Talks of a looming stagflation in the European Union have intensified over the past month as the region suffers from what many describe as the worst conflict in the continent in decades, threatening skyrocketing inflation, supply shortages, job losses and famine.
Even before the Ukraine invasion began, European countries had already suffered the worst economic shock since World War II in 2020 when the disruptions caused by the COVID-19 pandemic led to a 6.4% drop in the EU’s real GDP. That was worse than the GDP drop during the global financial crisis.
The EU region rebounded in 2021, posting 14.09 trillion euros in GDP, up 5.3% from pandemic-hit 2020.
However, just as the EU’s economic recovery was gathering pace, the region could now plunge into recession, or worse a stagflation — a period of high inflation, elevated unemployment, and slow economic growth rate — as the region is caught in between the Russia-Ukraine conflict.
As the Ukraine invasion drags on, the global oil trade remains in disarray as sanctions against Russia have prevented it from selling crude to some of its overseas customers. Although oil prices have fallen in recent days due to upbeat developments surrounding peace talks between the two warring countries, oil prices remain high as the absence of Russian crude continues to be felt in global markets.
This sparked concerns of rationing in many markets, particularly in Europe, the top buyer of Russian oil, as many European leaders have scoffed at Vladimir Putin’s demand to pay for natural gas and oil in rubles.
"Governments have a very clear understanding that there is a clear link between diesel and GDP, because almost everything that goes into and out of a factory goes using diesel,” John Cooper, director general of Fuels Europe, a unit of the European Petroleum Refiners Association, was quoted by Reuters as saying.
Germany, Poland, Turkey, Britain, France and Spain are the countries that are most dependent on Russian diesel, the news outlet added, citing data from energy consultancy FGE.
In addition to the shortage of oil, the Ukraine war has also exacerbated the global food shortage at a time when many countries are already struggling with poverty and hunger during the COVID-19 pandemic.
David Beasley, executive director of the UN World Food Program, on Tuesday warned that the war in Ukraine has led to “a catastrophe on top of a catastrophe,” that "will have a global impact beyond anything we’ve seen since World War II.”
In February, global food prices jumped to an all-time high, according to the FAO Food Price Index. Beasley said high prices mean more people globally will fall into hunger.
Employment levels in the EU have declined since the start of the pandemic, while the total hours worked also slumped reflecting supply and demand factors, according to a recent report by the International Monetary Fund.
As economies reopened prior to the war, labor markets have recovered from the pandemic-induced slump, with the EU unemployment rate shrinking to a historical low of 6.8% in December 2021, the IMF noted.
However, as inflation continues to soar, wages will likely follow the trend, prompting more rate hikes by central banks.
Against the many signs that point to a possible stagflation in the EU in the near term, Christine Lagarde, chief of the European Central Bank, said in a Wednesday conference that no data suggests Europe will fall into stagflation.
Although inflation will “no doubt” increase this year, conditions remain “quite fluid,” Lagarde was quoted by the Associated Press as saying.
The nickel market has been in disarray in recent weeks as prices soared to unprecedented levels before going on a freefall amid supply concerns and an unexpected short-squeeze by one of the world’s largest steelmakers.
Nickel is one of the most common metal elements in the world used to make stainless steel, batteries, coins, and other metal applications.
Russia is one of the world’s largest producers of nickel, supplying about 20% of class 1 nickel that is mainly used in the production of stainless steel and electric vehicle batteries. Data from market research firm Statista showed that Russia was the world’s leading exporter of nickel and nickel products in 2020, shipping about $3.02 billion worth of the commodity.
The conflict between Russia and Ukraine sparked fears of a nickel supply crunch as Russia has been hit with a number of economic sanctions and as importers of other Russian commodities like oil avoid being impacted by sanctions.
In addition to the supply concerns induced by the ongoing Ukraine conflict, a short-squeeze involving Tsingshan Holding Group, touted as the largest nickel producer in the world, was also behind soaring nickel prices.
