Forex Fundamental News Facts for 8th May, 2024

Forex Fundamental News Facts for 8th May, 2024

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[Quick Facts]
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1. Fed’s Kashkari says current rates may not be enough to curb inflation.
2. EIA expects 2024 oil market supply and demand to be balanced.
3. ECB’s Nagel says structural forces could keep inflation higher.
4. Powell’s public confidence nears a historic low.
5. Israel takes control of Rafah crossing.
6. Dollar Regains Momentum As Yen Struggle.
7. China-West Divide Threatens ‘Reversal’ For Global Economy, IMF Official Warns.
8. Gold Bars Are Selling Like Hot Cakes In Korea’s Convenience Stores And Vending Machines.
9. Stocks And Bonds Wobble As The Global Economy Throws Off Mixed Signals.

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[News Details]
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Inflation Concerns and Housing Market:

 Neel Kashkari, the President of the Minneapolis Fed, expressed concerns on Tuesday that the current Federal Reserve rates might not be sufficient to control inflation, which is estimated to be around 3%. He pointed out that despite a resilient labor market, the stagnant inflation in the recent quarter raises questions about the effectiveness of the current policy.

Since the 2008 financial crisis, the U.S. has been grappling with a housing supply shortage due to the failure to match home construction with population growth. The COVID-19 pandemic has further complicated the situation by increasing the demand for housing due to remote work. Additionally, immigration waves have added to the supply pressures. The Fed’s policy has resulted in a significant increase in 30-year mortgage rates, from about 4% pre-pandemic to approximately 7.5% today. However, the impact of these rates on residential investment is not as significant as anticipated.

Neel Kashkari, the President of the Minneapolis Federal Reserve, recently indicated that the Fed is likely to maintain its current monetary policy for the foreseeable future. However, he did not rule out the possibility of rate cuts if inflation decreases or if there are significant labor market weaknesses. The decision would be based on multiple inflation reports showing a return to the Fed’s 2% target.

In contrast, if inflation stagnates around 3%, the Fed may consider raising rates. Although this scenario is less likely and could be costly, it remains a possibility. More data is needed before the June rate hike decision to determine whether the forecast of two rate cuts this year should be maintained or reduced to one.

The housing market has been under pressure since the 2008 financial crisis, with the number of homes built in the U.S. not keeping pace with population growth. This shortage has been exacerbated by increased demand due to remote working during the COVID-19 pandemic and recent immigration waves. Federal Reserve policy has also contributed to this situation by pushing 30-year mortgage rates up by approximately 3.5%, from about 4% pre-pandemic to nearly 7.5% today.

Despite these factors, the contractionary effect of current mortgage rates on residential investment is not as significant as one might expect. Kashkari and his team are encouraged by the resilience of the labor market, but the high inflation figures in the most recent quarter raise questions about the actual restrictiveness of the current monetary policy.

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Oil Market Forecast:

The U.S. Energy Information Administration (EIA) predicts a balanced oil market supply and demand in 2024. The global crude oil supply is expected to rise to 102.76 million barrels per day (bpd), while the global demand forecast has been reduced to 102.84 million bpd. This leaves a supply gap of only 80,000 bpd in 2024, lower than previously predicted. The EIA attributes this balance to increased production from non-OPEC countries, including the U.S., Canada, Brazil, and Guyana, which is expected to offset recent OPEC production cuts.

The impact of Russia’s invasion of Ukraine continues to reverberate in the oil market, even after two years. Over 2 million barrels of Russian naphtha, a key component for plastics, have been stranded at sea for over a week, with some tankers located near Oman and Malta. This is a significant increase from the weekly average of about 790,000 barrels in the first two months of the year.

South Korean petrochemical manufacturers, traditionally significant consumers of Russian naphtha, are now avoiding direct imports and cargoes of uncertain origin due to fear of government scrutiny. This follows an investigation launched by South Korean authorities into naphtha imports in March.

