November 29th Financial News

Daily News

Summary:

Two Fed hawks give dovish remarks, preparing for rate cuts; U.S. home price index hits a record high after rising for eight straight months; famous investor Charlie Munger dies at 99...

[Quick Facts]

1. Two Fed hawks give dovish remarks.

2. U.S. home price index hits a record high after rising for 8 months.

3. Famous investor Charlie Munger dies at 99.

4. Binance US: Zhao (CZ) resigns as Chairman of the Board of Directors.

5. BOJ's paper loss on bond holdings grows to a 20-year high of $71bn.

[News Details]

Two Fed hawks give dovish remarks

Fed governor Waller, one of the Fed's most hawkish officials, seemed to be paving the way for rate cuts at an event at the American Enterprise Institute (AEI) on Tuesday. He said that he was "increasingly confident" that the Fed's current interest rates would prove sufficient to drive inflation down to the 2% target and that if inflation continues to fall, a rate cut would possibly come a few months later. Fed Governor Bowman, who has been hawkish, said she supports further rate hikes if needed, but she added some conditions compared to previous remarks, saying she supports taking action if inflation progress stalls or cannot fall to target in time. The two big hawks who promoted substantial interest rate hikes to curb inflation last year have hinted that they are now happy to see interest rates remain unchanged, which reinforces expectations that the Fed's current interest rate hike cycle has come to an end.

In addition, the "big dove" Chicago Fed President Goolsbee also said that interest rates staying high for too long is a matter of concern.

U.S. home price index hits a record high after rising for 8 months

U.S. home prices continue to climb to an all-time high. A national gauge of home prices rose 0.7% in September from August, according to seasonally adjusted data from S&P CoreLogic Case-Shiller. It was the eighth straight month of gains for the index. Mortgage rates above 7% have chilled the housing market, keeping both would-be buyers and sellers on the sidelines.

Famous investor Charlie Munger dies at 99

Berkshire Hathaway a few minutes ago was advised by members of Charlie Munger's family that he peacefully died at 99 this morning at a California hospital, Berkshire Hathaway posted a statement on the website of its subsidiary Business Wire on Tuesday, November 28, local time. Charlie Munger was a legendary investor who teamed up with Warren Buffett over the past 46 years to create one of the finest investment records of all time -- the book value of Berkshire's stock created an investment myth with a compounded annualized return of 20.3%, and the price per share rose from $19 to $84,487. Warren Buffett eulogized his old partner saying, "Berkshire Hathaway could not have been built to its present status without Charlie's inspiration, wisdom and participation."

Binance US: Zhao (CZ) resigns as Chairman of the Board of Directors

Cryptocurrency exchange Binance US announced on Nov. 28 that it is not implicated in the settlement announced last week as it operates separately from Binance, and it holds no outstanding enforcement matters with U.S. regulatory bodies such as the U.S. Department of Justice, Financial Crimes Enforcement Network, Office of Foreign Assets Control, or the Commodity Futures Trading Commission. The firm maintains full operations. Binance founder Changpeng Zhao has decided to resign as chairman of the Board of Directors of Binance US and transfer his voting rights through a proxy arrangement.

BOJ's paper loss on bond holdings grows to a 20-year high of $71bn

The Bank of Japan's (BOJ) semi-annual financial report released on Tuesday showed that its bond holdings have suffered the highest floating losses on record in the last six months, demonstrating the challenges faced by the BOJ governor Kazuo Ueda as he moves toward policy normalization. At the end of September, the paper loss on those assets was 10.5 trillion yen ($70.7 billion), the biggest since fiscal 2004. That's over six times higher than the 157 billion yen loss in the previous fiscal year.

