Omicron variant smashes crude oil

A new COVID-19 strain is putting big pressure on oil markets worldwide.

Oil trading

New COVID-19 strain puts pressure on oil

Just when you thought it was safe. Just when you thought the pandemic was under control. Just when you thought normality was in sight. A new COVID-19 variant has been found, and it’s already causing chaos in the oil markets.

The Omicron variant, a new highly contagious COVID strain, has been found and is already spreading across the world. The Delta variant was bad enough, but are oil markets resilient enough to withhold the Omicron assault?

Perhaps not. Crude oil futures took a tumble over the weekend, with the price dropping below $70 for the first time since September.

At the time of writing, WTI futures were down -2.38% on the day and trading around the $68.36 level. Daily lows, as of Tuesday 30th November, hit $67.05.

Brent futures are showing similar performance. Down -2.66% on the day, the North Sea benchmark was trading for approximately $71.32. Brent’s daily lows reached $70.23.

A broad sell off occurred last Friday when traders felt the fear after Omicron was first detected. Some traders may see value in lower oil prices, but current thinking implies lower oil demand could be in place.

We’ve already seen Delta-driven lockdowns in key European economies. This new virulent strain may force other nations around Europe and the wider world to restrict travel once more. That signals lower oil demand, thus lower oil prices going forward.

OPEC+ queries production hikes

Reports from OPEC+ suggest the cartel is split between continuing its 400,000 bpd monthly crude production hikes or pausing and rethinking. The $70 oil price is no good for OPEC it seems.

Word on the street is that Saudi Arabia and Russia, OPEC’s largest oil producers, would like a production pause. Others, mainly led by the UAE, are happy to keep pushing ahead with the planned production increases.

The cartel will have to perform another fine balancing act when it convenes for its December OPEC-JMMC meetings this week.

On the one hand, all of these nations require black gold to keep flowing in order to sustain their economies. On the other, keeping pumping out more crude will lead to an oil glut, which will force prices downwards anyway.

The downward price slide began last week, so OPEC has had some time to consider and calibrate its next moves carefully. However, the Omicron variant will put more pressure on the cluster of oil producers to reach a consensus.

Remember earlier in the year when the UAE caused an OPEC+ standstill? There’s historic precedent at play here, which suggests OPEC members may be at loggerheads. It will take some careful diplomacy to resolve what is looking like an oil emergency for the group in its final 2021 meeting.

There are also other, Biden-shaped reasons for OPEC+ to pull back too…

Biden dips into the US strategic oil reserve

Gasoline prices are hovering around a seven-year high, reaching $3.40 per gallon in recent days compared with $2.11 at this time last year.

High oil prices have led to high prices at the pump in the US. It’s a similar story in pretty much every developed economy, but it appears US voters are the most vocal regarding high petrol costs.

To combat this, Biden has authorised the release of stocks from the US Strategic Petroleum Reserve. Some 50 million barrels will be released from stockpiles upon the Presidents orders.

32 million barrels will be exchanged over the next several months, while 18 million barrels will be an acceleration of a previously authorised sale.

This was a coordinated move with several other economies, notably the UK, South Korea, India, Japan, and China all dipping into their own oil reserves too. With additions from these countries, a further 66 million barrels may be available to markets.

The addition of so much oil to the markets may present another reason why OPEC+ could slow its production output.

If that wasn’t enough, US energy envoy Amos Hochstein has indicated more oil could be released if necessary.

“Remember, this was not a 50-million-barrel release, 30 million barrels were an exchange where companies and traders can take the oil now and return it over a scheduled period of time. That means the Strategic Petroleum Reserve will be replenished,” Hochstein told CNBC.

“And therefore, we have more flexibility to be able to do this again in the future if the need arises. I think we wanted to do something that was impactful for the market and that also had the ability and the flexibility to allow us to do that again should the need arise for the American economy.”

From a gasoline price perspective, prices could fall below $3.00 if oil losses are extended. Good news for gas-guzzling working class Americans.

A quick look at the previous EIA storage report reveals US commercial crude inventories rose by one million barrels for the week ending November 19th.

At 434.0 million barrels, US crude oil inventories are about 7% below the five year average for this time of year. Total motor gasoline inventories decreased by 0.6 million barrels last week and are about 6% below the five-year average for this time of year.

Week ahead: Let’s talk about the US jobs market

Week Ahead

Nonfarm payrolls are the week’s big release as the US looks to keep the good vibes going in the labour market. The latest Canadian monthly GDP stats come too on the data front. Meanwhile, OPEC-JMMC meets at an interesting time for crude oil markets. 

Can November’s nonfarm payrolls keep up the momentum? 

At the time of writing, the US Bureau of Labour Statistics is carefully collating the nation’s job creation stats for November, ready for publishing on December 3rd. 

Once more, this latest jobs report is coming off the back of a hot printing from the month before. October’s stats, published in November, revealed 531,000 new roles were added to the US economy that month. Job creation beat the Dow estimate of 450,000. 