The invasion in 2022 disrupted global energy markets, leading to rerouted flows, shunned exports, and added complications due to western sanctions and price caps. South Korea, like most import-dependent economies, and its refiners and plastic manufacturers, have had to adjust accordingly.

Prior to the attack on Kyiv, Russia was South Korea’s primary supplier of naphtha. However, direct imports have decreased since the onset of the war, while imports from countries such as the United Arab Emirates, Malaysia, Singapore, and Tunisia have increased.

Since the launch of the investigation, imports from Middle Eastern suppliers, including Kuwait and Oman, have risen. Simultaneously, Russian naphtha exports to China and Taiwan have grown, with shipments from Moscow accounting for over half of Taiwan’s imports in April.

South Korean refiners and petrochemical companies can still import naphtha from Russia, but they must adhere to a price cap set by the Group of Seven (G7) that restricts access to western services if cargo costs exceed certain levels. Although not a G7 member, Seoul has supported the group’s measures to penalize Russia for the war.

The market is closely watching BP’s CEO, Murray Auchincloss, who took office in January, for any signs of a shift in the company’s climate goals and oil and gas production plans. However, no such changes were announced in the recent first-quarter results, which fell slightly short of market expectations with profits of $2.7bn against predicted $2.9bn. Auchincloss reiterated BP’s transition from an international oil company (IOC) to an integrated energy company (IEC), with a promise of $2bn cost savings in the next few years.

Despite these announcements, BP’s share price remains at a discount compared to other oil majors like Shell, which itself is at a discount to American competitors Chevron and Exxon. This valuation reflects BP’s ambitious strategy to invest more capital in non-fossil fuel projects, such as biofuels, renewables, and electric charging points, a move that has been scrutinized by the market.

BP’s transition strategy, which envisions a 25% reduction in oil and gas production to 2m barrels a day by 2030, is more ambitious than most of its major competitors. This has led some to call for less ambition and a longer commitment to oil and gas production.

Auchincloss, who describes himself as a pragmatist, has left room for flexibility in his strategy. His recent comments about prioritizing high-return development projects could potentially lead to a slight increase in oil and gas production without constituting a complete reversal of strategy. It’s important to note that the 2030 production figure is an “aim” rather than a “target”.

BP asserts that it can achieve 15% returns from biofuels and electric charging, comparable to the returns from oil and gas. While achieving similar returns from renewables, primarily wind and solar, is more challenging, BP believes that double-digit returns are still possible if these assets are integrated with other parts of its business, particularly the energy trading division.

The challenge lies in convincing investors of the credibility of these figures. BP’s “transition growth engines” won’t significantly impact overall earnings until the end of the decade, which requires investors to trust in the company’s long-term strategy.

However, there are currently no compelling reasons for BP to change its course. The company has not made any significant missteps, except for a setback with wind projects in the US. Furthermore, the $14bn share buy-backs over two years, equivalent to 14% of the current market capitalization, provide some support for the share price. Lastly, the strategy of diversifying investments beyond oil and gas for a more balanced earnings profile could prove to be a wise decision by 2030. Therefore, strategic adjustments, rather than a complete overhaul, are what’s needed at this point.

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Inflation and Confidence in Federal Reserve:

Joachim Nagel, a member of the ECB Governing Council and President of the Deutsche Bundesbank, warned on Tuesday that various factors, including demographic trends, could lead to higher inflation in the future. He assured that necessary actions would be taken if upward price pressures re-emerge in the medium term.

A recent Gallup poll revealed that public confidence in Jerome Powell, the U.S. Federal Reserve chairman, is nearing a historic low. The poll showed that only 39% of U.S. adults have confidence in Powell’s ability to make the right decisions for the economy. This is a slight increase from 36% a year ago, but still within the poll’s margin of error. Political factors, including former President Trump’s insinuations about Powell’s political influence, have contributed to these low ratings.

Last week, the Euro regained stability due to two key factors that negatively impacted the Dollar: the Federal Reserve’s relaxed stance on the inflation increase in Q1, and a weaker-than-anticipated non-farm payroll report for April. This led to a 0.63% weekly rally in the Euro-Dollar exchange rate, marking the third consecutive week of gains.