[Focus of the Day]

UTC+8 17:00 Switzerland ZEW Investor Confidence Index (Nov)

UTC+8 18:00 Eurozone Industrial Climate Index & Economic Confidence Index (Nov)

UTC+8 21:00 Germany CPI Prelim MoM (Nov)

UTC+8 23:05 BOE Gov Bailey Speaks

UTC+8 23:30 U.S. EIA Weekly Crude Stocks

UTC+8 02:45 Next Day: FOMC Member Mester Speaks

UTC+8 03:00 Next Day: Fed's Beige Book

Risk Warnings and Disclaimers

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Economic

Energy

OPEC+ delays decision on lack of consensus

Oil prices tumbled after OPEC and other major oil producing nations, known as the OPEC+ group, decided to delay a meeting scheduled for Sunday, November 26, to Thursday, November 30. Investors may have sold black gold on concerns that the group was unable to reach consensus on further production cuts amid a weakening global growth outlook, as it was anticipated heading into the meeting.

Sources said that this was due to African countries Nigeria and Angola aiming for higher oil output allowance, as they were earlier given lower targets after years of failing to meet the previous ones. Nonetheless, on Friday, news hit the wires that the alliance has moved closer to a compromise, which increases the likelihood of having a consensus on Thursday.

Are deeper cuts on the table?

Before the announcement of the postponement, it was largely anticipated that members are likely to extend or even deepen the existing supply cuts into next year. Saudi Arabia was also expected to stretch its additional voluntary supply cuts to at least the first quarter of 2024, so the big question may be whether there will be consensus of deeper cuts by other nations.

Although Saudi Arabia may be willing to cut more, it will likely want concessions from other nations as well. For example, Iraq is already exceeding its existing production target and could be tempted to take more barrels to the market if an accord to reopen its Kurdish export pipeline is soon reached. Iran's exports have also been increasing. Iran's targets have been suspended due to the imposition of US sanctions, but there is clear frustration among Gulf producers regarding soft enforcement by the US. Thus, there may be clear calls for this nation to be also given a target.

Any recovery could be limited and short-lived

As for the market's reaction, Friday's news that members have nearly reached common ground did not trigger a rebound in oil prices, which means that investors may be thinking that whatever cuts are decided, the alliance may have been on track to agree more if it weren't for the disagreements. A relief bounce remains a likelihood in case the group as a whole deepens its production cuts, but the hypothesis that they could have done more could keep the recovery limited and short-lived.

What's more, US output is also on the rise, hitting new records, which combined with weakening global demand prospects constitutes another reason why any decision-related recovery is likely to be brief. Therefore, oil prices could stay in a downtrend for a while longer, which could result in lower headline inflation around the world and perhaps prompt central banks whose economies are on the verge of recession, like the Eurozone, to cut interest rates earlier than currently anticipated.

WTI's broader path remains to the downside

From a technical standpoint, WTI's price structure remains of lower highs and lower lows below the downside resistance line drawn from the high of September 29. What's more, the 50-day EMA appears ready to fall below the 200-day EMA soon, which could validate the bearish picture. Although the 74.00 barrier provided decent support recently, it could soon be violated by the bears, with the next stop perhaps being the low of November 16 at around 72.15. A break lower would confirm a lower low on the daily chart and could see scope for extensions all the way down to the key area of 67.00.

For the picture to turn brighter, WTI may need to climb all the way above the crossroads of the aforementioned downtrend line and the round number of 80.00. Will Deeper OPEC+ Output Cuts Matter for Oil Prices?_2

Will Deeper OPEC+ Output Cuts Matter for Oil Prices?_2

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

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Damon

Forex

The EUR/USD pair is currently making steady gains, approaching multi-month highs around 1.0960, driven by a weakened USD and Christine Lagarde's somewhat hawkish remarks before the European Parliament.

Minor housing data from the U.S., specifically New Home Sales for October, came in below expectations but didn't significantly impact the pair.

Lagarde, President of the European Central Bank, cautioned that headline inflation might see a slight increase, and economic growth is anticipated to remain weak. However, Lagarde didn't provide clear indications on the duration of maintaining restrictive rates or the timeline for rate cuts.