We saw some good increases in key labour metrics alongside the raw job numbers in November too. The unemployment rate fell to a pandemic-era low of 4.6%. Wages rose by 0.4% and are now up 4.9% on a year-by-year basis. 

The good news doesn’t stop coming. August and September’s numbers were revised upwards following much lower-than-expected prints. August final reading came to 483,000 new roles created while September gained 314,000 roles after an initial 194,000 estimate. Higher frequency data is also encouraging: last week’s initial jobless claims total fell to 199,000, the lowest since 1969. 

Jobs data can be lumpy, though. July added over one million new jobs, and reports since then have all failed to meet expectations. This has led to some short-term volatility around US yields and the US dollar upon release. 

Nonfarm payrolls are a key metric of economic health and one that the Fed watches very closely. Chair Jerome Powell, who will be staying put as the Fed’s head honcho, has always said the US labour market still has more to give. Will it come with November’s data?  

OPEC-JMMC meets amidst a tricky oil market 

A new set of OPEC-JMMC talks kick off on Thursday as the cartel meets for the final time in 2021. 

On the agenda no doubt will be whether to raise production volumes further or stick with the current 400,000 bpd monthly increase. OPEC+ has committed to that output level until April 2022 at the earliest. The decision last week by the US and several other countries to release strategic reserves into the market could also see OPEC+ reduce the planned increase in oil output. 

Oil markets are in a bit of a sticky position at the moment. While they are back in the green at the time of writing, the WTI and Brent benchmarks have been having a relatively tough time at present. 

Part of the reason for dropping oil prices is rising global COVID-19 cases. Some major economies in Europe, including The Netherlands, Germany, and Austria, have reimposed new lockdowns. Even China, who allegedly reached zero-COVID status earlier in the year, is struggling to contain new Delta variant outbreaks. 

We saw a winter case spike around the world last winter. That fed into lower crude oil demand, although OPEC+ began its production increases soon after the turn of the new year. If cases continue to grow, then oil demand will likely drop with them. 

Prices are lower right now, but whether it’s due to US pressure it’s hard to say. I think COVID is the most likely culprit. 

US agitation may even go further. There are rumours circulating that the long dormant No Oil Producing and Exporting Cartels Act (NOPEC) could start being discussed. It’s not ever really likely to enter law, but if it did it would give the United States the power to essentially sue OPEC+ for perceived market manipulation and price controls. Seems a bit odd really. That’s kind of OPEC’s role. 

OPEC+ members pumped less oil in October than expected – some 217,000 bpd extra. A sign of lower demand? Possibly. It could also be a response to overproduction from September when the cartel’s members pumped out 650,000 bpd. 

OPEC does have a lot on its plate, but there’s talk of the cartel fighting fire with fire. It may slow its production increases in line with COVID-induced lower demand. This next meeting is crucial for setting the 2022 tone. 

Canadian GDP in focus 

On the data side, we’re also due the latest month-on-month GDP figures for Canada this week. 

Due to the way Canada reports, this should be for September. The previous report disappointed. There is discontent brewing in the Great White North as economic recovery appears sluggish. 

The Bank of Canada said in a statement published in late October: “The economic recovery hit another snag in August with industry-level GDP rising by 0.4% m/m. In isolation, this would be considered a relatively robust print, but markets had been expecting something considerably stronger (+0.7%), and flash estimates for September adding to the disappointment with Statistics Canada projecting a flat print.” 

“With the flat flash estimate for September, Statistics Canada is projecting an unannualized gain of 0.5% for Q3 GDP (so call it roughly 2.0% annualized). We had been looking for Q3 growth in the mid-to-low 3s, while the BoC had forecast Q3 growth at 5.5% in its most recent MPR. Following today’s report, we now look for 2021 GDP growth of about 4.7%, compared to the BoC’s forecast of 5.1% growth.”  

 

Major economic data 

Date  Time (GMT)  Asset  Event 
Mon 29-Nov  Tentative  JPY  BOJ Gov Kuroda Speaks 
  3:00pm  USD  Pending Home Sales m/m 
       
Tue 30-Nov  1:00am  CNY  Manufacturing PMI 
  8:00am  CHF  KOF Economic Barometer 
  1:30pm  CAD  GDP m/m 
  2:45pm  USD  Chicago PMI 
  3:00pm  USD  CB Consumer Confidence 
       
Wed 01-Dec  12:30am  AUD  GDP q/q 
  1:15pm  USD  ADP Non-Farm Employment Change 
  1:30pm  CAD  Building Permits m/m 
  3:00pm  USD  ISM Manufacturing PMI 
  3:30pm  OIL  US Crude Oil Inventories 
       
Thu 02-Dec  8:00am  EUR  Spanish Unemployment Change 
  All Day  All  OPEC-JMMC Meetings 
  1:30pm  USD  Unemployment Claims 
  3:30pm  GAS  US Natural Gas Inventories 
       
Fri 03-Dec  1:30pm  CAD  Employment Change 
  1:30pm  CAD  Unemployment Rate 
  1:30pm  USD  Average Hourly Earnings m/m 
  1:30pm  USD  Non-Farm Employment Change 
  1:30pm  USD  Unemployment Rate 
  3:00pm  USD  ISM Services PMI 

 

Key earnings data 

Wed 1 Dec  Thu 2 Dec  Fri 3 Dec 
  CrowdStrike Holdings (CRWD) AMC  Asana (ASAN) AMC 
Salesforce.com (CRM) AMC     
  Snowflake (SNOW) AMC  DocuSign (DOCU) AMC 

 

Should these 2022 stocks be on your radar?

