Mohicans markets：Markets Fear Rate Hikes Weakening Global Economy OPEC+ Warning of Possible Output Cuts Boosts Oil Prices

Todays Financial Events

Tonight, the United States will release a number of economic data, such as the initial Markit manufacturing and service PMI values in the United States in August, the annualized total number of new home sales in the United States in July and the Richmond Fed manufacturing index in August. Markets will be watching whether these economic data reveal that the U.S. is heading into a recession.

Global View--List of Major Markets

On Monday August 22, spot gold fell sharply before the European market. The high point once fell by about $21 and fell below the $1730 mark, and finally closed down 0.61% at $1736.47 per ounce. It is worth noting that gold has closed negative for six consecutive days. Spot silver closed down 0.28% at $18.99 an ounce.

The US dollar index achieved four consecutive positives and rose to a high of 109.11 for the first time since July 14, and finally closed up 0.78% at 108.94. Ten-year U.S. Treasury yields rose above 3 percent, the highest since July 21, to close at 3.24 percent. The euro fell below the previous low of 0.9952 against the dollar, continuing to hit a new low since 2002.

In terms of crude oil, the two oil prices fluctuated greatly in the day, and the two oil prices dived before the US market. WTI crude oil once fell by 4%, then rose sharply and once turned up nearly 1%, and finally closed up 0.8% at US$90.59/barrel. Brent crude oil also extended its daily decline to 3%, and then sharply rose by more than 1%, and finally closed up 0.96% at $96.68 a barrel.

US stocks fell throughout the day, the Dow closed down 1.91%, the Nasdaq and the S&P 500 closed down 2.55% and 2.14%, respectively. Most sectors such as chips and WSB concepts generally closed lower. AMC Cinemas closed down about 42%, and 3B Home closed down about 16%.

European stocks continued to fall. Germany's DAX closed down 2.32% at 13,230.57 points. The UK's FTSE 100 closed down 0.21% at 7,533.79 points. The European Stoxx 50 closed down 1.93% at 3,658.22 points.

Precious Metals

Beijing time on Monday August 22, spot gold is hovering near a four-week low and is currently trading around $1,737. Overnight, the price of gold continued to decline, hitting a minimum of $1,727.69 per ounce, the lowest since July 28, and closed down for six consecutive trading days. As investors grew increasingly concerned that the U.S. and Europes move to curb inflation would weaken the global economy, safe-haven demand for the U.S. dollar soared again, helping the greenback hit a more than five-week high, approaching a nearly two-decade high set in July, adding to gold prices. The crackdown is clear. And the market is expecting a hawkish speech from Fed Chairman Powell at the Jackson Hole annual meeting this week.

Follow in the day: This trading day will usher in the initial August Markit manufacturing PMI values for France, Germany, the euro area, the United Kingdom and the United States. The market is currently expecting a worse performance than July. Moreover, it is expected that the PMI values of France, Germany and the euro area will be further away from the 50 line of prosperity and decline, which will provide further upward momentum to the dollar in the short-term, which may further suppress the price of gold, but it is expected to support the price of gold in the medium and long term.

Fundamentals are mostly bullish

[The UK economy shrinks by a record 11% in 2020, the worst since 1709]

[Citi forecasts UK inflation to peak at 18% in early 2023]

[The Bank of Japan is expected to downgrade its economic growth forecast in October to reflect weaker consumption]

[U. S. stocks fell sharply to a near two-week low]

[Ukraine bans Independence Day celebrations, UN says war killed more than 5,500 civilians]

[Ukraine has raised about 855 million hryvnia to buy drones for the military]

Taken together, markets are focused on Fed Chair Jerome Powell's speech at the Jackson Hole Central Bank Symposium on Friday to gain more insight into how aggressive the Fed may be in raising interest rates in the future. Analysts widely expect Powell to sound hawkish, this expectation is inclined to further support the US dollar and suppress the price of gold. The price of gold is inclined to further test the support near the low of 1711.38 on July 27, or even near the 1700 mark, and the support of the lower Bollinger Band is not far away. Above, pay attention to the resistance near the 5-day moving average at 1748.22. In addition, the August PMI data of Europe and the United States to be released on this trading day and the US July PCE data released on Wednesday are also biased towards the US dollar and the negative gold price. Investors need to be vigilant to see if the dollar can breach resistance near 109.30, a near 20-year high set in July.