The Chinese company took a nickel short position of 200,000 tons of nickel in the London Metal Exchange (LME) and as the price of nickel surged in the early days of the Ukraine crisis, the company’s short position was left in disarray, setting it up for a paper loss of about $8 billion.
Tsingshan recently inked a deal with banks to avoid further margin calls, buying it time to cut its nickel position as markets stabilize.
The short-squeeze and supply concerns sent nickel prices skyrocketing by more than 50% to $100,000 per tonne on March 8, significantly up from about $25,000 per tonne a week earlier.
Since the trade resumption, prices have been on a freefall over low trading volumes and concerns about the status of Tsingshan’s short position. The benchmark three-month nickel on the LME fell 2.2% on Tuesday at 10:30 a.m. GMT to $32,000 per tonne.
Higher nickel prices could drive up the costs of electric vehicles even higher as nickel is one of the key materials used to produce EV batteries. Morgan Stanley auto analyst Adam Jonas had recently warned that EVs in the US could be $1,000 more expensive as nickel prices soar.
This could hurt electric carmakers’ profit margins and impede the growth of the burgeoning EV market at a time when markets like China, Europe, and the US transition to new-energy vehicles.
The shortage in nickel and skyrocketing prices of the metal have forced some EV makers like Tesla (NASDAQ:TSLA) to look for other battery materials. In late February, Tesla CEO Elon Musk tweeted that the Silicon Valley-based company’s biggest concern for scaling lithium-ion cell production is nickel.
“That’s why we are shifting standard range cars to an iron cathode,” Musk said. Tesla recently hiked the prices of its Model 3 and Model Y cars in the US and China, the world’s biggest car market, due to high raw material prices.
Its rivals in China including XPeng (NYSE:XPEV), Li Auto (NASDAQ:LI) and BYD (HKG:1211) also announced price hikes to counter rising raw material costs. However, NIO (NYSE:NIO), another local player, last week said it has no plans to raise prices at the moment after its sales have lagged behind its rivals XPeng and Li Auto for five straight months.
The markets are trying to anticipate whether the Federal Reserve is leaning toward a 25 basis points hike or a 50 basis points for its Interest Rate Decision in March. A rate hike is all but guaranteed, but the exact value of the hike is up in the air. The decision is due on March 16, so there just under a month for investors to analyse the comments of Fed officials and set their positions.
With uncertainty surrounding the Fed’s decision, the USD and US stocks will possibly be in for a volatile ride. Investors will be constantly rejigging their positions as new information presents itself in the lead up to the event. Immediately after the event, trading will likely appear exaggerated.
Remarks from St. Louis Fed President James Bullard was one of the main culprits for this expectation when he called a 50 basis points rate hike in March a "sensible approach". Producer Price inflation hit 9.7% YoY in January 2022, contributing to the market's expectations for an unusually hawkish rate hike.
However, expectations for a 50 basis points rate hike have cooled recently. Fed officials have begun pushing back on the probability of a rate hike exceeding 25 basis points out the gate. New York Fed President John Williams recently noted that he doesn't see "any compelling argument to take a big step at the beginning,". Cleveland Fed President Loretta Mester sides with Williams with this assessment but doesn't "like taking anything off the table".
What are you expecting the Fed to do on March 16? Set your position with BlackBull Markets, and trade CFDs, Forex, and individual stocks which are likely to be impacted by the coming decision.
Block Inc (NYSE: SQ), the point-of-sale payment provider formerly known as Square, is reporting its Q4 2022 earnings this Thursday, February 24.
The usual market dynamic of ‘good report = stock price rise’ and ‘bad report = stock price fall’ may not be entirely appropriate to expect after the report’s release.
As we have seen over the past month, a favourable earnings report does not necessarily mean that the market will respond favourably in turn. For one, when Nvidia (NASDAQ: NVDA) reported its impressive Q4 2022 results on February 16, its stock proceeded to sell-off. As of writing, NVDA is down 12% since its earnings call as investors were all too happy to overlook its earnings beats and strong guidance for the next quarter.