Equities
Investments

With December approaching, and 2022 on the horizon, here are some stock ideas to think about in the new year.

2022 stocks

Barclays picks out 2022’s potential big earners

Earnings season has come and gone. According to the latest data from FactSet, it’s been another successful quarter for Wall Street with the latest Q3 earnings report from S&P500 firms showing high growth.

FactSet reports that 82% of reporting S&P500 firms recorded per-share earnings growth above the mean EPS estimate.

Tesla, for example, had a robust third quarter with revenues and vehicle deliveries breaking records. That was just one of many megacaps reporting better-than-expected EPS performance in the third quarter.

Another includes Google parent Alphabet. The tech firm’s latest financials showed an earnings-per-share beat of $27.99 against $23.48 per share forecast.

However, many companies may run into difficulty next year. Earnings growth may be more modest. Recovery in major economies is not expected to match the rates we’ve seen so far this year. A fair few megacaps warned of slowing numbers, such as Disney and Netflix subscribers, in their Q4 guidance.

Wages have also been rising. In the US, for example, wage growth is up 4.9% year-on-year. That may put pressure on margins going forward too.

That said not all businesses are equal. Barclays’ investment division has eyeballed several overweight stocks that could deliver earnings growth in 2022. The banks has scoured the markets to find 35 equities worth looking at as reported by CNBC.

According to Barclays, the selected stocks may offer a 10% upside over their current target prices.

Of those 35, we’ve boiled then down into a further five.

2022 stocks to watch

These equities are drawn from a number of sectors, but the most common are energy, financials, information technology and consumer discretionary.

Halliburton and Schlumberger are two major energy stocks Barclays identifies as having high upsides over the next calendar year. Both are major players within the oilfield services industries and could be poised to make solid gains upon a wider crude oil recovery.

It should be pointed out, however, that COVID is still weighing heavily on the crude oil industry. The pandemic is far from over and rising global COVID cases are putting pressure on oil prices. Demand may take longer than expected to reach pre-pandemic levels.

In terms of price targets, Barclays is optimistic. Schlumberger has been set a $48 price target. At the time of writing, the stock was trading for around $31.25. For Halliburton, the target is $36 with it trading at $23.29 at the time of writing.

Ally Financial may have the biggest potential upside, representing the chief financial stock to watch for in 2022, at least according to Barclays. Upsides maybe as high as 36% for Ally in 2022. Barclays has set a $68 price target. At the time of writing, Ally was trading at around $51.05.

Moving away from financials, Barclays analysts have selected Dick’s Sporting Goods as its 2022 consumer discretionary stock of choice. The stock is already up 130% this year, driven by better-than-expected quarterly financial results.

The stock is down 5% in trading as of Thursday 25th November at around $127.49 – but Barclays believes it may reach as high as $173 across the next twelve months.

While Dick’s 130% year-on-year growth is impressive, it has been positively dwarfed by online personal loan providers Upstart. Upstart by name, upstart by nature it seems. The stock has skyrocketed an incredible 400% y-o-y in 2021.

It may still have plenty of room to grow. Barclays posits 44% share price growth across 2022 with a target price of $285 for Upstart. It is currently trading at $208.21.

Of course, it goes without saying that investing or trading any of the aforementioned stocks holds substantial risk of capital loss. Always do your research prior to committing any capital. Only trade or invest if you are comfortable with any potential losses.

Fed lift-off coming soon?

Morning Note

Will the Fed raise rates sooner than expected? Inflation the highest in 30 years, a labour market tighter than at any point since the great financial crisis and no Fed action – yet. No wonder we are starting to see them talk about a quicker taper, which would provide the ‘optionality’ to maybe raise rates a bit sooner than expected. We’ve been saying for some time that the Fed cannot ignore all this hard economic data, yet it seemed to be turning a blind eye to all the evidence. Recently though we have seen that it can adjust its uber-dovish stance to something less accommodative, albeit the pace of such transition has been glacial.  

 

But the Fed is going up a notch. We got really the first big ‘inflation alarm bell’ if you like from the FOMC, as minutes from the last Fed meeting said: “Various participants noted that the Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee’s objectives”. Wow, that is a step-change and shows at last the persistence of the inflation and inflation expectations dynamics are starting to worry them.

 

Inflation is super-hot: Month-over-month deflator at 0.6%, up 5% year-on-year, hottest since 1990 and up from 4.4% in Oct. Core up 0.4% m-o-m, up 4.1% y-o-y from 3.7% in Oct, also the highest in 31 years. Consumer spending is strong – was up 1.3% in October, ahead of the 1% expected and up on the +0.6% last month. Consumer inflation expectations are rising, if not particularly market-based measures, with the University of Michigan 5-year outlook up to 3% from 2.9% and the one-year climbing to 4.9% from 4.8%. 