Crude Oil

In early trading on Tuesday August 23, Beijing time, U.S. oil was now at $91.11 per barrel.

Oil prices rebounded from session lows on Monday, as the market weighed Saudi Arabia's warnings of possible OPEC+ output cuts and reduced exports due to partial damage to the CPC oil pipeline in Russia. Markets are also assessing the possibility that a nuclear deal could bring sanctioned Iranian oil back to the market.

Intraday attention: The initial value of the US Markit manufacturing PMI in August, the revised monthly rate of construction permits in the United States in July. The changes in API crude oil inventories in the United States for the week ended August 19 were announced at 4:30 on Wednesday.

Positive factors affecting oil prices

[Investors are worried about the Fed's aggressive stance, US stocks end lower]

[It is now closer to reaching a nuclear deal with Iran than two weeks ago]

On the 22nd local time, Iranian Foreign Ministry spokesman Kanani said at a press conference, so far, Iran has not received a reply from the United States on the text of the final agreement of the Iran nuclear deal's Vienna talks. The State Department said it was closer to a nuclear deal than it was two weeks ago.

[There have been more than 14,000 monkeypox cases in the United States]

According to the US Capitol Hill report on August 21, the New York health department reported the first case of juvenile monkeypox.

Negative factors affecting oil prices

[U.S. Strategic Petroleum Reserve crude oil inventories fell to the lowest level in more than 35 years]

Crude inventories on the U.S. Strategic Petroleum Reserve fell by 8.1 million barrels last week to their lowest in more than 35 years, according to the U.S. Department of Energy. Inventories in the Strategic Petroleum Reserve fell to 453.1 million barrels in the week ended Aug. 19, the lowest since January 1985, the data showed. The drop of 8.1 million barrels was the largest since the end of April.

[Saudi Energy Minister says OPEC+ can meet challenges through means including production cuts]

The Saudi state news agency SPA reported on Monday, citing Saudi Arabian Energy Minister Prince Abdulaziz speaking to Bloomberg News, Prince Abdulaziz said that OPEC+ has the means and flexibility to meet challenges, including by cutting oil yield.

[European energy supply will be hit by a new blow, part of the CPC oil pipeline damaged in Russia will reduce exports]

Europe faces fresh energy supply disruptions as pipeline operators said on Monday that damage to the pipeline system transporting oil from Kazakhstan to Europe via Russia has heightened concerns amid a slump in natural gas supplies.

On the whole, oil prices have been boosted by Saudi Arabia's warning about possible production cuts by OPEC+, coupled with the reduction of exports due to partial damage to the CPC oil pipeline in Russia, and the strong oil price bulls. The U.S. crude oil reserves fell to the lowest level in 35 years, which may further highlight supply concerns, and oil prices may fluctuate upwards in the short term. Inventories also need to pay attention to the API and EIA data released on Wednesday, and if they further show a decline in inventories, oil prices may be further boosted.

Foreign Exchange

The dollar index edged higher in early trading on Tuesday, August 23, Beijing time, and is currently trading near 109.00. The dollar rose across the board on Monday, rising through parity again against the euro. Investors are increasingly concerned that interest rate hikes in the U.S. and Europe to curb inflation will weaken the global economy, so stay away from riskier assets.

The dollar index has gained support in recent sessions as several Fed officials reiterated their stance on aggressive monetary policy tightening. The dollar index rose on Monday, hitting a more than five-week high of 109.11, which is not far from the 20-year high of 109.29 reached in mid-July.

The euro briefly fell below parity against the dollar on Monday for the first time since July 14. It finally closed down 0.98% at 0.9940.

