We are only 20 days into 2022, and several developing events are already looking like they will become year defining. Here are 3 events that may define trading in 2022.
3 rate hikes are tentatively planned by the US Federal Reserve this year. According to Fed board members, such as Christopher Waller and Patrick Harker, 3 rate hikes is the baseline number needed to control the current level of inflation, but 4 or more hikes is definitely on the table and up for discussion if warranted.
The aggressiveness of each hike is likely to play an equally important role in trading in 2022. While 25-basis point hikes are usual for the Fed (and what is anticipated by the market), some commentators, such as Bill Ackerman, suggest that the Fed may have to double this value for its initial rate hike to help restore its institutional credibility.
The first hike is expected as early as March, but a February hike is entirely possible.
Naturally, as the cost of debt increases (via the aforementioned rate hikes from the US Fed), the growth prospects of the Nasdaq 100 can be squeezed, leading to a flat or negative year for the Nasdaq 100 index.
The last time the Nasdaq 100 had a genuinely negative year was in 2008, dropping in value by 41.9%. The Nasdaq 100 fell 1.04% in 2018, but this is arguably characterised as a flat year rather than a negative year.
With at least 3 rate hikes on the cards for the US Fed, the possibility of a negative year for the index is perhaps higher than a flat year. Bolstering this sentiment is the prediction of Jamie Dimon, CEO of JP Morgan Chase (NYSE: JPM). Dimon has floated the idea that the Fed may have to resort to six or seven rate hikes to tame the 40-year high inflation that the US is currently experiencing. However, Dimon didn’t specify if he believed all these rate hikes should take place in 2022.
Several big banks, including Goldman Sachs (NYSE: GS), predict that oil could hit $100 per barrel in 2022 or 2023.
Oil is currently in a solid position, trading between US $80 and US$90 a barrel and not far off the US $100 forecast.
Without OPEC committing to any significant increase in oil output, it looks unlikely that the price of oil will fall without a demand reduction. Yet, even with the possibility of new covid variants emerging or tightening monetary policy of some nation’s central banks, OPEC is confident in predicting that oil demand will grow by 4.2 million barrels per day over 2022.
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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.
The USD has enjoyed a decent level of upside against the Canadian Dollar since the end of May 2021. This is visible in the D1 timeframe. In this time, the Loonie has travelled from 1.202 to 1.255 per USD.
In the channel that it is currently caught, the CAD reached a low of 1.280. This low occurred at the beginning of this week, intraday Monday.
It appears the USD got a little ahead of itself, and once the pair closed higher than the 200MA, it set out to quickly correct itself. Since this time, the Canadian Dollar has strengthened by 2.5 cents, with the USD closing lower for the past three days.
Channel support currently holds between the 61.8% and 50.0% retracement as of June 23 (Asian session).
On the shorter time scale, H4, we can see that Canadian Dollar bulls have tested the 1.252 price level. The rejection at this level might indicate that the bullish impetus that the CAD held earlier in the week has begun to run itself down. For one thing, WTI Crude/Brent Oil prices have settled down. Barring more conflict among the OPEC+ members, the price of Oil should affect the USDCAD pair a little less moving forward.
Keep an eye on US stocks and the possibility of another big selloff. Much like that experienced on Monday this week, where the SPX500 dropped ~100 points. If the SPX repeats this situation, expect the CAD to be denied a pass down through the 1.252 price level in the short term.
US stocks have been on a three-day run with impressive earnings reports, injecting a buoyancy to the markets.
Friday’s earning reports are not as interesting (from a media perspective) as those dropped earlier in the week. On Friday, we will be keeping an eye on American Express (NYSE: AXP) and Honeywell International (NASDAQ: HON). However, the market at large it probably the better target of your focus on Friday. It will be interesting to see if the market euphoria carries into the close of the week, or if fatigue sets in, and US indices finish the week in red.
Oil hitting one hundred dollars per barrel sometime in the next six months is the bullish sentiment held by many financial institutions.
Analysts expect that Oil producers will not be capable of ramping up supply in time to meet an anticipated surge in demand. Increasing supply is not a simple undertaking. It generally takes weeks or months of investment to ensure the infrastructure is in place to manage the change in supply.
The lift in demand is supposed to be driven by economies further relaxing travel and commerce restrictions in line with the rollout of their respective vaccine programs.