 

Labour market is exceptionally tight: US initial jobless claims fell to 199k, their lowest level since 1969 – jobs everywhere, but no workers to fill them. Things look very tight indeed and such a strong position for the labour market indicates that the Fed, as consistently argued here, has been too slow to react and is now chasing events. Also, yesterday the Fed’s Daly said she sees the case for speeding up the taper – USD liked that and EURUSD sank to a fresh 16-month with 1.11. She also said that while wage inflation is higher than normal, there are no signs yet of a ‘wage price spiral’. 

 

Anyway, the US data and Fed minutes indicate that a faster taper + earlier hike are potentially on the cards: good news is bad news. But it also pointed to relatively robust growth and consumer health: good news is good news. All in, we have seen a big pop in rates already this week and the recent jump in bond yields cooled, so the kind off rotation we saw the last few days flipped a bit and we got some payback for financials. 2yr yields are hovering around 0.65%, not making much further progress, whilst 10s have stalled around 1.64%, from a high of 1.67% post-Powell. Bit of dip buying, bit of positioning for the seasonal tailwinds ahead of the holiday (US basically out of action until Monday). High beta tech recovered a notch, and ARK’s Innovation ETF (ARKK) rallied almost 2%. The S&P 500 rallied a quarter of one percent, whilst the Nasdaq Composite climbed almost half of a percent. The Dow made a tiny retreat, snapping its two-day win streak. Holiday-thinned futures indicate the S&P 500 around the 4,700 again, an area it’s effectively been stalled at since the start of November. Thanksgiving today should keep things quiet. 

 

In Europe, stock markets are trading broadly higher on Thursday morning, with gains of about 0.5% for the Stoxx 50 and CAC 40. Smaller gains for the FTSE 100 and DAX. The dollar is giving back some ground, allowing the euro and sterling to mount mild rallies this morning, though the bullish momentum for the greenback remains intact. We hear from both Christine Lagarde and Andrew Bailey later today. Minutes from the most recent ECB meeting are due to be published. Earlier this morning German consumer sentiment data showed a sharp fall, whilst Q3 GDP figures were revised lower as the supply chain problems facing the global economy affected the country’s manufacturers and exporters. 

 

Oil – OPEC looking to meet fire with fire and respond to Biden’s puny release of crude reserves. OPEC+ is said to be reacting to the SPR release by the US and others by looking at slowing the rate of production increases when it next convenes. OPEC+ meets next week and could easily frame a pause to output hikes as a response to the rising covid problem in Europe and new restrictions to movement. US crude inventories rose by over 1m barrels last week, vs an expected draw of 1.8m barrels. Crude prices have paused, with WTI (Jan) holding around $78.30, from a high yesterday at $79.20. 

Higher rates split the pack, big day for US data ahead of Thanksgiving

Morning Note

Rollover in tech/momentum continues as rising rates splits the pack. Nasdaq lower, S&P 500 and Dow mildly higher on energy and banks. US 10-year rates hit 1.67% yesterday from 1.54% on Friday, before retreating to 1.64% this morning. All this comes in the wake of the reappointment of Jay Powell as Fed and expected path of tightening. Tech, momentum, consumer discretionary names in the firing line – ARKK down big again, -11% the last 5 session, Zoom –25% over the same period, Peloton –18, and Robin Hood is another standout underperformer – down 20% in the last 5 sessions. There are two main things happening – a total pullback from the high growth speculative momentum names, and an unwieldy rotation out megacap quality tech into cyclicals and financials, i.e. those that do well from higher rates. Overall, the broad market is keeping its end up thanks to the rotation – no great signs of stress yet and the market continues to trade near its all-time high, though the Vixx hit a month-and-a-half high above 21.

More of the same? Bank of America forecasts the S&P 500 at 4600 by year-end 2022 (-2% from here). It argues for a higher discount rate for stocks from the Fed’s taper and eventual rate hike plus increased rate and stock volatility. The theme for next year is therefore inflation-protected yield so dividends can keep pace with govt bonds. As such BoA likes energy and financials, which offer inflation-protected yield, and healthcare which offers growth and yield at a ‘reasonable price’. What they are talking about for the year ahead is what we are seeing in this rate-repricing-rotation.

It’s a challenging picture regards Covid in Europe, but the main bourses are firmer this morning. The FTSE 100 has reclaimed the 7,300 level and the DAX made an attempt to regain the 16k level before retreating into the red on some soft Ifo business sentiment data. German business sentiment fell in November, and could fall a lot more as the number of Covid cases and the government’s draconian response make life difficult for businesses. Meanwhile Germany’s three coalition partners have agreed a deal that clears the path for Olaf Scholz, the current finance minister, to become Chancellor. A press conference is due later – watch for anything on Nord Stream 2 and potential for nat gas markets.