Soaring energy costs and summer strikes have highlighted a cost-of-living crisis in the U.K., which fuels peoples fears of a further economic slowdown. The pound fell to its lowest at 1.1741 against the dollar on Monday since mid-July. It eventually closed down 0.50% at 1.1766,  which was just a step away from the nearly two-and-a-half-year low of 1.1743 touched in mid-July.

The yen has come out of a rally since mid-July. The dollar closed up 0.45% against the U.S. yen at 137.49 on Monday. According to the Commodity Futures Trading Commission, the net short yen position on hand by leveraged investors has fallen to a new low since March 2021.

Institutional Currency Viewpoint

1. Mitsubishi UFJ: GBP/USD could fall to 1.15 in the coming month

①Lee Hardman, a foreign exchange analyst at Mitsubishi UFJ, said:The outlook for the pound does not look good and the pound may fall more than we expect against the dollar in the coming months. 

②He also warned that the pound could fall to as low as 1.15 against the dollar in the next few months.

2. ANZ: The market expects the RBNZ may close to the end of tightening, so the New Zealand dollar is under pressure

① The New Zealand dollar maintained its downtrend against the U.S. dollar. ANZ economists expect the New Zealand dollar to remain under pressure because the market expects the New Zealand Fed to be nearing the end of its tightening cycle. The continued hawkish rhetoric from the Fed, and the likely next rate hike (which would keep the Fed rate high for longer), have led to continued strength in the dollar. Meanwhile, concerns about the rocky road to rate hikes have fueled risk aversion.

② Economists expect the Fed to be the same as the New Zealand Fed in raising rates three more times this year by 50 basis points each. Although economists do not believe that the New Zealand Fed is nearing the end of its tightening cycle, the market holds the opposite view, and this view recently has been weighing on the New Zealand dollar.

3. HSBC: the euro and the pound will continue to weaken, but not to the lows of the year

① Eurozone and the United Kingdom are likely to go into recession, so the European Central Bank and the Bank of England may have difficulty delivering on the market pricing of interest rate hikes, which will put pressure on the euro and the pound. HSBC economists believe that both currencies are unlikely to sustain gains even if they accelerate and front-load the contraction cycle. A large rate hike is also unlikely to have a positive impact beyond a “knee-jerk” reaction. Instead, an accelerating the front-load contraction cycle could exacerbate the concerns about economic growth and the risk of a policy reversal in 2023.

② Risk aversion has risen as concerns about global growth continue. The euro and the pound are expected to continue to fall in the same manner, but not to new lows for the year.

4. Morgan Stanley strategist: Holding dollars in cash looks more attractive relative to U.S. stocks

①  Morgan Stanley's Andrew Sheets said that holding dollar in cash looks more attractive relative to U.S. stocks. Meanwhile, investors confidence in the global rebound in equities is starting to waver. Now, cash offers higher yields, liquidity and better 12-month total returns than U.S. equities, U.S. Treasuries and U.S. credit bonds. Sheets supports holding cash at a time when investors are beginning to realize that an accelerated reduction in the Fed's balance sheet is imminent. 

② The so-called quantitative tightening will culminate next month, which exacerbates the pressure on risky assets brought on by expectations of a rate hike. So far, the rate hike has captured most of the markets attention.

5. Citi: Expectations for a more dovish tone from the Fed may be fading, recommending going long USD, etc

① Tom Fitzpatrick, Citi‘s chief technical strategist, said the Fed’s work is far from done. They need to raise rates another 75 basis points in September until inflation (or other factors) subside. Achieving that goal in the near term without a recession and rising unemployment could be a difficult challenge. Stock and credit markets have improved in recent months. Meanwhile, 10-year U.S. bond yields have retreated from the 10-year highs touched in June. The worst of inflation may be behind us as the market expects the Fed to slow the pace of rate hikes. 

② And the rise in U.S. bond yields last week and on Monday suggests that expectations that the Fed will take a more dovish tone may be waning and markets may begin to look volatile again. Fitzpatrick recommends shorting fixed income, going long the dollar, closing out or shorting stocks, shorting gold and going long energy.

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