Mohicans markets：Weak Economy and U.S. Rate Hike Expectations Cool OPEC+ May Tighten Supply to Boost Oil Prices

Todays Financial Events

The United States will announce the EIA crude oil inventories for the week ending August 19 at 22:30 tonight. The market currently expects them to decrease by 1.5 million barrels. The API data released this morning recorded a decrease of 5.632 million barrels. Investors will need to pay attention to whether tonight's EIA crude oil inventory data will also have such a large decline.

Global Views - List of Major Markets

Spot gold rose sharply by about $24 during the U.S. session, rising above $1,750 at one point, and then fell back, finally closing up 0.69% at $1,748.40 per ounce on Tuesday August 23. Spot silver closed up 0.65% at $19.11 an ounce.

The U.S. dollar index rose to a high of 109.29 and then retreated, extending its decline during the U.S. session, and finally closed down 0.4% at 108.52. The 10-year U.S. bond yield was on a roller coaster ride, still above 3.0%, closing at 3.24%.

In terms of crude oil, affected by the news, the two crude oils rebounded and expanded their gains during the U.S. session. WTI crude oil rose 3.8% during the day, and finally closed up 3.49% at $93.76 per barrel. Brent crude oil reached the $100 mark, setting a new high since August 12, and finally closed up 3.67% at $100.09 per barrel.

The Dow closed down 0.47%, the S&P 500 closed down 0.22%, the Nasdaq closed flat, oil and gas stocks and education stocks rose, and vaccine stocks fell. Xiaopeng Motors closed down about 11% after the results, the biggest one-day drop since May. Shell closed up about 7%, and JD.com closed up about 3%.

European stocks continued to fall. Germany's DAX closed down 0.27% at 13,194.23 points. The UK's FTSE 100 closed down 0.61% at 7,488.11 points. The European Stoxx 50 closed down 0.16% at 3,652.52 points.

Precious Metals

On Wednesday August 24th, Beijing time, spot gold fluctuated within a narrow range and is currently trading around $1,746.22, temporarily holding most of the overnight gains. The dollar retreated from near 20-year highs on Tuesday on weaker U.S. housing data and PMI data. Data from the euro zone and the United Kingdom also intensified market concerns about the weakening of the global economy, and concerns about the geopolitical situation intensified, giving gold prices some rebound momentum. Still, the market is still widely expecting Powell to deliver a hawkish speech this week. At present, interest rate futures show that the probability of raising interest rates by 75 basis points in September has increased, and the yield of US bonds has risen, which makes the price of gold still under pressure below the middle rail of the Bollinger Band, and there is still a certain downside risk in the short-term gold price.

Intra-day attention: The initial monthly rate of U.S. durable goods orders in July will be released on this trading day. This data has a great reference to GDP data, and investors need to focus on it. In addition, it is necessary to pay close attention to news related to the geopolitical situation in Russia and Ukraine and changes in risk aversion sentiment. On Tuesday August 23, the U.S. embassy in Kyiv warnedof an increased possibility of a Russian military strike in Ukraine in the coming days around Ukraine's Independence Day (August 24), and again urged U.S. citizens to leave Ukraine if possible.

Fundamentals are mostly bullish

[U.S. new home sales plummet to a six-and-a-half-year low]

[The initial U.S. composite PMI fell to a 27-month low of 45 in August]

[The White House slashed its economic growth forecast for this year from 3.8% to 1.4%]

[Goldman Sachs believes that Powell will reiterate the case for slowing the pace of policy tightening in Jackson Hole speech]

[The dollar fell after surging higher on Tuesday]

[Europe faces worst drought in at least 500 years]

[The UK's August composite PMI fell to the lowest since February last year, and factory output fell for the first time since February last year]

[Ukraine warns that Russia may launch a barbaric attack on Independence Day, the United States urges citizens in Ukraine to evacuate]

Fundamentals are mostly bearish

[Fed Kashkari: Very clear we must tighten monetary policy]

[The probability of raising interest rates by 75 basis points in September increases]

[Morgan Stanley: Powell's speech at the Jackson Hole annual meeting will support the dollar]

[U.S. bond yields hit multi-week highs, Powell is expected to release a hawkish signal at the Jackson Hole meeting]

Taken together, although the dollar fell on Tuesday, expectations for a 75 basis point rate hike in September have increased. Before Powell's speech on Friday, the dollar still has a chance to rise further, and the US bond yield also rose to a multi-week high, which is also unfavorable for gold prices, and there is still a risk of further decline in the future of gold prices. Of course, we also need to beware of the possibility of a sharp deterioration of the geopolitical situation in Russia and Ukraine. Short-term gold prices will even get some rebound opportunities, and worries about a global economic recession will also limit the downside of gold prices.