Despite the overall outlook still appearing soft, the Euro is currently benefiting from this improved short-term perspective. For the first time in two months, the 1-week EUR/USD risk reversal skew has turned in favor of calls, indicating a growing bullish sentiment towards the Euro in the near term.

Kit Juckes, a strategist at Société Générale, suggests that a rise above 1.08 could pave the way for additional gains. However, such a move would need a catalyst, which Juckes believes could be next week’s U.S. CPI data. If the data falls short of expectations, it could trigger a significant rise in the Euro.

According to FxPro’s Kuptsikevich, market bulls are persistently attempting to breach this resistance, finding the Euro appealing at its current price levels. The sentiment on the Euro-Dollar is currently very balanced, making it an opportune time to observe the next move. A sharp change of around 1% in either direction could indicate the start of a relatively long trend.

In terms of levels, if EURUSD surpasses the 1.0850 level, it could potentially rise to the 1.1050 area. Conversely, a drop below 1.0650 could lead buyers to regroup around the 1.05 area, possibly triggering a further downward trend.

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Israel’s Control of Rafah Crossing:

On May 7, Israeli military forces took control of the Palestinian side of the Rafah crossing between Gaza and Egypt, effectively closing the humanitarian aid channel to Gaza. This move was condemned by Egypt and several other parties. Despite Hamas agreeing to the terms of a truce deal, Israel’s core demands were not met, leading to this action.

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Dollar Regains Momentum As Yen Struggle:

The offshore yuan has recently pulled back from a three-month high, currently standing at 7.2247 per dollar, driven by expectations of further policy stimulus from Beijing to bolster its economy.

The yen, on the other hand, has slightly moved away from its peak of 151.86 per dollar, which was achieved last week due to suspected intervention from Japanese authorities to support the depreciating currency. However, analysts believe that any intervention from Tokyo would only provide temporary relief for the yen, considering the significant interest rate differentials between the U.S. and Japan.

Bank of Japan Governor Kazuo Ueda stated that the central bank would examine the impact of yen movements on inflation when guiding monetary policy. Finance Minister Shunichi Suzuki reiterated that authorities are prepared to respond to excessive volatility in the currency market.

The euro and New Zealand dollar each edged 0.02% lower to $1.0752 and $0.6000, respectively. Meanwhile, the greenback remained steady at 105.41 against a basket of currencies, a considerable distance from a one-month low it hit last week.

Investors’ focus continues to be on the pace and timing of Fed rate cuts, which are expected to influence currency movements. The latest weaker-than-expected U.S. jobs data and an easing bias from the U.S. central bank have reinforced expectations that rates will likely be lower by year-end.

Minneapolis Fed President Neel Kashkari’s recent comments that it is too early to confirm that inflation has definitely stalled did not significantly affect market pricing for rate cuts.

In other news, the sterling dipped 0.08% to $1.2499, ahead of the Bank of England’s policy decision on Thursday. Analysts anticipate that the central bank may start cutting rates as early as June. The Australian dollar fell 0.2% to $0.6585, partly due to a less hawkish outlook from the Reserve Bank of Australia than expected after it held interest rates steady on Tuesday.

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China-West Divide Threatens ‘Reversal’ For Global Economy, IMF Official Warns:

Gita Gopinath, a top official with the International Monetary Fund (IMF), has expressed concern over the economic consequences of the ongoing strained relations between China and the West. She warns that the global economy could face severe repercussions if this discord continues. The world is currently divided into three major blocs – China-leaning, US-leaning, and nonaligned countries. This division is leading to a significant reversal of the gains from economic integration and a retreat from global rules of engagement.

The escalating rivalry between the US and China, along with the war in Ukraine, has increased geopolitical uncertainty. Economic fragmentation, although not as severe as during the Cold War, carries a higher potential cost due to increased global trade reliance. Trade between China and US-leaning countries has been negatively affected, with China’s share of US imports and the US’ share of China’s exports both decreasing.