The shortage of supply in the face of surging demand will then push the Oil price up another USD 30 per barrel. WTI and Brent are currently in-between USD 72 and 75 per barrel, with a general momentum to the upside. The upside momentum is in line with the general optimism swirling around global markets since the world's major economies, particularly the US and the United Kingdom, reported the immense success they were having in vaccinating their populations.
The major event that can derail the bullish predictions for Oil is, of course, Covid. In particular, the Delta variant spreading further afield.
The drop in price that Oil experienced over Monday trading (28/06/20201) perfectly Illustrates the power of the delta variant to affect Oil prices
The price drop followed new lockdown measures in South Africa, Australia, New Zealand, and Malaysia. Throughout Monday trading, WTI fell by 1.5%, and Brent fell by 1.9%
To make matters worse for the bullish predictions for the Oil price is the upcoming OPEC meeting on July 1st. The Oil-producing nations might agree to lift the number of barrels they supply.
The last time OPEC met, they were drinking the positive-optimism cool-aid being served at that time. But, in doing so, they knowingly dismissed the lacklustre data coming from the US and Eurozone and the worsening situation in India and Japan.
However, OPEC noted that they had not ruled out a negative outlook for the rest of the year in their last meeting. Therefore, we could expect a different tone from the group in the forthcoming meeting.
Suppose OPEC continues to believe that the global economies are on their way to recovery. In that case, they might continue on their plan to lift supply, and a bullish prediction extending to $100 per barrel begins to look less likely.
Here's an interesting juxtaposition. There are currently just over 25 Million Currently Infected Patients of Covid-19, with 2.4 million deaths*. However,
The point is, main street continues to grapple with the Coronavirus. However, if you were looking at the financial markets, you would've thought we were in one of the largest economic expansions in history.
So much so, Warren Buffet's favourite indicator is flashing signs of mania. Currently, the U.S equity market cap is more than double the GDP of the United States. The last time this happened was during the bubble of the 2000s.
That is a long, convoluted, and somewhat poor segue to the main point of this article. A lot has happened in the past couple of days, with many asset classes at significant highs during one of the worst pandemics in history – here's an article to summarize them.
As vaccinations pick up in the United Kingdom, alongside lockdown restrictions starting to show results in lower cases and deaths, investors have been flocking the pound as optimism for the United Kingdom's economy. It is important to note that 1.45 was the bid before Brexit was announced in 2015, making it a ripe target for bulls to take.
Vaccines have played a considerable part in the strengthening in confidence in the United Kingdom, helped by the fact that they did not join the European Union's vaccine effort. This enabled them to approve and administer vaccines at a faster rate than their European counterparts.
Nearing the same time last year, we had an unprecedented event occur – traders saw the price of WTI Crude Oil on their terminals go negative. A year of supply cuts, recovering demand, and recently a rise in tensions in the middle east has pushed the black Gold back to pre-pandemic levels.
After an influx of institutional attention dawning upon the digital currency, including the likes from Mastercard, JP Morgan, Morgan Stanley, and of course, Tesla, Bitcoin has reunited with bulls taking the price up to just under $50,000 per Bitcoin. To note, Around the end of November last year, we saw Bitcoin at around $20,000.
The S&P 500 has closed at an all-time high, touching 3,950 in futures trading. The index is up 7% year to date. If we lived in an ordinary world, all-time highs in the equity markets would be the headline of the day.
However, it seems like stocks are too boring nowadays, and everyone wants to know which altcoin is next to return 1000x. However, many companies in the index are producing blowout or at least better than expected earnings. Considering the macro-environment we are currently living in, is quite an achievement.
I had concerns about the notion that investors were considering Gold's valuation – not something you want to be talked about in a safe-haven asset. I believe a safe-haven asset should be there to ballast your portfolio in times of risk-off periods, meaning investors should be able to flock to it / rely on it to hold their portfolio in steady shape.
Gold's steady decline eases my concerns, with Gold trading at around $1,816 an ounce, way off its $2,000 highs. We can see a continuation of the trend should see prices around the $1,700 - $1,750 level.
Markets are frothy – stay safe, and trade safe.
*For you tinfoil hats-wearers out there, I will entertain you by including the fact that there are up to 650,000 deaths due to the flu each year. Take that what you will
The headline says it all – market euphoria has reached an all-time high. However, given the events that have occurred in 2020, it feels like it is just another day at the office. For the most part, it is.
