US dollar falls to one-month low on Federal Reserve’s dovish stance

Posted on July 29, 2021 by Vrasidas Neofytou

The world’s most powerful currency weakens across the board after Federal Reserve kept interest rates unchanged at its latest policy-setting meeting, reassuring its “accommodative” monetary policy, while it claimed that rising inflation is only transitory.

Dovish Federal Reserve weighs on US dollar:

Following the end of the two-day FOMC monetary policy meeting on Wednesday night, the central bank maintained its dovish stance despite the progress that had been made towards its economic and employment targets.

The central bank kept interest rates steady, as expected, while Fed’s Chair Jerome Powell said in his news conference that rate hikes are “a ways away” and that the labour market and the economy have still some ground to cover.

Powell maintained that inflation is only transitory, and that millions of Americans have yet to return to work before the central bank start tapering its $120 billion per month bond-buying program.

Market reaction:

Fed’s remarks weighed down on greenback as prospects of additional dollars flowing to markets from massive monetary stimulus would be negative for the currency in near future.

Given the Fed’s dovish stance, the US dollar index, also known as “DXY” which measures the value of the dollar against a basket of major currencies, broke below 92 level on Thursday afternoon for the first time since early July.

The weakened dollar and the improved market risk sentiment have allowed other major or risk-sensitive currencies to bounce off their recent multi-month lows.

The growth-sensitive Euro extended gains for the fourth day in a row, climbing to near $1,19, hitting the highest in two weeks. Euro has gained more than 150 pips on the dollar from last week’s four-month low of $1,175.

Pound Sterling had the same upward reaction with Euro, bouncing back to near $1,40 for the first time since mid-June after it touched a low around $1,357 last week. Pound also receives support on the optimism over the re-opening of the British economy after the pandemic, despite the rising infection in the country.

The risk-sensitive currencies Australian and New Zealand dollars posted some small gains against dollar trading to near $0,74 and $0,70 respectively. Both currencies hit multi-month lows in mid-July amid the resurging “Delta” covid variant in the Pacific region and the recent escalation of the US-China trade conflict.

Vaccine makers BioNTech and Moderna skyrocket on strong demand

Posted on July 28, 2021 by Vrasidas Neofytou

The biotech companies behind the successful development of Covid vaccines have seen their stocks skyrocketing by almost 300% since the start of the year, after rising 1,000% in 2020.

The two leaders in the vaccine space, BioNTech and Moderna, have been some of the best performing stocks in 2021 as demand for vaccines keeps growing while they have more promising mRNA vaccine candidates in their pipelines.

BioNTech is a German biotech company which has collaborated with U.S. drugmaker, Pfizer, to develop the first authorized and the most successful Covid vaccine using messenger RNA technology.

Moderna is the first US-based biotech company to produce its own Covid vaccine using the same mRNA technology as BioNTech. Yet, Moderna’s market capitalization is much larger than BioNTech’s after its listing in the S&P 500 index in July.

The impressive stock performance is mainly due to the expected future sales of the vaccine since the pandemic has proved more difficult to contain than initially thought, especially after the emergence of the highly transmissible “Delta” variant.

Investors remain bullish on these high-flying biotech companies following the comments from top U.S. infectious disease official, Anthony Fauci, that persons with compromised immune systems may need a vaccine booster, while the FDA is expected to give emergency authorization for covid vaccines to children under age 12 in a few months.

Interestingly, both BioNTech and Moderna will use their billions in cash to finance their research pipelines in the years to come. The companies are developing several mRNA-based vaccines and therapies to prevent cancer, malaria, and other life-threatening diseases that impact millions of people worldwide each year.

This is not your grandfather’s bond market

Posted on July 26, 2021 by George Kessarios

With US 10-year bond yields around 1.25% (as of Thursday July 22) the question is, what is the bond market telling us?

Some say the bond market is pointing to stagflation from 2022 and beyond. Others say yields will rise because of inflation, and that these low yields are “transitory”. Other say the low yields point to the continuation of the pandemic with the Delta variant.

Then there are others who think at the bond market is not telling us anything anymore. The low yields we are seeing, despite inflation, are probably a reaction to the liquidity created by central banks. Let us not forget at the Fed the ECB and the Bank of Japan are all continuing to create liquidity at a record pace. So maybe the bond market it is not telling us anything anymore because it can’t.

So where does this leave equities? The answer is by themselves. Stocks do not have bonds to give them a hint of what might happen in the future. And while analysts, economists, and pundits alike are all confused about what the bond market is saying, it’s probably safe to say we should not look to bonds for any kind of direction.

The bottom line is that market participants are very confused as to what the bond market is saying. This confusion stems from the fact at the bond market is giving us conflicting signals based on what we have been conditioned to think for many years now. Maybe low bond yields are a bad omen for global growth, or perhaps not. One thing is true, this is not your grandfather’s bond market.

