would provide an $80 million loan for the 100-megawatt green hydrogen plant to be built by Norway's Scatec, Fertiglobe, Orascom Construction and the Sovereign Fund of Egypt.

The $83-billion figure assigned to the nine framework agreements is presumably huge because it includes the investments in technology transfer and infrastructure needed to support all of these large projects.

"These plants need an industrial facility, they need a port and they need a grid, and they need green energy," Mr Nageib said.

Mr Chatzimarkakis said partners that are willing to sign 10 and 20-year agreements are needed.

It will take until 2035 for all of the projects to be operational, but some are on the horizon sooner.

"It could already be 2024, but I think 2025 is more realistic," Mr Chatzimarkakis said.

Source: The National News

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Cohen

Commodity

Stocks fell for a fifth day, but the sovereign bonds gained, a hint that the market catalyzer shifted from the hawkish Federal Reserve (Fed) pricing – where stocks and bonds fall at the same time, to recession fears, where stocks remain under pressure, while investors seek refuge in safer sovereign assets.

The latest data showed that around $5 billion flowed into U.S. bond ETFs over the past week. Ishares 7–10-year Treasury bond ETF is up by more than 7% since the October dip, up by 3% since the beginning of December and should recover further as investors are expected to return to bonds before they return, sustainably to equities.

The S&P 500's latest bear market rally is weakening by the day. The index gave back another, though a slim 0.20% yesterday, and closed near its 100-DMA.

The U.S. 10-year yield slipped below its own 100-DMA for the first time since August – when investors were pricing recession fears remember – although at that time recession fears fed into softer Fed expectations and boosted the stock valuations. Today, it's not the case. The recession fears only increase worries about the future health of the economy, as Fed expectations remain relatively hawkish.

The falling yields kept the U.S. dollar under pressure below the critical 200-DMA, which stands at 105.75.

The EUR/USD hovers around the 1.05 mark following the dollar's waltz, while Cable is holding on to its gains above the 200-DMA, near 1.2125, but remains perfectly at the mercy of the next move from the greenback.

Oil's dive

One big move of the day is oil. The barrel of American crude slipped below the $73 floor and fell to $71.70 on the back of rising recession fears.

The fact that the Europeans revised their Q3 GDP higher, that Germany revealed a weaker-than-expected contraction in industrial production, that the Chinese continue relaxing Covid measures, and that the Chinese central bank promised to keep financial conditions soft enough to boost economic growth – and reverse the economic disaster, did nothing to improve the mood. The latest news and data remained fully in the shadow of a sharp 8.7% fall in Chinese exports in November released yesterday. The U.S. crude oil inventories fell more than 5 mio barrels last week, but the gasoline inventories rose more than 5 mio barrels, making the data difficult to give direction.

But note that we have started seeing a structural change in the oil markets. Crude price curve was in backwardation up until a month ago. But over the past weeks we started seeing the front-end of the price curve falling and even going back to contango. That means that immediate demand for oil is weakening due to recession fears, and that we may not see a soft landing in the U.S. economy, even less in the world economy next year. The latter could further weigh on crude prices, and we could see the price of a barrel slip below $70 before the year-end.

The 'only' good news

The softening U.S. dollar gives other pairs space to breathe. This is perhaps why we see the European companies posting mild losses. The German Dax index lost only about 2% since it peaked early December, whereas the S&P500 lost the double that amount, a bit more than 4%.

And if the softer dollar helped some majors like euro and sterling keep their head above water, the USD/CAD advanced to 1.37 yesterday, even after the Bank of Canada (BoC) decided to go ahead with a 50bp hike, instead of 25bp, but didn't say that there will be more rate hikes – an absence which has been interpreted as 'maybe there will be no more hikes'.

Of course, the sharp drop in oil prices does impact Loonie negatively as there is a clear positive correlation between oil prices and the Canadian dollar. Therefore, if crude oil continues its journey south, there is little to prevent the USD/CAD to advance past the 1.38 level. The only thing that could slow down the Loonie's fall, is the dollar's global depreciation. Otherwise, the year-end outlook for the Loonie looks rather bearish.If all this is not depressing enough

Russian President Vladimir Putin said that the nuclear threat is rising and didn't say he wouldn't use a nuclear weapon to defend itself, giving a fresh boost to geopolitical tensions.

Gold may have benefited from rising safe haven flows – although the U.S. dollar remains the ultimate safe haven if you fear a further escalation of military tensions with Russia.

What also made gold and silver shine yesterday – besides from the softer U.S. dollar – was news that China increased its bullion reserves for the first time in three years, in an effort to diversify away from the U.S. dollar. The price of an ounce rebounded to $1790. In this short run, gold bulls will likely see further resistance above the 200-DMA, and the $1800 psychological resistance. But the weakening U.S. dollar outlook strengthens appetite for gold in the medium run. There is potential for around $100 rise to $1880, May peak.