On the flip side, an unfavourable report can sink SQ stock considerably more than at any time in the past. Investors have little patience for growth tech stocks at the moment, with US Federal Reserve rate hikes just around the corner and post-covid revenue surges seemingly coming to an end.
PayPal (NASDAQ: PYPL), a leading competitor of Block, reported its own Q4 2021 earnings report three weeks ago, on the first day in February this year. While PYPL beat earnings expectations, its dismal guidance for Q1 2022 has helped tank the stock price 46% in 2022, YTD.
As of writing, SQ is not far off PYPL’s shocking price retreat. SQ’s stock price has lost 40% of its value, YTD.
An unfavourable report may push this loss into the 50s or even the 60s. Tech stocks dropping more than 20% in a single trading day is not unheard of this year, as you may have seen Meta Platforms (NASDAQ: FB) trim 25% (USD 230 billion) from its market cap on February 3.
According to several investment banks and analysts, including Deutsche Bank, Credit Suisse, SeekingAlpa and MarketBeat, an even greater rout in the SQ’s share price may set investors up for a great long-term buying opportunity. SeekingAlpha and MarketBeat have price targets in the mid USD 200 range, which represent substantial upside potential.
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Several equities have reacted sharply over Tuesday trading to the suggestion that Russia is de-escalating its presence on the Russia/Ukraine border.
As reported by Reuters, Russia has begun to move an undisclosed number of its troops away from the Ukrainian border after completing mock defence exercises. Even so, tensions have not entirely dissipated. NATO, US, and UK officials remain cautious of the situation, with Boris Johnson noting that "the intelligence that we're seeing today is still not encouraging".
European Equities spent Tuesday rebounding sharply. The STOXX Europe 600, which is comprised of 600 stocks across 17 European exchanges, broke a three-day losing streak and rose 1.43%.
On an individual bourse level, the Italian stock market Index, the IT40, led the way back into positive territory, up 2.17% over the trading day. The German (DAX30) and French (CAC40) indices followed closely, each climbing ~1.9%, and the UK's FTSE100 climbed up 0.98%.
Naturally, commodities would be significantly affected by a war between Russia and Ukraine and NATO affiliated nations that have reacted the sharpest.
WTI and Brent have pulled back a shocking 3.7% and 3.4%, respectively. On Monday, Brent oil prices were pushing their way up to USD 100 per barrel after crossing USD 95 per barrel. Before the turnaround in the oil price, talk of USD 110 per barrel was beginning to filter into market predictions.
Russia and Ukraine are two of the largest exporters of Wheat. As such, supply concerns for the soft commodity have eased slightly, and with it, the price has pulled back from its two week high. Wheat is now trading down 2.63% to USD 7.8 per bushel. Low supplies could temper more downside for Wheat in Canada and the US.
To trade WTI, Brent, and US Dollar vs Russian Rouble, we welcome you to sign up today.
The price of oil dropped 13% on Friday (26/11/21), marking the commodities worst single day in 2021.
A drop in oil prices this large was last seen in January/February 2020, when WTI was making its way down to unprecedented negative per barrel territory. No one expects oil to veer this low again, but the comparison to 2020 is apt, with Coronavirus responsible for the commodity's downfall on both occasions.
An effort to lower the price of oil had begun before the new Coronavirus strain, named the Omicron variant, appeared.
Led by the US, a strategic release of Oil reserves was being enacted or considered by members of the International Energy Alliance (IEA) in an attempt to lower the price of oil, which they saw as hampering their respective economic recoveries.
It has been claimed that the strategic release would have little effect on the oil price, as the quantity to be released is half of the world's daily consumption. Yet, oil has fallen from its 2021 highs of US ~$85 per barrel since the announcement.
In response, OPEC+ was said to be reconsidering its plan output increase to counter the strategic reserve release by the US and its IEA allies. The OPEC+ rumours helped plug some of the losses oil was experiencing, but not enough to stop consistent weekly losses in the commodity's price. By Friday, oil had rung up five weeks of straight price decreases.