There is a lot of US data to watch for in the session ahead of tomorrow’s Thanksgiving holiday. First up the second reading for Q3 GDP is expected to be revised up to 2.2% from 2.0%. The PCE deflator, which includes food and energy, rose at a 4.4% in September, the fastest since 1991. Core inflation, the Fed’s preferred gauge as it excludes volatile items like food and energy, increased at 3.6%, which was also the fastest pace in 30 years. We could see the headline print above 5% and core above 4% for the October reading, which is released today. We think the Fed seems to be a little more wary of the risks of persistently high inflation than they were a couple of months ago, which means a super-hot reading will have market reaction. The kneejerk moves higher in the dollar and rates on the Powell announcement have held, but a similar jump today could be one to fade. Finally, we will be watching for the minutes from the last FOMC meeting for clues about the likely path of monetary policy, specifically how worried about inflation are policymakers, and how close do they think the labour market is to being strong enough to warrant raising rates.

FX markets are still anchored by the strong dollar, with DXY holding onto the Powell announcement gains at 96.50. Cable made a fresh yearly low yesterday at 1.3342, as the sellers remain in charge. The euro also continues to come under heaps of downwards pressure and is just holding the key support at the 1.1230 area, but has just made a fresh 16-month low this morning as the bears hold sway. If this area doesn’t get breached soon, though, we could see a bump up to 1.14. Turkey’s lira continued to plunge and traded at 13 this morning, a new record low. New Zealand’s dollar fell against the USD despite the RBNZ hiking rates again. Whilst sounding hawkish about the outlook, some had anticipated the RBNZ to go for more than just a 25bps hike.

Strategic oil reserves were released by the US and others in a coordinated effort, but crude prices rose as the move had been well anticipated and priced in. WTI (Jan) rallied for a third day to retake $79 as the coalition of the willing released 50m barrels – somewhat short of the 100m Goldman Sachs says the market had priced. 50m barrels is about half a day’s worth of demand – it was never going to do much. API data showed oil inventories climbing by 2.3m barrels last week vs the expected decline of 500k.

Gold is trying to hold the $1,790 level but remains under a lot of pressure. A bearish MACD crossover was the big signal on Monday and with rate expectations moving up but cooler energy market (for now) seeing inflation expectations come back a bit, it’s a tough picture. Breach here could open up path to $1,770 area. Recovery of $1,800 (hot inflation reading?) could see retest of old horizontal resistance around $1,834.

Gold Chart 24.11.2021

Colder temps heat up natural gas but outlook is mixed

Commodities

Natural gas prices got a slight bump on Tuesday morning ahead of the week’s colder temperatures, but the run into December could bring unseasonable warmth.

Natural gas trading

Short term colder weather on its way to the USA…

We write about this every week. Temperature changes and forecasts have a big impact on natural gas prices. If you’re a gas trader, you’ll already know this. Last week, prices fluctuated on changing weather predictions, and they’ve done the same again at the start of this one.

At the time of writing, Henry Hub natural gas futures were up 3.89% on the day, trading over the $5.00 level. Some solid progress has been made by natural gas at time when more bearish analysts were saying a $4.50 market correction was likely on the cards.

Cold weather systems are on their way this week.

Natural Gas Weather says: “A chilly weather system with rain and snow will track across the Great Lakes and East Mon-Tue w/highs of 30s to 40s and lows of 10s to 30s. Most of the rest of the US will be mild to nice w/highs of 50s to 70s.

“A mild break is expected across the East mid-week w/highs of 40-60s for a swing back to lighter demand. However, a fresh cold shot will drop into the Midwest and track across the East Fri-Sat w/lows of 10s to 30s for a swing back to stronger national demand. Overall, national demand will swing between MODERATE and HIGH every few days over the next week.”

…but early December forecasts put traders in a bearish mood

The life of a natural gas trader eh? Warmer temperatures might be on their way in December.

“The change is a result of a deeper trough over the eastern Pacific, alongside waning of the North Atlantic block,” Maxar Weather Desk said in its latest forecast. “This allows for a much warmer pattern for most of the U.S. and Canada, where bellows are limited to the East Coast at the start of the period.”

Natural Gas Weather backs this up. Almost all of the US is expected to see temperatures be much warmer than usual between the 1st and 7th of December.

“The focus this week is likely to turn to how long the coming warmer than normal early December U.S. pattern lasts, because the further into December it takes for blue weather maps to return, the more pressure it puts on bulls to reduce risk,” NatGasWeather said.

That market correction might still be on the cards then. Price movements are so tied in with the weather that it makes it tough for traders to really get a grasp on things. At the start of the month, all forecasts suggested an icy blast was on its way and that December would be chilly, thus pushing up US natural gas futures prices.

To summarise: short term gas demand for the week up to 26th November: moderate to good. After that? Probably weaker.

A quick look at US gas inventories

US working gas in storage was 3,644 Bcf as of Friday, November 12, 2021, according to EIA estimates. This represents a net increase of 26 Bcf from the previous week.