Trade finance’s currency composition has also changed more for China-leaning countries than US-leaning ones. The proportion of US dollar-denominated trade finance payments among China-leaning countries has fallen, while the yuan-denominated share has doubled. This trend is expected to continue even if Russia is excluded from the China-leaning bloc.

Despite Beijing’s efforts to attract foreign investors, many international companies remain cautious due to China’s economic slowdown and ongoing geopolitical conflicts. Surveys from the American Chamber of Commerce in China and the European Chamber of Commerce in China reveal a reluctance to expand investment in China.

However, the erosion of direct US-China economic ties has been mitigated through third-party “connector countries” like Mexico and Vietnam. The cost of worsening divisions could vary greatly, with losses ranging from 0.2% of world GDP in a mild scenario to 7% in an extreme one. Low-income countries would be hit harder by trade fragmentation due to their greater reliance on agricultural imports and investment from more developed countries.

Gopinath suggests that pragmatic steps need to be taken to rebuild trust, starting with keeping open lines of communication. Dialogue between the US and China can help prevent the worst outcomes, and non-aligned countries can play a bigger role in keeping the world integrated. However, a report by the Economist Intelligence Unit predicts that economic and diplomatic ties between China and the US will worsen through the rest of the decade, regardless of the outcome of the US presidential elections in November.

China’s policy banks, including the China Development Bank and two other policy-oriented lenders, are shifting their funding strategy amidst a strong rally in the Chinese bond market. Instead of relying on the People’s Bank of China (PBOC) for funding, these banks are now rushing to raise debt.

In April, these banks repaid a net 343 billion yuan ($48 billion) of funds under the PBOC’s Pledged Supplemental Lending (PSL) program, marking the largest repayment since data collection began in 2015. In contrast, bond sales by these banks reached 364.7 billion yuan last month, the highest level in nearly two decades.

This shift in funding strategy has implications for policymakers. While PSL lending is primarily dedicated to infrastructure and real estate projects, the policy banks may have more flexibility in utilizing the funds raised from bonds. However, by increasing supply in the bond market, these banks could help regulators curb a rally that has raised concerns.

Record low yields on several instruments have weakened demand for China’s currency as rates remain relatively high in the US and other markets. In response, officials have increased scrutiny of trading behavior and advised some banks to limit their exposure to bonds due to financial stability concerns.

The policy banks, which are key state-owned lenders that extend credit based on government priorities rather than profit, have seen yields on their five-year bonds fall to 2.15%, below the 2.25% interest rate on PSL loans. This demonstrates the relative attractiveness of funding in the market.

According to Zhong Linnan at GF Securities, the cost of financing from bond issuance is cheaper than the cost of PSL, making policy banks less inclined to roll over the PSL loans. The increased supply could eventually dampen the bond market rally, and the PBOC may even encourage policy banks to issue more securities to achieve this.

Despite the reduction in PSL credit to the policy banks, this does not necessarily indicate a withdrawal of support for major projects, including government-subsidized housing and urban village renovations. The Ministry of Finance recently announced it will provide billions of yuan of direct funding to assist more than a dozen qualified cities in renovating dilapidated public buildings and upgrading infrastructure.

Strategists at a US bank, led by Laura Wang and Jonathan Garner, have advised investors not to pursue recent gains at the index level. Instead, they suggest focusing on single-stock and thematic opportunities due to improved investor sentiment. They note that global investors’ fund positions have improved and there is less need to diversify away from the US and Japanese markets as geopolitical, yield, and FX factors are abating or reversing.

The recovery of Chinese equities from multiyear lows has sparked optimism that the market has bottomed out. However, opinions are divided, with some pointing to weak earnings growth and a deflating property sector as reasons for caution. The onshore CSI 300 Index and the Hang Seng Index have experienced fluctuations, with the latter showing signs of being overbought.

Despite Beijing’s efforts to deepen reform and expand opening-up, concerns remain about the effectiveness of these policies in addressing the property downturn. The real estate market continues to struggle, even as more cities relax home purchase restrictions to boost sales.