Market sell-off as “Delta” variant threatens global growth recovery

Posted on July 21, 2021 by Vrasidas Neofytou

Global financial markets have started the week with significant losses as growing concerns over the impact of the “Delta” variant on global economic recovery, have hit risk-sensitive stocks and currencies and have pushed safe assets higher.

The fast-spreading Delta variant is now the dominant strain worldwide and has been accompanied by a surge in infections around Europe, the United States and Asian Pacific regions, largely among the young and unvaccinated.

Dow Jones index lost 2% on Monday, posting its biggest drop for the year, led by losses in economically sensitive stocks which are tied to a successful re-opening, such as the classic cyclical sectors of energy, financials, and travel.

Investors rushed into the safe of the bond market, pushing yields on US Treasury and German Bunds to hit their lowest level since February, intensifying fears of global economic slowdown.

The risk aversion sentiment has also benefited safe-haven currencies such as the US dollar, Japanese Yen and Swiss Franc, which advanced to near multi-month highs against growth-sensitive currencies.

The Euro fell below the 1,18 level on surging virus cases in Europe, whilst the Pound Sterling dropped to the 1,36 level after the health minister, Sajid Javid, tested positive for the virus.

The commodity-sensitive, Australian dollar, fell to its lowest level since December 2020 as nearly half of the population is living under lockdown whilst commodity prices plunge on concerns over demand.

Meanwhile, cryptocurrencies also sank following the broader market sell-off, with Bitcoin falling below 30,000 dollars for the first time in a month, while Ethereum dropped to yearly lows of 1,700 dollars.

Economic Sustainability

Posted on July 20, 2021 by George Kessarios

Up to about 50 years ago, inflation was the main worry of central banks, primarily because high inflation eroded consumer purchasing power.

Today however this has changed, and the main objective is economic sustainability. By this I mean Central Banks want a continuation of growth with or without inflation. Besides, why increase interest rates and crash the economy making a mess of things, only to lower interest rates to try to inflate the economy, and then do the entire thing all over again?

Many say these asset purchases will cause inflation. Yes, it might happen in the future, but over the past 30 years or so, the lessons to be learned are that we are not in the 50s – 70s anymore.

Which brings us to the discussion on when the Fed will lower or even eliminate the 120 billion dollars in bonds it purchases each month.

My guess is that the Fed will continue these purchases for longer than we imagine. The reason is, the last thing the Fed wants are higher interest rates. Higher rates will affect negatively both the labor market and asset prices. Both stocks and real estate prices are likely to trend lower, which will have an impact on the wealth effect, which will eventually impact the real economy.

Also, contrary to many years ago, the US government today has a much higher debt load. Higher interest rates mean more dollars to service this debt. And with fiscal spending still running, the last thing the US Treasury needs are higher outlays for servicing its debt.

So, while you will not hear the Fed saying it, higher interest rates are not what it wants, even if inflation persists. Insofar as what risk assets will do, we do not know. While logic dictates the liquidity created should continue to be supportive for markets, practically speaking the outcome is not a given.

Q3 Outlook: High price volatility is expected in the crude oil market

Posted on July 19, 2021October 6, 2021 by Vrasidas Neofytou

It has been a phenomenal year for the energy commodities sector so far, having surged by almost 25% in Q2 and up 50% year-to-date thanks to strong post-pandemic fuel demand and tight supplies, with crude oil becoming the hottest commodity on Wall Street.

US-based West Texas Intermediate Crude (WTI) topped to near $77 per barrel in early July, hitting a 7-year high, whilst Brent crude, the international benchmark, climbed to $78 per barrel in the same period, posting a 3-year high.

The rally was mostly driven by the successful vaccination campaign around the world, which allowed governments to gradually ease the pandemic-led lockdown measures, coupled with the historic production cuts from the OPEC+ alliance and a large drawdown in global crude inventories.

Furthermore, the massive central bank monetary policies, cheap liquidity, government fiscal stimulus, and zero-interest rates have exploded the inflationary pressures that lifted oil prices over the first half of the year.

Yet, oil prices started retreating from their multi-year highs at the start of Q3, following an agreement within the OPEC+ group of producers to boost output, while the unexpected outbreak of the highly contagious “Delta” covid variant deteriorates the oil growth demand in the short term.

Crude oil rally reached our yearly and Q2 2021 price targets:

Our price prediction has come to fruition as crude oil prices reached our price projection of $75 per barrel in Q2, 2021 (Bullish scenario for Q2), anticipated back in early April when prices traded around $60 per barrel, 20%-25% lower.