Bitcoin reached an all-time high earlier in the U.S Trading session, touching $43,000. This is primarily due to Tesla CEO, Elon Musk, revealing in an SEC filing that they had purchased over $1.5 Billion in Bitcoin in January.
They stated that they invested “To further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity” - or in other words, a bet on Bitcoin using cash not required to run the business. They also stated that they “expect to begin accepting bitcoin as a form of payment for our products in the near future.”
This interest in cryptocurrencies does not just stick to Bitcoin. The meme currency Dogecoin has returned to all-time high levels at around 8 cents after many celebrities like Snoop Dog and, of course, Elon Musk, continue to talk about the currency.
Like I wrote in my previous article, it was relatively common for people to hold hundreds of thousands, if not millions, of Dogecoins in 2014. Assuming those people held them till now, we would have miners and investors with life-changing wealth – all from a meme currency.
In the commodity markets, Oil has made a legendary comeback. Brent Crude topped $60 as vaccines, and unexpected Saudi cuts have made tailwinds for the Black Gold.
However, some analysts are concerned about the quick rise in price, stating that further tension between Russia and Saudi may ensue due to the higher prices. The last time Russia was not on board with OPEC, prices plummeted below $30 a barrel. Brent currently sits at around $60.60 a barrel.
Equity markets saw a breath of fresh air, with the Dow Jones, S&P 500, and the NASDAQ up over 0.4%. Stimulus positivity, alongside vaccination numbers, boost the possibility of a strong fiscal 2021.
John Stoltzfus, Chief Investment Strategist at Oppenheimer, stated, “as people feel safer, investors can expect the economy to experience a rebound that should contribute to revenue and earnings growth as the economy reflates.”
At such inflated valuations in many asset classes, investors and traders should be ready for a sudden pullback on any negative sentiment.
Brent Crude broke a critical fundamental level of $57 a barrel, a psychological resistance that may see Brent continue to price pre-Coronavirus levels.
This is likely on the news that more Americans have received at least one dose of a Coronavirus vaccine than having tested positive for the virus. The United States has been administering vaccines to citizens faster than any other country, with Bloomberg estimating the administration rate at around 1.34 Million doses a day.
With the demand side of Oil improving exponentially, OPEC has started to increase crude supply by 300,000 barrels to the market in January – showing their confidence in oil prices' stability now and going forward. However, disruptions and African nations Nigeria and Libya have slightly offset the supply hike, with a leak in a fundamental pipeline in Libya alongside a suspension in deliveries in Nigeria pulling away around 110,000 barrels of supply off the market.
With Brent Crudes futures month's spreads trading at the highest backwardation in a year, alongside Royal Dutch Shell Plc purchasing the most benchmark-grade cargoes in a single day in 10 years, the physical and financial markets are showing supply tightness and demand for the Crude Oil.
Ole Hansen, head of commodities research at Saxo Bank A/S, stated that currently, the oil market is "supported by the combination of tightening fundamentals, as seen through the rising backwardation and the renewed risk appetite in the U.S stock market.
Other analysts share this perspective, with Bill O'Grady, Executive Vice President at Confluence Investment Management, stating that "the market is going to see supply contract, assuming OPEC doesn't immediately move to fill the gap." Furthermore, Goldman Sachs' commodity analysts estimate of 500,000 a day restriction on supply has been greatly surpassed, with the average supply deficit ranging at around the 900,000 barrels a day mark.
It is important to note that with commodities and other hard asset such as Silver and Gold – the futures market may say one thing. Ultimately, however, it is what happens in the physical market that sets the final price. And in this case, the physical market for Oil is more robust than it was at the peak of the pandemic. Pair that with positive sentiment regarding the vaccine rollouts around the world and a continuation of a supply restriction by OPEC+, and you have a breeding ground for Oil to move higher.
24th February 2020 was when the last time we saw oil hovering around the $55.80 mark. The Oil markets were hammered in 2020, taking investors and traders back to their economics 101 classes.
However, unlike traditional markets, the Oil markets have something traditional markets do not – controlled supply.
OPEC+, a 24- country cartel, took drastic measures as of late to control the drop in oil price by restricting supply. The most recent supply cut by 1 million barrels a day by Saudi Arabia has pushed Oil markets to levels not seen since 24th February last year. Saudi's unexpected move was on the back of the OPEC+ decision to gradually bring back supply to the market in January.