Stocks were 310 Bcf less than last year at this time and 81 Bcf below the five-year average of 3,725 Bcf. At 3,644 Bcf, total working gas is within the five-year historical range.

COVID sinks crude oil

Commodities

It’s a continued slide into the red for crude oil prices at the start of this week.

Oil trading

Crude oil prices start the week on a weak footing

Crude prices took a bit of a beating over the weekend. Slight gains were made on Monday, where highs topped out at around $77 for WTI and $80 for Brent. As of Tuesday morning, however, both benchmarks had slumped back into the red.

WTI futures are currently trading for around $75.79 and are down 0.92% on the day.

Trading 0.52% lower are Brent Crude futures. They are trading for roughly $78.84 at the time of writing.

There is plenty going on that explain the current drop in oil prices.

Firstly, COVID. Rising case numbers across Europe has caused fresh lockdowns in the likes of The Netherlands, Austria, Germany, and Slovakia. These nations could be used as lockdown bellwethers as we head into the winter months. Remember how cases surged last year around this time? We could be looking at that again.

Some countries, like the UK, are banking on high vaccine take up and natural immunity to prevent further restrictive movement measures across the festive season.

Either way, oil traders are feeling cautious. Higher COVID caseloads resulting in widespread lockdowns is likely to put a dent in oil demand for at least the next month. Given we’re trading December contracts, it might be a smart play. Winter is coming.

President Biden and strategic oil reserves

Word is President Biden is tapping up other nations to get them to dip into their strategic oil reserves.

We already saw last week’s US supply concerns trip crude oil up.

US gasoline prices are up 60% this year. Crude oil prices are heading lower, so gasoline prices should start to drop off too (in theory). However, that hasn’t stopped Democrat voices in the Senate pushing Biden towards the strategic oil reserve. Who else will think about all those working-class Americans in their gas-guzzling pickups?

Reports say Biden has reached out to China, India, South Korea, and Japan to coordinate efforts to cool global energy prices. All of the above are major, major crude importers and are no doubt feeling the heat from high energy prices.

The moves comes after Biden previously reached out to OPEC+ to get it to pump more oil. OPEC said no. The cartel is sticking with its 400,000 bpd monthly production increases. Having said that, it does appear OPEC+ is not reaching those 400,000 bpd levels anyway.

In October, it was revealed that OPEC members had jointly increased production by 217,000 bpd. On the other hand, the cartel pumped 650,000 bpd in September, so perhaps October’s fall away was to cover the excess from the previous month.

Still, Biden seems fairly displeased with the cartel of oil production nations. There is even talk of resurrecting the old No Oil Producing and Exporting Cartels Act (NOPEC). It’s unlikely to ever become law, but NOPEC would give the White House the power to sue OPEC+ members for perceived market manipulation. That is kind of OPEC’s job though.

The latest EIA crude oil inventories report is published on Wednesday this week. The previous week’s report, with date for week ending November 12th, showed a two million barrel drawdown.

At 433.0 million barrels, US crude oil inventories are about 7% below the five-year average for this time of year.

Stocks trade lower in wake of Powell nomination, Europe’s Covid surge

Morning Note

After a kneejerk bounce to fresh all-time highs, stocks on Wall Street ended the day lower as investors decided that Jay Powell is likely to tighten monetary policy more swiftly than Lael Brainard would have done. Quite how the market is reading so much into this reappointment is kind of hard to work out. Bond yields ticked up, with the policy-sensitive 2yr note rising to its highest since March 2020; the dollar rose to a new 16-month high and has held gains as of this morning; gold tumbled as yields climbed; financials and energy rose and tech stocks fell, dragging the broad market lower. Cyclicals helped the Dow Jones hold on to a tiny gain. European stocks have fallen this morning following the weaker US session, whilst the Covid spread is another factor likely weighing on sentiment. Reasonably upbeat PMIs this morning don’t reflect the shift in Europe we have seen over the last fortnight. Bond markets remain under pressure this morning with the US 2yr note trading at 0.63%, having yesterday jumped 8bps to 0.58%.

 

Markets now price in a full 25bps hike by June 2022. Are markets right to think the Fed is suddenly going to be more hawkish? Richard Clarida suggested last week the Fed could speed up the pace of its tapering – was this more of a signal shift than at first assumed? Yesterday Powell seemed to flag inflation as a concern: “We know that high inflation takes a toll on families… We will use our tools… to prevent inflation from becoming entrenched.”

 

As noted yesterday, the hawkish reaction to the news seemed odd, for a couple of reasons. Firstly, Powell has hardly been a hawk and the appointment means continuity; secondly the odds on Brainard were quite long. Nevertheless, the market seems to have taken the Powell nomination as something of a signal; broadly speaking we might say that the Fed and, more importantly maybe the White House, are starting to recognise the danger of inflation the longer it stays high. Janet Yellen, Treasury Secretary, told CNBC that inflation has reached a level that “concerns most Americans” and that the Fed needs to play an important role to make sure that inflation “doesn’t become endemic”. I guess we could be in the middle of a policy adjustment of sorts, but it’s mainly tinkering at the margins – whether the Fed hikes by June or July is kind of irrelevant. We must also consider a degree of ongoing uncertainty around a number of open governor and regional chair positions, which makes the outlook for 2022 a little harder to read than usual. Ultimately I don’t see how the Powell-led Fed is more hawkish today than it was last week, but we should always beware linear thinking: even the Fed can adapt and learn from the persistently high inflation. You never know perhaps the Fed – and the White House – are starting to heed some warnings about what untethered inflation can do. In summary, you could say there’s been a whiff of a hawkish tilt at the Fed in recent weeks and the administration is OK with that.