The focus for the rest of the week will be on Eurostat's release of the Harmonized Index of Consumer Prices (HICP) and the U.S. report on the Core Personal Consumption Expenditures Index (PCE), influencing short-term expectations for the ECB and the Fed.

EUR/USD – D1 Timeframe

EUR/USD is currently trading around a major supply zone on the daily timeframe. The bearish array of the moving averages can be considered an additional confluence in support of the bearish sentiment. In the meantime though, there is a trendline support on the 4-Hour timeframe that I will be expecting price to break, before the bearish move can commence.

Analyst's Expectations

Direction: Bearish

Target: 1.06965

Invalidation: 1.10556

GBP/USD – D1 Timeframe

GBP/USD is currently at an intersection of a supply zone and a trendline resistance. Usually, this is considered basis enough for a bearish sentiment. However, considering the apparent lack of volatility from the US Dollar, I will personally wait to see a break of the minor trendline support on the 4-Hour timeframe for a safer entry, as in the case of EUR/USD.

Analyst's Expectations

Direction: Bearish

Target: 1.22494

Invalidation: 1.27452

USD/JPY – D1 Timeframe

USD/JPY is currently approaching the major demand zone with an overlapping trendline support. Based on this, I am expecting a bounce off of the trendline with an initial target at the 76% of the Fibonacci retracement level.

Analyst's Expectations

Direction: Bullish

Target: 150.28

1Invalidation: 145.692

Conclusion

The trading of CFDs comes at a risk. Thus, to succeed, you have to manage risks properly. To avoid costly mistakes while you look to trade these opportunities, be sure to do your due diligence and manage your risk appropriately.

Source: FBS

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ING

Commodity

Energy

Energy - Kazakh oil disruptions

A move lower in treasury yields and a weaker USD following some less hawkish comments from some Fed officials yesterday provided a boost to the commodities complex. ICE Brent managed to settle a little more than 2.1% higher on the day, which took it back well above US$81/bbl. The strength in the oil market comes despite the fact that there appears to still be no resolution to the disagreement between OPEC+ members over 2024 production targets. The group are scheduled to meet tomorrow, but if they fail to come to a preliminary deal, we cannot rule out the risk that the meeting is further delayed, which would likely put some downward pressure on oil prices. The outlook for the oil market in 2024 will largely depend on OPEC+ policy.

Further support would have likely come from disruptions to oil loadings in the Black Sea following a storm in the region. And this bad weather is expected to continue for most of this week. The halt in loadings will weigh on output, with Kazakhstan’s energy ministry already saying that output at its largest oil fields (Tengiz, Kashagan and Karachaganak) has been cut by 56%.

Numbers from the API overnight were somewhat neutral, showing that US crude oil inventories fell by 817Mbbls over the last week, while stocks at Cushing declined by 465Mbbls. The market was expecting a small draw in crude inventories. For refined products, gasoline inventories fell by 898Mbbls, while distillate stocks increased by 2.8MMbbls. If EIA numbers later today show a similar build in distillate stocks, it would be the first build since September.

Metals – MMG Peru copper miners begin strike

Workers at MMG’s Las Bambas copper mine in Peru began an indefinite strike starting Tuesday over delayed payment of their bonuses. The mine has a maximum production capacity of 400ktpa. The strike’s impact on the mine’s copper production remains unclear as of now. The copper concentrate market is expected to tighten with smelters around the world increasing capacity, while political risks continue to increase for mining operations globally. In Panama, Canada’s First Quantum mine has ignited massive protests in the country and was recently forced to suspend activity. A court yesterday ruled that the contract, which allowed the miner to operate the mine, was unconstitutional.

LME on-warrant copper stocks fell by 6,900 tonnes yesterday to 154,325 tonnes, the lowest since 19 September. The decline was driven by warehouses in New Orleans. Meanwhile, exchange inventories fell by 1,400 tonnes for a second consecutive day to 176,400 tonnes as of yesterday, the lowest since 2 November.