The Energy Minister of the Oil-dependent country, Prince Abdulaziz bin Salman stated that "[Saudi Arabia] are the guardian of the [Oil] industry", showing their influence in the Oil markets.
Since December, Oil prices have rebounded 18% on the vaccine's slow rollout, peaking at around $56 a barrel. With the rollout of Vaccinations, analysts at Goldman Sachs are becoming bullish on the Black Gold, stating that they predict Brent could rise to $65 a barrel by the summer of this year, bringing the timeline half a year from their previous prediction. However, they stated that "given the magnitude of the recent rally, however, markets are likely to consolidate near-term,"
Given the Coronavirus situation worldwide, the demand situation has not improved to the point where it was on the 24th February, giving the price of oil the characteristic of a forward-looking stock instead of a spot looking commodity. However, if the vaccine continues to make its way around the world and demand truly starts picking up, we may see the Oil markets return back to a relative norm.
Is this the beginning of the end? The UK announced yesterday that they have provisionally approved Pfizer’s Coronavirus vaccine. This makes the UK the first country to approve a vaccine, which they state will be available to individual members of the public by next week.
Simon Steve, Chief Executive of the NHS, stated that the bulk of the vaccinations would occur between January and April next year. The Medicines and Healthcare Regulatory Agency (MHRA), the governing body for the UK which is responsible for ensuring medicines and vaccines are acceptably safe, stated that they volowed “an extremely thorough and scientifically rigorous review of all the evidence” and that “the public can be absolutely confident that the standards we have worked to, are equivalent to those around the world.”
The UK framework allows vaccines to be approved while reviewing the data given to them on a rolling basis, which is why it was approved earlier in the UK. This is compared to the United States, which requires a public review and full scrutinization of all the data available. The British Government has secured 357 Million allocations of seven separate vaccines.
The S&P 500 and the NASDAQ were able to squeeze their way to new all-time highs. However, the real winner was oil – reaching $48.40c for a barrel of Brent Crude. It’s edging to break the strong psychological barrier of $50.
The Vaccine has provided a needed boost to the Black Gold. With OPEC+ coming close to a deal, we may see oil breach that $50 mark if OPEC decides to continue the supply cuts.
John Kilduff, a partner at Again Capital LLC, stated that “it looks like there is headway being made, which the [oil] market is looking for.” With the said, US Oil Inventories this week fell lower than what analysts were expecting, with a drop of 754,000, well shy of market estimates of 2.3 Million.
GBP/USD was surprisingly stable, maintaining that 1.337 level. However, EUR/USD blew past that 1.20 mark, currently sitting at 1.21.
Are you going to take the Vaccine when it's available?
The oil markets have been seeing the light as of late. Oil prices have reached an eight-month high, with WTI and Brent Crude trading around $45 and $48. This is from the recent positive vaccine news, alongside better than expected EIA data and geopolitical supply-side tensions.
Peter McNally, global head of industrials, materials, and energy at Third Bridge, stated that "it has been a really good run. We haven't seen a run like this since the spring after we went to negative prices." He also stated that "Sentiment has changed pretty quickly… lately it feels like supply and demand fundamentals are heading in the right direction."
Many markets have been revolving around optimism on a vaccine, and Oil is no exception. The Price of Oil has come a long way, from the price war between Saudi and Russia earlier this year, alongside Oil going negative in late April. With the vaccine in sight, the Oil markets are banking on increasing demand in the following months. Bloomberg also reported that Chinese and Indian refiners had issued a large number of tenders seeking crude Oil for loading in Jan, highlighting the strong demand from parts in Asia.
The supply side is also providing pressure for Oil upwards, with the geopolitical tensions rising with recent attacks on a fuel depot in Saudi and an oil tanker in the Red Sea.
However, the main governing body for the oil markets, OPEC, is having some troubles with their members. Iraq, which requires an oil fiscal break-even price of $64, is voicing their frustrations at OPEC's "one size fits all" policy. Iraq's Finance and Deputy Prime Minister, Ali Alawi, stated that "We have reached the limit of our ability and willingness to accept a policy of one size fits all."
Although they have breached OPEC's quotas many times this year, Iraq is quite influential within OPEC, as they are the largest producer after Saudi Arabia. OPEC is set to renew its policies regarding supply cuts on December 1st.
OPEC is placed in an awkward position, as rising oil prices means it's harder to come to a consensus for the 13 countries on whether they should continue to cut supply to the market, in turn, giving up the opportunity to lock in revenue for years to come.