 

Crude remains under pressure, with WTI taking a $75 handle, as the US and other nations are set to release oil from strategic reserves to cool prices. Although such moves are unlikely to exert much of a long-term influence on prices, there is already worries about oversupply into the year end and start of 2022. Rising covid cases and new restrictions are a factor. OPEC+ could adjust its production plan to absorb the excess crude from strategic reserves, but it’s unclear as yet what they plan to do.

 

Profits warnings seldom come alone: AO World shares fell by a quarter after a sharp downgrade to guidance issued only two months ago, which was a also downgrade.  The company warned that growth in the UK has been impacted by the shortage of delivery drivers and the ongoing disruption in the global supply chain, whilst Germany has seen significantly increased competition. Availability of some new products is poor and inflation is biting with higher shipping costs, material input prices. As a result, management warn that current peak trading period is “significantly softer” than was anticipated only eight weeks ago. Full year group revenue is now guided to be flat to -5% year on year, with group adjusted EBITDA in the range of £10m to £20m. As noted of this stock in Oct, it needs high double-digit revenue growth. Margins in a highly commoditized business are wafer thin at the best of times. Now supply chain woes coupled with a shortage of drivers creates some serious headwinds for the stock, which benefitted greatly from the surge in online demand last year. It now faces some new challenges which seem set to perform the double trick of hammering margins and lowering revenue growth. 

 

Pets at Home shares rose on a decent set of interim results as the company posted group like-for-like (LFL) revenue growth of 22.2%, or 28.6% on a 2-year basis. Total group revenue growth of 18% to £677.6m. Profit before tax rose 77.2% to £70.2m, with growth of 68.3% on a 2-year basis. Free cash is up more than 50% to almost £92m. Basically, everyone was bored in lockdown and bought a puppy and most people have been decent enough human beings to continue to look after them. Or as management put it today: “The stronger than expected and continuing growth in the pet population over the past eighteen months is materially increasing the size of our addressable market.” 

 

Shares in Compass Group fell despite the company saying it should be back to pre-Covid operating margins next year. Margins improved to 5.8% in the fourth quarter (4.5% for the FY) and the company said it anticipates FY22 underlying operating margin to be over 6%, hitting 7% by the end of the year. Still revenues are stubbornly low despite the Healthcare & Senior Living and Defence, Offshore & Remote sectors performing well above pre-pandemic volumes. Underlying revenue recovered to 88% of 2019 revenue by Q4. FY underlying revenue is at 77% of 2019. Still nursing the lingering effects of the pandemic – a long Covid sufferer as people, particularly in business, office work, spend less time face to face. 

Joe sticks with Jay, yields, dollar up

Equities
Forex

US bid: Stocks on Wall Street rose to all-time highs, the dollar rose strongly and US front-end yields ticked up as the White House confirmed it will stick with Jay Powell as chairman of the Federal Reserve. Lael Brainard will become vice-chair. I think Powell is rightly getting a heck of lot of credit for steadying the ship at the height of the pandemic when credit markets were exploding. What he’s doing with inflation now is another matter but Brainard wouldn’t have moved swifter on rates, that is for sure.

 

Market reaction has been pretty hawkish, which is kind of odd since a) he ain’t no hawk and b) the odds on Brainard were long. Still there seems to have been something of a Brainard trade which is being unwound, or perhaps it’s just the kind of market overreaction to an unpriceable bit of news which is good to fade…

 

Markets are pricing in a rate hike by June vs July before the announcement, with 2s up 5bps to 0.566%, hitting the highest since March 2020 and 10s rising back to 1.6%. Gold extended its drop as yields rose. The dollar index spiked to a new high at 96.50, whilst EURUSD plumbed a new 16-month low at 1.1236. Cable also lower, back to 1.340 support from 1.3450 before the news. S&P 500 and Nasdaq Composite have hit fresh all-time highs, while the Dow is up 170pts. Banks +2% – yields but also Powell is seen as not such a tough sheriff as Brainard was going to be perhaps? 

 

Markets like the continuity – we know what we are getting with Powell, the market is confident in his leadership, and Brainard will be an effective deputy and mouthpiece in a similar fashion to the outgoing Clarida.  

 

Markets also probably like the fact that the decision to keep a Trump appointee helps to depoliticize the role of Fed chair. This is a good thing – central bank chiefs should not be political appointments, selected by whatever administration in power to suit their partisan ends. Investors will be happy that the left wing of the Democrat party didn’t get their pick – again apolitical appointment is important. But also the fact the ‘progressives’ haven’t got their way this time is good for USD. Biden’s got an eye on opinion polls going south so side-lining the progressives in his party here is probably seen as a good thing, too.