The Omicron variant is possibly the worst coronavirus variant known, as reported by the BBC. However, uncertainty exists as to how vaccine resistant, virulent, and deadly the strain is compared to its predecessors. As such, countries quickly moved to restrict travel from South Africa, reminiscent of January/February 2020, when international travel came to a screeching halt, and the price of oil fell from US $63 per barrel to sub-zero.
Countries that have placed travel restrictions on South Africa (and other African nations) include the US, the UK, and Germany.
As of writing, WTI is trading at US $68.16 per barrel, as mentioned above, 13% lower than Thursday's price.
Two questions come to mind:
Regarding the former, Goldman notes that Omicron should have only warranted a ~6.5% drop in the price of oil and that the commodity should quickly recoup some of Friday's dip.
Regarding the latter, it might not be too late to turn this tap off. IEA nations have pledged to release as much as 80 million barrels of oil, with 50 million of these barrels coming from the US. However, a genuine commitment from IEA members has yet to be agreed upon, with discussions still underway as of Friday.
Some interesting factors are currently affecting commodity prices. Supply chain bottlenecks, unpredictable demand from economies reopening, geo-political tensions, climate change policies are just a few examples.
I find it helpful to review the state of the commodities market periodically. In this article, we will examine Lumber, Cash Crops, and Iron Ore.
Lumber Mills have done their best to increase timber supply in 2021, with production hitting a 13-year high to meet the unpredicted demand from new house builds and renovations. After reaching a peak of over US $1,600 per thousand board feet in May this year, Chicago Lumber Futures have retraced to US ~$640 per thousand board feet as of early November. It could be said that the psychological level of US $600 is very supportive of this commodity. November 2021, and January and March 2022 Future prices are also trading above this level.
Speculation is rife that Lumber is due for another price run-up, with Sawmills cutting production to counter the gluttonous output earlier in the year. One indicator supporting this theory is Chicago Lumber Futures increasing by just-under ~40% since plateauing in August, at one point hitting US $820 in mid-October.
Corn and many other grain Futures are currently trading at premiums or multi-year highs, including Wheat and Oats. As of writing, Corn, Wheat, and Oats are trading at 555 USd/Bu, 781 USd/Bu, 716 USd/Bu, respectively.
Several factors have led to inflation in grain prices. For one, we can thank (or curse) the high cost of crude oil. Due to WTI and Brent trading US ~$80 per barrel, demand for ethanol has been pushed to the extreme. It is important to note, that in the US, Ethanol is produced predominantly by fermenting Corn (25% of the Corn grown in the US is used for ethanol production).
Kluis Commodity Advisors does not believe the prices of grains is sustainable, even in the short term. The Advisors go so far as to suggest that farmers should be hitting the sell button right now to make the most of the grain rally. Butting up against this prediction are forecasts for a continuation of unfavourably dry weather, which have already put the supply of Cash Crops, including Wheat and Oats, in a precarious position.
From mid-September until the end of October, Iron Ore appeared to have found a safe space above US $100. Now, after a steep decline beginning October 27, 2021, Iron Ore has started to test May 2020 lows, close to US $90 per metric tonne. The commodity is grating against predictions by ANZ Bank (ASX: ANZ) for it to “find a floor around current levels”.
Demand (or lack thereof) from China is what has driven the price of Iron Ore sub-100 dollars. Chinese authorities have ordered its steel manufacturers (large consumers of Iron Ore) to cut production to meet targets to reduce energy consumption and pollution across its provinces. China’s production restrictions are scheduled to last until mid-March 2022.
According to S&P Global, Iron Ore outlook is unfavourable, with “pricing risk is to the downside” as supply tends to increase in the latter half of the year.
I like to refer to the current retail investing frenzy as a 'DIY investor revolution', powered by the likes of Robinhood Markets (NASDAQ: HOOD), Interactive Brokers (NASDAQ: IBKR), and BlackBull Markets. Within this revolution, we have seen retail investors adopt derivatives trading with a level of sophistication on par with 'professional' traders.