Agriculture – Cocoa jumps on supply woes

US cocoa prices extended their upward rally yesterday reaching their highest level since 1977. Concern over a strong El Nino event and wet weather elevating crop disease in West Africa are pointing towards a third consecutive supply deficit for the 2023/24 season. Recent reports suggest that the upcoming harmattan season (starting from late November-March) in the Ivory Coast has raised concern about caterpillar attacks while ageing plantations are expected to reduce overall productivity in the northwest region. Along with that, cocoa farmers in Ghana are struggling to receive proper fertilizers to control crop diseases, while Cameroon is also fighting black pods and other diseases due to persistent rains.

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Justin

Economic

The rise in Europe’s populist parties, underlined by this week’s far-right election win in the Netherlands, further exacerbates central banks’ political and public relations problems over their weakened balance sheets.

The far right’s surge, with anti-Islam, anti-euro Party for Freedom leader Geert Wilders favourite to become the next Dutch prime minister, makes life more difficult for central banks for several key reasons. It concentrates the spotlight on policy mistakes by largely independent central banks contributing to an unpopular mix of high (though now diminishing) inflation and high interest rates.

The rise of a new breed of politicians unstinting in their criticism of public sector technocrats will focus attention on central bank operating losses and measures taken to stem them. A landmark report from the International Monetary Fund in July found that losses throughout the euro system were ‘temporary and recoupable’. However, following the European Central Bank’s further interest rate rise in September, prospects for a medium-term easing of the central banks’ balance sheet plight have deteriorated further.

As the IMF wrote, quantitative easing – large-scale, across-the-board purchases of government bonds introduced in 2015 – removed duration risk from the private sector’s balance sheet, in an effort to support credit provision to the real economy. ‘In effect, the ECB executed a fixed-for-floating rate swap for public debt. This leaves the ECB and its shareholder national central banks with a large interest rate exposure in the current tightening cycle.’

Campaign to raise minimum reserve levels could hit bank lending

Deposit rates paid by central banks to commercial banks have increased sizeably in the past 18 months. These outlays hugely exceed the paltry interest rate return on the asset side of central banks’ balance sheets, heavily swollen by huge purchases of low- (sometimes negative-) yielding bonds during the past decade.

This imbalance – as well as some more mainstream monetary policy reasons – represents one reason why some euro area central banks have been campaigning to raise much further the volume of commercial banks’ non-remunerated minimum reserves held at Eurosystem central banks.

This aim is unlikely to be met, at least in the short term. Increasing minimum reserves might lower banks’ profitability and capacity to overpay staff, potentially garnering political applause. But bank executives argue it would impede lending at a sensitive time for European economies.

As the IMF wrote, major euro area central banks seem unlikely to turn to governments for recapitalisation or other forms of overt state support. But an end to a long cycle of paying profits to aid public finances is politically problematic. De Nederlandsche Bank is likely to pay no dividends to the government for the next 10 years. The Bundesbank is braced for a wider public debate over its finances in 2024-25. This will coincide with a probably stormy run-up to the next scheduled general election for Germany in autumn 2025.

QE criticism and appeal of populist parties

The Bundesbank will have used up nearly €20bn of provisions on its balance sheet in covering 2023 losses, to be announced in early 2024. These balance sheet problems, although soluble through accounting adjustments, will sharpen the debate about the drawbacks of large-scale QE. Many now believe this continued too long in the European Union and the UK. QE has been blamed for exacerbating wealth imbalances and undermining the solidity of public finances – both factors enhancing the appeal of populist parties.

The UK has a different mechanism to the euro area for dealing with central banks’ QE-induced losses. The prospective levy on UK taxpayers to stem losses through the Bank of England’s asset purchase facility is estimated to be as high as a cumulative £150bn by 2033.

The Bundesbank may see its sizeable gold reserves as an important buffer for its balance sheet strains. For political, legal and accounting reasons, it probably will not resort to direct use of its gold valuation reserves to plug its deficit. But it pointed out in its 2022 annual report that its balance sheet is underpinned by a gold revaluation reserve of €176bn, eight times larger than when the euro started in 1999.