 

Meanwhile, the pressure on EURUSD remains on both sides of the cross as Germany seems to be heading into lockdown – Merkel said situation with Covid is the worst it’s ever been, new restrictions needed. Reaction to the Powell announcement at 2pm is clear to see.

EURUSD Chart 22.11.2021

Cryptocurrency update: Bitcoin continues to slide

Bitcoin continues its downward trajectory as it continues to travel away from its recent all-time highs.

Cryptocurrency update

Bitcoin starts week on a downward trajectory

Bitcoin eh? Just last week we were talking about the token heading for a new all-time high after an important network upgrade. Things look quite different after the weekend.

As of Monday morning, Bitcoin was continuing to slide away from the $60,000 level. The price drop had been triggered last week with Friday showing lows of $55,574. Monday trading sees the coin’s small gains wiped out with it down -1.26% on the day. BTC is currently trading for around $57,229.

So, why the drop this week? There are a couple of factors are play here.

Firstly, trading activity might be lower across the board, regardless of asset, this week. It’s Thanksgiving on Thursday 25th November, which means US markets will be closed. Less coin volume will be changing hands at this stage.

But traders will also be taking a close look at the week’s US PCE data which comes on Wednesday. Personal consumption expenditures are the Fed’s favourite inflation metric. As many traders and investors are using BTC to hedge against inflation, the report is key for understanding their next moves. Activity may be slow until the PCE report lands.

Traders are also waiting to see who wins the race to be the Fed’s new Chair. Will President Biden stick with current Chairman Jerome Powell? Or will he go for Bully’s special price Fed Governor Lael Brainard?

Both of them hold pretty similar positions on crypto – that is the need for close regulation so digital finance doesn’t overwhelm the current financial system – but the nuances are so close there’s not really much in it. Some crypto analysts believe that not much will change, regardless if either Powell or Brainard sit in the Fed’s top seat.

The Bitcoin Fear & Greed index is now sitting at neutral – despite BTC losing 20% off its all-time high this week.

Looking at other coins, Ethereum is down some 3.62% this morning, Litecoin is down 4.58%, and Cardano is 2.34%. This is kind of to be expected. Whenever Bitcoin falls it tends to bring down the other popular coins down with it. It’s not a great day for crypto bulls it seems.

Australia’s crypto investors are “on their own”

On Monday, Australian regulators said they were working with lawmakers to develop rules for digital currencies, but for now investors are “on their own”.

“Consumers should approach investing in crypto with great caution,” newly minted Australian Securities and Investments Commission (ASIC) chair Joe Longo told an Australian Financial Review Conference. “At present many crypto-assets are probably not ‘financial products. For the most part, for now at least, investors are on their own.”

It’s the same rhetoric we’ve heard from many securities and exchange regulators and central bank figures over the past year: crypto has big potential but it has enormous potential for losses and traders and investors must proceed with caution.

ASIC is now ploughing ahead with lawmaker collaboration to create a regulatory environment for crypto. One proposal involves changing laws to allow decentralised autonomous organisations (DAOs), which are governed by artificial intelligence rather than a board of directors, and a licensing regime for crypto exchanges.

“Crypto is on our doorstep, here and now, and being driven by extraordinary consumer and investor demand. The implications for consumers are potentially huge,” Longo said.

Interestingly, Australia is ahead of the curve in some aspects of cryptocurrency. The Commonwealth Bank of Australia become the developed world’s first mainstream bank to provide a retail crypto trading platform earlier in the month.

El Salvador’s volcano-powered cryptocurrency city

In Bond villain lair news, El Salvador is prepping construction of a Bitcoin City powered by a volcano.

Bitcoin City will sit at the foot of the Conchagua volcano near the Coast of Fonseca in Southeast El Salvador. The idea is to harness Conchagua’s geothermal power to fuel the city’s electrical needs. Bitcoin mining is particularly energy intensive – last year, it used more energy than the entirety of Sweden – so why not go green and use that mass energy to fire up the mining rigs?

The Salvadorian government, headed by Bitcoin evangelist Nayib Bukele, will be acquiring the land and infrastructure in a bid to lure investors. According to Bukele, Bitcoin City will be funded by $1bn in BTC-backed bonds.

“In Bitcoin City, we will have mining, agriculture, culture, and sports. When we are no longer there, this will last, and everyone will be able to see the city,” Bukele said.

The city is also attempting to be a no-oncome tax zone. The plan is to get rid of income, property, procurement, and city taxes. Project originators hope VAT will be enough to cover the expenses that come with running a large urban area.

It all seems a bit pie in the sky, but El Salvador is unique in the world of crypto. It’s the only country in the world where Bitcoin is legal tender, for example. Much of the impetus for its crypto push comes directly from the top. As mentioned earlier, President Bukele is a crypto nut.

As it stands, El Salvador owns around 1120 Bitcoin tokens.

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