For those that haven't caught on to the revolution, I thought it would be a good idea to detail the basics of a couple popular derivatives. I hope to show what many retail investors have already found out for themselves; CFDs and Options are not all that complicated or mysterious.
Derivatives, such as CFDs and Options, are 'derived' from traditional financial instruments such as stocks, commodities, and foreign exchange. Typically, derivatives take the form of a contract that takes its value from an underlying asset, such as the spot price for one troy ounce of Gold (XAU/USD).
Derivatives are used by investors worldwide to take advantage of investment opportunities or hedge efficiently against uncertainty.
CFD stands for 'Contract For Difference'. As the name denotes, a contract's buyer and seller agree to compensate the other the difference between the current price of an asset and its future price.
The buyer of the CFD is said to be taking a long position in the underlying asset (i.e., believes the asset's price will rise). In contrast, the seller of the CFD is said to be taking a short position (i.e., thinks the asset's price will fall). If the price of the asset rises, the seller of the CFD will compensate the buyer. If the price of the asset falls, the buyer of the CFD will compensate the seller.
CFDs exist for various securities, including stocks, indices, commodities, and, most popularly, foreign exchange.
There is one primary reason investors choose to trade CFDs over other derivatives such as Options and Futures. With CFDs, traders can generally trade with greater leverage than other derivatives, allowing larger positions with smaller deposit sizes. Consequently, gains and losses can be magnified more easily when trading CFDs.
The handy thing about derivatives is that their titles aptly describe what they are and do.
An Options contract gives the buyer the 'right', but not the 'obligation' to buy or sell a set quantity of an asset from/to the contract's seller before a given expiration date.
Option contracts exist for various securities, the most popular being Indices and Stock Options (i.e., an Options Contract for 100 shares of Tesla (NASDAQ: TSLA)).
Options come in two flavours; Calls and Puts. Calls give the contract buyer the right to buy an asset, while Puts give the contract buyer the right to sell. Either way, the contract buyer will pay the contract seller a fee (known as the premium) to enter into the contract. Additional costs to the buyer can exist depending on other factors, but we can ignore them for clarity.
It is good to remember that generally, as secondary market instruments, the spreads on Options can be much smaller than the traditional assets on which they are based. Smaller spreads are one primary reason retail investors are attracted to trading Options.
When Trader X sells a Put contract to Trader Z, Trader Z buys the right to sell an asset to Trader X before the contract expires. Whether Trader Z exercises this right mostly depends on the movement in the price of the asset.
Trader X will pocket the premium paid by Trader Z as compensation for offering the Option.
Trader X has sold the Put contract because they believe the price of the underlying asset will rise. In contrast, Trader Z thinks the asset price will fall. Thus, if Trader Z is correct, they will be able to sell the asset to Trader X at the agreed contract price (known as the Strike Price) rather than the asset's current value (Spot Price). Effectively, Trader Z will pocket the difference between the lower Spot Price of the asset and the higher Strike Price stated in the contract.
If Trader X is correct, Trader Z will not exercise their right to sell the asset at the contract's Strike Price, and the Option will expire unexercised.
The political, social, and military turmoil currently occurring in Afghanistan will have wide-ranging consequences. Some of which have, of course, already played out. Some will play out over a more extended period.
The consequences I am interested in are related to the commodities market. The consequences, as it relates here, could play out over the short or long term.
The possibility of unrest in Afghanistan spilling over to its neighbouring region, however that manifests, is a real threat. Afghanistan shares a border with several significant producers of the most commodity traded raw commodities.
To the west of Afghanistan is Iran, a big producer and exporter of oil, iron, and copper. Iran is responsible for approximately 3.5% of the global crude oil production, churning out 2.7 million barrels per day. Concerning Iron and Copper, Iran ranks 11th and 15th largest producer globally, respectively.