The bullish projection for Q2 was based on the rapid rate of COVID-19 vaccinations, fiscal and monetary stimulus, and the recovering fuel demand driven by the resumption of global trade, traveling, manufacturing, and tourism around the world. Here is the link to the Q2,2021 Outlook: https://exclusivecapital.com/research/quarterly-outlook/q2-outlook-2021-crude-oil/

Our accurate prediction comes after we also forecasted, back in December 2020 (when the oil prices hovered around $45 per barrel), that crude oil prices could top $70 per barrel, up 55%. Here is the link to the Yearly Outlook 2021: https://exclusivecapital.com/research/quarterly-outlook/q1-outlook-2021-growth-led-commodities/

Neutral crude oil outlook for Q3, 2021:

While crude oil prices have topped to the near $80 mark in the first half of 2021, there is no guarantee the rally will continue into Q3 since the growing concerns for more OPEC+ supplies and the resurgence of Covid outbreaks around the world could have a more significant impact in the overbought oil prices.

Therefore, we have turned our Base case scenario from Bullish to Neutral, with oil prices averaging to near $70 per barrel, expecting Q3 to be a transition phase to test the waters for the energy markets.

3-month targets:

Base case scenario: Neutral: We expect crude oil prices to consolidate near $70 per barrel or to remain volatile between $65-$75 per barrel in the third quarter until there is clarity on the oil market landscape.

The uncertainty around the OPEC+ production deal, and the possibility of a new market share battle by top oil producers, loom over the energy market.

In addition, the renewed lockdown measures to curb the spread of the “Delta” variant around the world and the higher oil prices could start to destroy demand growth for petroleum products such as gasoline, diesel, and jet fuels.

Bullish scenario: We anticipate that crude oil prices could break above $80 per barrel, assuming Covid outbreaks do not slow down the global demand recovery, whilst the falling oil inventories, the tight supplies, the massive monetary and fiscal policies, the re-opening and reflation bets, could push oil prices towards fresh multi-year highs.

Supporting the bullish oil outlook, OPEC sees a tight energy market in the next quarters, with global oil demand reaching pre-pandemic levels of 100 million bpd in 2022, driven by strong economic growth from top-consuming countries such as China, India, and the USA.

Hence, the International Energy Agency (IEA) predicts that global oil consumption will rebound by 5.4 million bpd in 2021 and rise by another 3.1 million bpd in 2022, on solid global fuel demand. It also estimates a 1.5 million bpd supply deficit for the second half of 2021, indicating a tight market despite the gradual OPEC supply boost.

We additionally expect the Federal Reserve and other central banks to continue their “accommodative” massive monetary and fiscal stimulus into Q3, supporting the global economies and improving the demand for petroleum products. If the global economy is in a decent position to keep recovering from the pandemic, then crude oil prices should benefit as well.

Hence, oil prices could find strong support on tight supplies since the US crude stockpiles have fallen to a 2-month low, while the global crude inventories have seen the largest draws in a decade.

The bullish scenario also assumes that Investors will continue placing funds into cyclical and energy sectors as the global economy re-opens from the unprecedented pandemic, while some passive funds will bet on inflation-sensitive assets, such as crude oil, as a hedging tool against rising inflation rates (reflation bet).

Bearish scenario: We expect crude oil prices to fall back to $60 per barrel assuming the highly transmittable “Delta” covid variant could trigger new lockdown that would likely reduce demand for petroleum products, while we are concerned that the OPEC+ alliance will increase production above projected global demand.

Saudi Arabia and the United Arab Emirates have reached a compromise on the production deal in mid-July, with UAE increasing its baseline production from today’s 3,170 million bpd to 3,5 million bpd from May 2022.

Overall, the OPEC and its non-OPEC allies led by Russia, known as the OPEC+ alliance, will increase production by a further 2 million bpd from August through to December 2021, 400k barrels daily each month over the next five months.

We would also pay attention to another bearish catalyst for the oil market in Q3, which would be the comeback of the US Shale oil production. With oil prices trading above $70 per barrel, U.S. crude production has started slowly increasing to near 11.5 million bpd in mid-July, the highest since May 2020.

Meanwhile, the prospect of a quick return of Iranian supplies to global markets has arisen since the restart of negotiations over the revival of the 2015 nuclear deal. An estimated 2 million bpd of Iranian crude is excluded from the market due to sanctions, while in case of a deal, Iran may supply between 0.5 and 1 million bpd to global markets.

Conclusion:

Surging crude oil prices may threaten global economic recovery after the pandemic and damage the oil growth demand. The cure for high prices in the commodity sector is always high production, and there would be no exception for the crude oil market.

With WTI and Brent crude oil prices trading within overbought territories of $70-$80 per barrel, we expect that it would trigger a rapid rise in production from OPEC+ members and US Shale oil producers. Inventories will begin to build up, and consumers will start seeking substitutes (green-renewable energy), and the “Delta” variant will start weighing in on oil prices, putting an end to the bullish oil price upward momentum in the third quarter of the year, despite surging oil demand.