Crude Oil

In early trading on Wednesday, August 24, Beijing time, U.S. oil was now at $93.51 per barrel.

Oil prices surged nearly 4 percent on Tuesday, as Saudi Arabia floated the idea of OPEC+ production cuts to support prices on the prospect of a return of Iranian crude to the market and a drop in U.S. inventories. CPC Black Sea terminal equipment maintenance affected crude oil exports and also contributed to the rise in oil prices.

Intraday attention: Changes in EIA crude oil inventories in the United States as of August 19

was announced at 22:30.

Positive factors affecting oil prices

[Weak economic data U.S. stocks closed down]

[U.S. new home sales plummet to a six-and-a-half-year low]

[The White House sharply lowered its economic growth forecast for this year from 3.8% to 1.4%] 

[Norway maintains high natural gas production levels until 2030]

Negative factors affecting oil prices

[U.S. crude oil inventories plummeted by about 5.6 million barrels last week]

U.S. crude oil inventories fell last week, while gasoline and distillate inventories rose, data from the American Petroleum Institute said. Crude oil inventories fell by about 5.6 million barrels in the week ended Aug. 19, gasoline inventories rose by about 268,000 barrels, and distillate inventories rose by about 1.1 million barrels.

[CPC Black Sea Terminal Equipment Maintenance Will Affect Crude Oil Exports and Disturb at least a month]

The Caspian Pipeline Consortium confirmed on Tuesday that oil exports from Russia and Kazakhstan via its Black Sea terminals will both face disruptions for at least a month after maintenance begins at two of its three berths (SPMs) at its Black Sea terminals.

[Saudi Arabia's threat of OPEC+ production cuts may push up international oil prices, Asian refiners are panicked]

[EU is ready to support Ukraine for a long time]

According to the latest news from Agence France-Presse, French President Emmanuel Macron said at the “Crimea Platform” summit via video on Tuesday, 23rd, local time that the EU's support for Ukraine's resistance to Russia's “invasion” will continue “for a long time”. “Our determination has not changed, and we are prepared to maintain this effort to support Ukraine for a long time.” Macron said.

On the whole, Saudi Arabia's remarks on OPEC+ production cuts are the main factors behind the short-term rise in oil prices, while the decline in US crude oil inventories, coupled with the maintenance of CPC Black Sea terminal equipment, affects crude oil exports. At the same time, the EU is ready to support Ukraine for a long time, or to further escalate the geopolitical tension. Under the influence of many factors, there is room for oil prices to rise. If the EIA data in the evening shows a further decline in inventories, oil prices will test the resistance near the 200-day moving average at 95.69 in the short-term.

Foreign Exchange

The dollar index is slightly down in the early trading session on Wednesday, August 24, Beijing time, and is currently trading around 108.50. The dollar index touched a high of 109.28 on Tuesday, the highest level since it hit a 20-year high in mid-July, and then turned lower. It finally closed down 0.40% at 108.53.

Earlier data showed that the U.S. private sector activity was weaker than expected in August, which it drove bets that the Federal Reserve may not be as aggressive in its interest rate hike cycle. A survey by S&P Global showed on Tuesday that he preliminary U.S. S&P Global Composite Purchasing Managers' Index fell to 45 in August from a final reading of 47.7 in July, which is the lowest since May 2020. Demand in the service and manufacturing sectors contracted for the second consecutive month amid high inflation and tightening financial conditions.

The euro closed up 0.28% against the dollar at 0.9968 on Tuesday. People fears again that energy shocks continue to fuel inflation and make Europe more likely to fall into recession and drag the euro lower.

