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Euro zone inflation soars to a record 10%, piling pressure on the European Central Bank
SHORT-TERM ENERGY OUTLOOK
Forecast Highlights: Global Liquid Fuels
Natural Gas
Short-Term Energy Outlook – U.S. Energy Information Administration (EIA)
Oil rises towards $90 as OPEC+ considers output cut
Oil prices firmed on Thursday, erasing earlier losses, on indications that OPEC+ might cut output, though a stronger dollar and weak economic outlook kept a lid on gains.
Brent crude futures rose 52 cents, or 0.6%, to $89.84 a barrel and U.S. crude futures rose by 52 cents, or 0.6%, to $82.67.
Leading members of OPEC+ have begun discussions about an oil output cut when they meet on Oct. 5, two sources from the producer group told Reuters.
One source from the Organization of the Petroleum Exporting Countries (OPEC) said a cut looks likely but gave no indication of volumes.
Reuters reported this week that Russia is likely to propose that OPEC+ reduces oil output by about 1 million barrels per day (bpd).
Hurricane Ian also provided price support. About 157,706 bpd of oil production was shut down in the Gulf of Mexico as of Wednesday, according to the Bureau of Safety and Environmental Enforcement.
Both crude benchmarks had rebounded in the previous two sessions from nine-month lows earlier in the week, buoyed by a temporary dive in the dollar index and a larger than expected U.S. fuel inventory drawdown.
However, the dollar index rose again on Thursday, dampening investor risk appetite and stoking fears recession fears, sending both crude contracts lower earlier in the session.
The Bank of England said it is committed to buying as many long-dated government bonds as needed between Wednesday and Oct. 14 to stabilise its currency after the British government’s budget plans announced last week sent sterling tumbling.
Goldman Sachs cut its 2023 oil price forecast on Tuesday, citing expectations of weaker demand and a stronger U.S. dollar, but said global supply disappointments reinforced its long-term bullish outlook.
In China, the world’s biggest crude oil importer, travel during the forthcoming week-long national holiday is set to hit its lowest level in years as Beijing’s zero-COVID rules keep people at home while economic woes curb spending.
Citi economists have lowered their China GDP forecast for the fourth quarter to 4.6% growth year on year from 5% expected previously.
“Stringent zero-COVID measures and a weak property sector continue to cloud growth prospects,” Citi analysts wrote on Wednesday.
Waiting for market bottom is a mistake and investors should buy now, David Rubenstein says
Investors looking to scoop up deals and position themselves for long-term growth should act now instead of waiting for stocks to bottom, David Rubenstein said Wednesday.
“People shouldn’t be afraid of going in and buying things now,” The Carlyle Group co-founder said during CNBC’s Delivering Alpha Investor Summit in New York City. “The great fortunes in the investment world are often made by buying things at discounts.”
During the past decade or so, there haven’t been many discounts with the U.S. stock market being in a bull cycle. Now, however, stocks have fallen into a bear market and have remained volatile, meaning many names are trading at a relative discount, Rubenstein said. The S&P 500 is down more than 15% year to date through Tuesday’s close and off more than 23% from a record set in January.
Rubenstein sees good value in stocks now and continuing through the next six months — about the time he thinks it will take for Federal Reserve rate hikes and policies from Congress to start making a dent in inflation.
Jim Chanos says this is the biggest investing story that no one is talking about
Beneath all the clamor over Russia’s invasion of Ukraine and the efforts to tamp down inflation, investors are largely passing over a huge story in China, famed short-seller Jim Chanos said Wednesday.
Troubles in the Chinese real estate market are a distant third to the war and rate hikes targeted at containing inflation.
But Chanos, known in particular for his long history of bets against the world’s second-largest economy, said it’s a major story with far-reaching implications, particularly at a time when global markets are in a fragile position.
“If what is going on in the world, whether it’s Russia/Ukraine, whether it’s central banks losing control, whatever might be, weren’t happening right now, I think what would be happening in the Chinese real estate market would be front and center for investors,” the Chanos and Co. founder said Wednesday at CNBC’s Delivering Alpha conference in New York.
The nation faces a deepening crisis caused by multiple factors, resulting in the worst plunge in home sales since China started allowing private property sales in the late 1990s.
In an effort to stem the crisis, authorities earlier this week lowered five-year mortgage rates and one-year prime rates to allay concerns that builders have had over private financing. The pandemic has exacerbated the problems, with the government’s zero-Covid policy hammering economic activity.
Chinese apartment prices are, probably, “after Treasury bonds [the] most important asset class in the world. And they are declining,” Chanos said. “We are seeing a real real estate problem in China over the past 18 months that the government does not seem to have a handle on, and the reason that’s important is that investment is still almost 50% of the Chinese economy.”
Evergrande, China’s second-largest property developer, has come under scrutiny for its financial dealings and defaulted on dollar-denominated bonds, making it a symbol of the China real estate bubble.
But Chanos said the problems run deeper.
“You have to understand that like Tokyo … almost every large company in China has a real estate development arm. So it’s not just the developers,” he said. “This is endemic to the whole economy there. And I think that we ignore it at our own peril.”
European stocks set to rebound after Bank of England placates markets
European stocks are heading for a higher open on Thursday after the Bank of England said it would purchase bonds in an effort to steady its financial markets and the cratering British pound.
Sterling has stooped to record lows against the U.S. dollar in recent days.
Global markets saw another volatile trading day on Wednesday, with stocks trading sharply lower as global markets sold off on economic concerns surrounding inflation and the growth outlook.
