WTI crude prices (CL1:COM) rocketed 4.7% to over $83.20 a barrel early Monday as OPEC+ considers cutting production by 1M bbl/day or more at the group’s meeting this week. The move would help prop up declining oil prices, which have been on a steady descent since hitting more than $120/bbl in late June. It would also mark the cartel’s second consecutive monthly cut – after it reduced production by 100K bbl/day in September – and the biggest since the early days of the pandemic.
Bigger picture: As gasoline prices in the U.S. soared to over $5 a gallon this summer, the Biden administration asked the Saudis and OPEC+ to pump more to bring down prices. The president also unleashed a record number of barrels from the Strategic Petroleum Reserve to help put a lid on energy costs, and those efforts bore some fruit, especially when compounded with a slowing global economy. Growth worries are now everywhere, like in China, where COVID-19 lockdowns are hurting demand, as well as other economies that are suffering from consequences of rapidly rising rates and a surging U.S. dollar.
“OPEC+ are very focused on stronger U.S. interest rates and its impact on emerging-market demand,” noted Amrita Sen, Director of Research at Energy Aspects. “Hence, they want to pre-empt any possible surpluses.”
Thought bubble: The latest dynamics once again show the key relationship between OPEC+ heavyweights – Saudi Arabia and Russia. The ties have been able to survive Russia’s invasion of Ukraine, and the country’s oil chief – Alexander Novak – may even show up in person in Vienna despite being sanctioned by the U.S. on Friday. Besides propping up crude prices, the Saudis may be prepared to slash output to keep some production capacity in reserve, given that Russian output is forecast to drop off later this year as the West tightens its growing list of economic sanctions. (11 comments)
Volatility is the name of the game these days as markets move from crisis to crisis. From inflation and a looming recession to energy scares and food security, 2022 has been a tough year for investors, and governments are not feeling any different. The latest turmoil is playing out in the United Kingdom, with fears that a cost-of-living crisis could spiral out of control.
Backdrop: Controversial tax cuts that were announced as part of Britain’s so-called “mini-budget” have been scrapped, as backlash over the measures spread from the population to a growing number of Tory MPs. The decision deals a blow to new Prime Minister Liz Truss, who insisted as of Sunday that she was still pressing ahead with the plan. The pound jumped on the latest news, climbing by more than a cent against the greenback to over $1.12, after crashing to the $1.02 level only a week ago and triggering chaos in financial markets.
“It is clear that the abolition of the 45% tax rate [paid by people earning over £150K a year] has become a distraction from our overriding mission to tackle the challenges facing our economy,” Chancellor of the Exchequer Kwasi Kwarteng said in a statement. “As a result, I’m announcing we are not proceeding with the abolition of the 45% tax rate. We get it, and we have listened.”
More turmoil brewing: Strikes hit the U.K. over the weekend as tens of thousands of transport workers walked off the job and shut down most of the nation’s railway network. It’s the latest labor unrest over the rising cost of living, and wages that have not kept up with 40-year-high inflation. Postal workers, nurses, teachers and public defense lawyers have also threatened industrial action, while “Don’t Pay” protests are making headlines over the soaring cost of energy bills. (18 comments)
During the third quarter of 2022, the Federal Reserve jacked up its key policy rate by 150 points across two meetings, accounting for half of its rate hikes since it started tightening policy in March. That, and Fed officials’ insistence that they’ll keep rates higher for longer to beat down inflation, put a damper on asset prices. The S&P 500 (SP500) closed Q3 down a total of 5.3%, with the benchmark index ending in bear market territory for a second consecutive quarter.
Not to be ignored: The Fed’s actions to shrink its balance ramped up during the quarter, reaching its full reduction rate in September. At its full pace, the central bank is letting $60B of Treasury securities and $35B of agency debt and agency mortgage-backed securities roll off its balance sheet, an action that reduces liquidity to the financial markets. In response, investors finally realized that the central bank is serious about removing the punch bowl to ratchet down the economy in an effort to reign in prices.
During the past three-month period, the 10-year Treasury yield has also increased by 93 basis points to 3.829% on the last session of the quarter. Last Wednesday, it touched as high as 4.0%, its highest level since the global financial crisis of 2008. Remember, as bond yields rise, bond prices fall.
Commentary: “Markets welcome the arrival of monetary injections from central banks very warmly,” said Interactive Brokers economist José Torres. “The departure of those injections and the reintroduction of liquidity withdrawals, however, are not warmly welcomed and are accompanied by volatility as market participants sweat while discovering true prices in less distorted markets.” Analysts expect the S&P 500 to continue sinking, with Bank of America and RBC Capital Markets believing the index could fall to as low as 3,000 points. Goldman Sachs cut its year-end forecast for the index to 3,600 points, and anticipates it to end 2023 at 4,000 points in the case of a soft landing and 3,750 points in the case of a hard one. (42 comments)
Google (GOOG, GOOGL) has shut down its Translate app for China, ending one of the few remaining products the tech giant still operates in the world’s second-largest economy. Mainland Chinese users are now shown a static image of a generic Google search bar, as well as a link to the company’s Hong Kong-based domain, which is blocked for mainland Chinese users. The abrupt suspension adds even more bricks to China’s Great Firewall and disrupted some Chinese apps that relied on Google for translation.
Backdrop: Google first entered the Chinese market in 2006 with a version of its search engine that was subject to government censorship. The engine was pulled in 2010 following state-sponsored hacks and government-ordered blocks in response to YouTube clips showing Chinese security forces clashing with Tibetans. In 2018, Google briefly entertained the idea of relaunching Google Search in China as part of a project code-named Dragonfly – which would have censored results and location data – but the plan was abandoned following an uproar at the company and backlash from politicians.
“We are discontinuing Google Translate in mainland China due to low usage,” Google said in a statement, though recent figures may show otherwise. According to web analytics platform Similarweb, the page notched 53.5M visits from desktop and mobile users combined in August, while growing at a 30% pace over each of the previous two months.
Go deeper: Many U.S. businesses have shuttered their services in China over the past year, as they get caught in the middle of tech tensions between Washington and Beijing. Companies like Amazon (NASDAQ:AMZN) and Airbnb (NASDAQ:ABNB) have closed their local operations, while others like LinkedIn (NASDAQ:MSFT) have sought to comply with new internet regulations by removing the social feed from its China platform. Domestic competitors, such as Baidu (NASDAQ:BIDU) and Tencent (OTCPK:TCEHY), have benefited in the wake of their exits, and have dominated the Chinese internet landscape from search and translation to social media and gaming.
Be the first to comment