A similar approach seems likely to be followed by De Nederlandsche Bank. Drawing on gold directly might have adverse side effects if politicians opined that the Bundesbank’s gold should be diverted to other channels. In view of the political and constitutional imbroglio over German public finances, such speculation would be anathema to the Bundesbank and to Chancellor Olaf Scholz’s embattled government.

Source: David Marsh

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

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Damon

Economic

Global GDP growth is seen at 2.5% in 2024 and growth in developed markets (DM) will average 0.7% versus 3.6% in Emerging Markets (EM) amid the prospects of a slow and fragmented world economy. These are the predictions of Amundi, a leading European asset manager.

Amundi expects global growth gradually weakening while inflation tempers but remains above central banks' targets, until the end of the year. Assuming the Middle East crisis remains contained, this weaker global economic outlook will be mainly driven by a slowdown in Developed Markets (DM).

"For 2025, we forecast global, DM, and EM real GDP growth at 2.7%, 1.5%, and 3.6% respectively," Amundi says.

Quality sovereign & corporate bonds

Vincent Mortier, Group CIO of Amundi, said: "Investing in 2024 will be all about quality sovereign & corporate bonds, and seeking growth through Asian equities, as this region should benefit from better economic prospects than the others. Investors should also seek opportunities through companies positioned on promising long-term themes such as the energy transition or supply chain relocations. Nevertheless, investors will have to wait until the second half of the year to consider European stocks."

Monica Defend, Head of Amundi Investment Institute, added: "Turning tides in growth, inflation, and monetary policy will generate opportunities for investors to add on risk assets during the year."

Slowing and fragmented growth

The growth differential between Developed and Emerging Markets should reach a five-year high. The US will face a mild recession in the first half of 2024, while Eurozone growth will remain mildly positive and Japan should somewhat moderate. Emerging Markets remain more resilient but show higher fragmentation, with Asia standing out as a clear beneficiary of investment flows.

"We expect that the US will face a mild recession in the first half of 2024, as tight financial conditions begin to impact consumers and businesses. In H2, growth should stabilise below potential and inflation move closer to target. Our forecast is a 0.6% growth rate in 2024 and 1.6% in 2025."

Growth in the Eurozone should remain low, with mixed dynamics across countries, as fiscal policy becomes more restrictive on top of already tight monetary policy. Amundi expects both the Eurozone and the UK to grow by 0.5% in 2024, and by 1.2% and 1.3% in 2025, respectively.

Emerging Markets downturn

Emerging Markets are heading towards a cyclical downturn amid weak global demand. In China, additional fiscal stimulus will not reverse the trend towards lower growth (3.9% in 2024 and 3.4% in 2025). India emerges as a new power offering bright economic prospects amid strong domestic demand and investments (6.0% growth in 2024 and 5.2% in 2025).

Finally, countries at the centre of new supply chain routes in Asia or rich in natural resources in Latin America should do better.

Central banks: assessing the time for a dovish turn

With weaker demand, inflation should converge towards Central Banks' targets by the end of 2024. Risks for higher inflation remain in an era of disorderly energy transition and global realignment, that could drive a surge in energy and food prices. These risks could halt or reverse the process in place.

Amundi expects DM Central Banks to remain on a hawkish pause over H1, until inflation appears further under control. Inflation in the US will influence the Fed's response, thus determining the depth of the recession. The asset manager expects the Fed and the ECB to bring interest rates down by an overall 150 and 125 basis points respectively in 2024. In Emerging Markets, disinflation is ongoing and Central Banks have some room to cut rates but little room for error in re-anchoring inflation.

Investment implications

In 2024, investors will need to navigate a fragmented economic outlook. The high disparity in valuations and the drying up of excess liquidity will lead to higher equity volatility. Lower growth and inflation may favour a return to a negative bond-equity correlation, which is good news for diversification and multi-asset portfolios.