Market turmoil continued to hit the U.K., prompting the Bank of England to suspend the planned start of its gilt selling next week and begin temporarily buying long-dated bonds in order to calm the market chaos unleashed by the new government’s so-called “mini-budget.”
That move calmed markets in the U.S. yesterday, and that, in turn, pacified indices in Asia-Pacific overnight. U.S. stock futures inched lower in overnight trading Wednesday.
https://www.cnbc.com/2022/09/29/european-markets-rebounds-after-boe-steps-in-to-calm-markets.html
Asia-Pacific markets rise after Wall Street rebounds overnight- Sept 29
Shares in the Asia-Pacific rose on Thursday following a rebound on Wall Street overnight. The rally in the U.S. came after the Bank of England said it would intervene in the bond market to stabilize conditions.
Hong Kong’s Hang Seng index jumped 1.33% in early trade. In South Korea, the Kospi added 1.31% and the Kosdaq was 2.38% higher.
The Nikkei 225 in Japan advanced around 1% and the Topix index gained 0.37%. Australia’s S&P/ASX 200 jumped 1.53%.
In mainland China, the Shanghai Composite rose 0.88% and the Shenzhen Component added around 1%. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 1.06%.
Overnight in the U.S., the Dow Jones Industrial Average popped 548.75 points, or 1.88%, to 29,683.74. The S&P 500 gained 1.97% to 3,719.04, staging a comeback after notching a new bear market low the previous session. The Nasdaq Composite was 2.05% higher at 11,051.64 at the close.
https://www.cnbc.com/2022/09/29/asia-markets-wall-street-bank-of-england-ipo-currencies-oil.html
Embattled emerging markets face fresh pain from U.S. rate hikes
The prospect of U.S. interest rates climbing to levels last seen in the run-up to the global financial crisis has cast a fresh pall over emerging economies that have battled to recover from COVID, grappled with rampant inflation and faced capital flight.
Many past emerging market crises were linked to dollar strength and rising U.S. interest rates, forcing developing countries into tighter monetary policy to shore up their own currencies and fend off inflation pressures, pushing up costs of servicing dollar-denominated debt.
This time round, there are some differences: Emerging central banks have been leaders rather than laggards in the tightening cycle, with policymakers in many regions kicking off rate hikes as early as summer 2021.
Yet with major central banks now joining the inflation battle, markets predict the U.S. Federal Reserve will hike interest rates to 4.6% by March 2023 – a move that will raise the heat, especially on smaller, riskier developing economies.
That’s a sharp and swift change from just 12 months ago, when Fed forecasters predicted no rate hikes in 2023.
“This year has been a perfect storm,” said Damien Buchet, CIO at Finisterre Capital.
“The Fed and ECB (European Central Bank) are behind the curve we need to move towards a tightening of financial conditions.”
Some of the world’s poorest nations expect debt service payments to rise to $69 billion by 2024 – the highest level in the current decade, according to a recent report.
It has been a tricky year for financial markets as countries grapple with a potential recession and an energy shock in the wake of the war in Ukraine, but some emerging nation assets have taken a disproportionate hit.
Stocks from developing nations are down about 28% this year, underperforming major developed benchmarks in Europe and the United States which have fallen around 20%. Returns on both hard-currency and local-currency fixed income are deep in the red, while currencies – bar a few exceptions mainly in Latin America – have also tumbled.
According to the Institute of International Finance capital flows tracker, emerging market assets suffered a record breaking outflow episode sparked by Russia’s Feb. 24 invasion of Ukraine. Capital outflows from emerging markets ex-China which only ended in August were akin to those during the 2013 taper tantrum, the IIF said in September.
“Emerging market fortunes continue to rest quite heavily on what the Fed does,” said Manik Narain, head of emerging markets strategy at UBS.
Major emerging market central banks had delivered nearly 6,000 basis points in rate increases in 2022 until end-August in their inflation fight, Reuters calculations show.
But tighter monetary policy also dampens economic growth. Actions by the Fed, along with those of other major central banks, have prompted early warnings from international officials and analysts that rising rates for currencies like the dollar and the euro could tighten global financial conditions so much it leads to a global recession.
Developing central banks find themselves in different stages of the tightening cycle, said Claudia Calich, head of emerging market debt at M&G Investments.
“If you look at the forwards and the implied curves of some countries in Latin America such as Chile and Brazil, those markets are really starting to price rate cuts for the second half of next year,” Calich told Reuters.
Central banks in central and eastern Europe still have to deliver a few more rate hikes though the cycle was also coming to an end, Calich added.
Overall, many of the biggest emerging market economies enjoyed better fundamentals with the likes of Brazil, Mexico or South Africa delivering rate hikes, building up reserves and enjoying healthy trade balances due to a commodity price boom.
Deeper liquid markets in major emerging economies meant they could focus on raising debt locally. However, there is little let-up on the cards for smaller, riskier emerging markets.
A record 14 of these so-called frontier markets who issued international debt see their bonds trade at a premium of over 1,000 basis points over safe-haven U.S. Treasuries. Many others such as Egypt or Kenya are a whisker away from these levels.
Such wide bond yield spreads mean these countries are effectively shut out of markets and unable to refinance at this stage. Many – such as Egypt and Ghana – have been knocking at the door of the International Monetary Fund (IMF) to help shore up their funding.
Raphael Kassin, head of emerging markets hard currency debt at Itau Asset Management said investors needed some clarity on how long rates would stay high.
“If it is temporary, will be ok. The majority of countries don’t have big financial needs this year or next year. What really matters is what happens in the longer term.”
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