The Australian dollar closed down 0.73% against the U.S. dollar at 0.6927 on Tuesday. HSBC economists expect downward pressure on the Australian dollar to intensify in the future. Risk aversion and yield spreads may put downward pressure on the Australian dollar in the near term amid slowing global demand.

For the Australian Federal Reserve‘s monetary policy meeting on September 6, the market is pricing in a 39 basis point rate hike. But economists believe that the Australian Fed should soon achieve a “soft landing” of the economy, which may make the Australian dollar weaker. Given Australia’s high trade risk exposure, the global economic downturn may put pressure on the Australian dollar.

Institutional Currency Viewpoint

1. Morgan Stanley: Powells speech at the annual meeting in Jackson Hole will play a supportive role for the dollar

① Morgan Stanley research report pointed out that the tightening of the U.S. financial conditions due to a tougher Federal Reserve may be supportive of the dollar, and the Eurozone growth outlook continues to soften against the backdrop of higher energy and food prices. Continuing to recommend short EURUSD positions with 0.97 as a target and 1.05 as a stop.

② The upcoming Jackson Hole central bank annual meeting this week could be an important factor in favor of the dollar, as it gives Fed Chairman Powell an opportunity to continue to emphasize the Feds commitment to fighting inflation

2. JPMorgan Chase: The dollar will strengthen further

① Antonin Delair, FX analyst at JP Morgan, said that although the dollar is currently not undervalued, according to quantitative models, it is set to strengthen further as growth prospects deteriorate.

② The dollar has benefited from the recent rise in implied volatility, favoring the euro, Swedish krona and New Zealand dollar as funding currencies. Cross-sector risk adjustment and real arbitrage are the best strategies so far this year.

3. Mitsubishi UFJ: Fundamentals still support dollar strength

① Mitsubishi UFJ Bank economists believe the dollar will continue to strengthen in the coming months, as Fed policy and European energy woes boost the dollars relative attractiveness. The strength of the dollar reflects market expectations that the Fed will continue to deliver a relatively hawkish policy message at its annual meeting in Jackson Hole this week. Reiterated that it will still continue to raise rates to curb inflation, despite recent evidence that inflationary pressures have eased as a result of previous rate hikes.

② The negative impact of the European energy price shock worsened further pushing the dollar stronger. The current difficult situation makes it difficult to refute that the dollar will continue to strengthen in the coming months, and it seems unlikely that the Fed will turn dovish in the near term.

4. JP Morgan: Expect the UKs energy crisis to send the pound down to 1.14

① JP Morgan Chase Private Bank said the pound could fall to its lowest level against the dollar in more than two years if this winter‘s natural gas supply crisis pushes Britain into recession. Sam Zief, head of global foreign exchange strategy, said the pound has fallen 13 percent against the dollar so far this year, which is starting to reflect people’s concerns. The higher natural gas price will drive a spike in inflation as the economy gets closer to recession.

② If the natural gas price continues to rise, the pound will definitely fall to 1.14 against the U.S. dollar. Traders have turned to selling the pound due to problems in the U.K., it is more a result of the dollar's strength causing the pound to weaken earlier in the year.

5. UOB: USDJPY near-term target at 137.85

① UOB forex strategists believe USDJPY continued rally may lead it to break 137.85 in the near term. USDJPY is expected to consolidate and trade in the 136.80/137.85 range today.

② USDJPY may break through 137.85 in the next 1-3 weeks, but there is no significant improvement in the upward momentum. It may take some time for USDJPY to reach the next resistance level at 138.30. All in all, only a break below the strong support level at 136.40 would indicate that USDJPY is unlikely to continue rising.

6. Societe Generale: Euro may remain under pressure below parity on weak German PMI

① Societe Generale analysts predict that Germanys weak initial August manufacturing PMI may keep the euro under pressure against the dollar under parity, because the weak PMI means that the German economy is on the verge of recession. Survey data given by several European governments have been stronger than the PMI, which may give a glimmer of hope for stronger data; however, in Germany, high natural gas prices, low Rhine levels and high inflation are dealing a devastating blow to business confidence.

② A very poor German PMI alone may be enough to keep the euro under pressure against the dollar below parity, even if the rest of the Eurozone performs better.

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