Real and alternative assets (such as macro and fixed income hedge funds) may further add to traditional diversification. Gold can provide protection from geopolitical risk and some commodities can hedge against inflation.

Fixed income is king amid peaking rates: Quality bonds (sovereign or corporate) are the favoured asset class entering 2024. Gradually add duration and focus on investment grade credit, EM debt in hard currencies and Euro high yield short-term. Add more EM local currency debt after the Fed starts cutting rates and the US dollar weakens. US high yield may be pressured by high refinancing costs in H1 and could come back when financial conditions ease in H2.

Resilience in Equities: Entering 2024, stay defensive and focused on dividend sustainability, quality, and low volatility. Favour value in the US and Japan. When the Fed starts cutting rates, turn to more cyclical markets and sectors, such as Europe, Emerging Markets, and small caps. Themes to watch in equity will be the energy transition, healthcare, and artificial intelligence.

Emerging Markets are a key performance engine: At the start of the year, favour fixed income hard currency debt, then add local currency debt when the Fed pivots. EM Equity should benefit from a rebound in earnings, particularly in Asia. Throughout the year, look at long-term (India) and nearshoring stories, as well as winners in the energy transition (commodity exporters like Brazil) and technological advances (China).

Source: ZAWYA

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

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Owen Li

Energy

In the intricate world of global oil trade, a profound transformation is unfolding, challenging the longstanding dominance of the U.S. dollar. Recent geopolitical tensions surrounding the Ukraine conflict have intensified this shift, leading to a clash between Russia and India over oil payments.

The Petro-Dollar era unravelled

The U.S. dollar has been the undisputed currency in international oil transactions for decades. However, as Western sanctions gripped Russia in response to the Ukraine conflict, Moscow began steering away from the dollar and euro. Currently, less than 10 per cent of Russia's daily oil output is sold in these dominant currencies. The Russian central bank, restricted by sanctions, faces challenges in dollar operations, prompting a strategic shift in how Russia engages in global trade.

Pivot to India

Amid this shift, India emerged as a pivotal player, becoming Russia's largest buyer of seaborne oil. In a bold move, India insisted on paying for oil in rupees, disrupting established norms. However, this stance faced resistance, as the Russian central bank provided informal guidance against accepting the Indian currency. The resulting standoff almost derailed crucial trading activities, revealing the complexities that arise when traditional powers navigate new and assertive players.

Seeking alternatives amid sanctions

As Moscow faces limited access to the international banking system due to sanctions, Russian oil executives sought alternative currencies to facilitate transactions. The challenge lies in finding a viable substitute for the dollar, a quest that has implications not only for Russia and India but also for other key players such as buyers in Africa, China, and Turkey – all significant purchasers of Russian oil.

The Yuan factor and diplomatic sensitivities

Russian officials and oil executives, pressed by the limitations on the dollar, advocated for transactions in the Chinese yuan. While advantageous for Russia, this proposition faced resistance from India, given the sensitive nature of using the currency of a regional rival. The complexity deepened as Indian state refiners turned to the UAE dirham, introducing additional clearing requirements amidst Washington's tightened stance on enforcing price caps.

The story takes a dramatic turn as at least two major Russian oil companies threatened to redirect tankers carrying millions of tonnes of oil away from India. This move underscored the severity of the clash and the challenges in finding swift solutions. With Washington imposing sanctions on owners of tankers carrying Russian oil, the situation escalates, leaving a cloud of uncertainty over the future dynamics of global oil trade.

Bottomline

This exploration into the clash between Russia and India over oil payments unveils a narrative that goes beyond economic transactions. It reflects geopolitical shifts, the impact of sanctions, and the delicate dance between established and emerging players in the ever-evolving global trade landscape. As we witness the consequences of this clash reverberating across markets, one thing becomes clear – the tides of the global oil trade are shifting, and the implications are profound.