To the South and East of Afghanistan is Pakistan. Pakistan is the fifth largest producer of cotton in the world. The sixth-largest producer of cotton, and second-largest exporter, Uzbekistan, shares a tiny slither of a border with Afghanistan in the north. Together, Pakistan and Uzbekistan produce more than 2 million tonnes of cotton per year.
Turkmenistan, the fourth-largest producer of Natural Gas globally, shares a sizable border with Afghanistan's north.
Political implications of trading with Afghanistan or the countries leadership have also to be taken into consideration. For one, Afghanistan's newly self-appointed leadership, the Taliban, are said to have halted imports and exports with Pakistan and India, two of its largest trading partners, as of last week.
Afghanistan itself is not an efficient producer or exporter of goods. In 2019, they exported a minuscule US$780 million worth of product. For comparison’s sake, Turkmenistan exported US$10.5 billion worth of goods in the same year.
Yet, within Afghani exports are some commonly traded soft commodities, like Coffee, Cotton, and Soybeans. While, at this point, they appear in minor quantities, Afghanistan has room to lift its production capacity significantly.
Gold and other minerals appear sparingly on the export sheet of Afghanistan. It is within the sphere of hard commodities that Afghanistan holds the most promise.
Afghanistan's infrastructure is severely underdeveloped, resulting in underutilising its natural resources and limiting its production capacity.
It is estimated that the country holds more than US$3 trillion worth of minerals within its complex geography. Mineral deposits are thought mainly to consist of iron, copper, cobalt, lithium, and gold.
Herein lies the long term consequences. Afghanistan can become a much bigger player in the supply of raw materials. But this will, of course, take time and investment in the country's infrastructure. From whom this investment might come is up for debate, but it appears China has already thrown their hat in the ring.
Arguably, the most exciting resources that Afghanistan have are cobalt and lithium. Cobalt and lithium are in high demand due to their application in emerging technologies like EV batteries. Macquarie Bank of Australia is predicting a lithium shortfall of up to 61,000 tonnes by 2023, up from 2,900 tonnes in 2021.
Cobalt and lithium are currently priced at three-year highs. Cobalt at US$50,000 per tonne and lithium at 92,500 yuan per tonne (~US$14,000).
Silver has rejected prices lower than $21.5 and higher than ~$30.0 for more than a year. What it hasn’t done, until recently, is cross below its 50-day simple moving average in this time. Consequently, we might expect a very strong retest of the $21.5 level in the next couple of weeks. Strengthening this proposition, the alligator bands have separated and creating some distance between themselves. there is very little indication that a reversal is imminent.
The USD, currently at a ten-month high, has absorbed the news that the Fed is likely to slow the pace of asset purchases before years end. Naturally, we might expect the USD to jump on such information, and as an inverse correlate, Silver to fall.
During the Wednesday US session, after the release of the Fed minutes, the USD index fell from 93.15 to 93.05. However, in early Asian trading, the USD has powered its way up to 93.30. The slight drop on Wednesday could be attributable to the Fed’s unassertive tone and the presence of some dissenting voices. In any case, Silver isn’t going to be benefiting from a weak USD any time soon.
Silver has favoured a position in the lower half of its ranging band. So, an extra significant catalyst will have to present itself to push Silver above $27.0 and, once that hurdle is cleared, onward to $30.0.
For one, global demand would have to really pick up. And pick up at a greater rate than that which an average Covid recovery could spur.
What Silver needs is the green revolution. Such a proposition is not entirely preposterous. This brings me to the reason I wanted to write this article in the first place.
Yesterday the Biden Administration announced that it has a target for 40% of the electrical energy consumed in the US to be generated by solar panels by the year 2035. Currently, the US produces roughly 3% of its electricity via Solar.
As it stands, solar panel manufacturers are responsible for approximately 20% (or 3,000 pounds) of global industrial silver consumption. Thus, regardless of how the US accomplishes its goal (technological innovation and government incentives, no doubt), the flow-on effect for Silver could be the significant catalyst it needs to build, and sustain, some significant gains.