Skepticism persists, with Union Bancaire Privee suggesting that the recent outperformance of the Hang Seng is likely driven by internal flows from China and may not be supported by fundamentals. Bank of America Securities warns that the rally could be disrupted by factors such as geopolitical tensions, weaker macro data, and policy disappointment.

Morgan Stanley, one of the first Wall Street banks to downgrade Chinese stocks, has maintained its equal-weight rating. The firm also reduced targets for major Chinese stock benchmarks in January. Despite this, the MSCI China Index has rebounded by 14%. Looking ahead, Morgan Stanley sees geopolitical uncertainty, upcoming US elections, and EU trade controversy as potential challenges for Chinese equities.

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Gold Bars Are Selling Like Hot Cakes In Korea’s Convenience Stores And Vending Machines:

In South Korea, convenience stores have introduced a new hot-selling item – mini gold bars. The country’s leading convenience store chain, CU, in partnership with the Korea Minting and Security Printing Corporation (KOMSCO), has been offering these gold bars in various sizes. The bars, which weigh between 0.1 gram and 1.87 grams, have been available since April and are selling rapidly.

Interestingly, the 1 gram bars, priced at 113,000 won each, sold out within two days. These gold bars come with personalized messages and designs. The majority of the buyers are people in their 30s, accounting for over 41% of total sales, followed by those in their 40s and 50s.

The demand for gold bars and coins in South Korea has increased by 27% year on year to 5 tons in the first quarter of this year, according to the World Gold Council. This surge is the sharpest quarterly increase in gold purchases in the country in over two years. Other convenience stores, like GS25, are also capitalizing on this trend by offering small gold wafers in vending machines.

The rise in gold demand is attributed to economic uncertainty and depreciation of the local currency, leading domestic investors to seek safe haven assets. The Korea Gold Exchange reports that gold prices have hit a record high of 456,000 won per 3.75 grams. Meanwhile, the Korean won has weakened by over 5% against the dollar this year.

The World Gold Council notes a growing interest in gold investment among younger Asians, despite record-high gold prices. This trend is also observed in China, where collecting 1 gram gold beans in glass jars has become popular among the youth. In fact, China overtook India in 2023 to become the world’s largest buyer of gold jewelry. In the U.S., retail giant Costco has become a popular destination for buying one ounce gold bars.

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Stocks And Bonds Wobble As The Global Economy Throws Off Mixed Signals:

U.S. Economy Resilience: Despite predictions of a downturn, the U.S. economy has remained robust, with inflation rising to 2.7% in March from 2.5% in February. However, there are indications of potential weaknesses, with first-quarter growth and April’s employment figures falling short of expectations. As a result, traders are preparing for a prolonged period of higher rates, leading to increased bond yields and decreased prices. The anticipated number of Federal Reserve rate cuts has also decreased from six or seven to just two.

Slow Recovery in Europe: The economies of Britain and the euro zone, while not as strong as the U.S., are showing signs of recovery, suggesting that any rate cuts will be minimal. The euro zone economy returned to growth in the first quarter following a mild recession, and British output increased in January and February. Despite expectations of a June rate cut by the European Central Bank, bets on rate cuts have been reduced due to an inflation rate of 2.4% in April.

Fluctuating Commodities: Oil prices saw a significant increase in March and April due to fears of a broader Middle East conflict and supply disruptions. However, prices have since cooled, with the S&P Goldman Sachs commodities index down 4% since reaching a six-month high last month. This is a positive development for central bankers aiming to control inflation.

Stock Market Volatility: Stocks in developed economies fell around 4% in April after reaching record highs in March, but have since rallied in May. The relationship between stocks and the economy can be unpredictable, with good U.S. data sometimes boosting equities and other times causing them to fall. Despite this volatility, indexes remain close to record levels worldwide.

Strength of the Dollar: The dollar has surged almost 4% in 2024 due to bets on prolonged higher interest rates, drawing money back to the U.S. This has negatively impacted almost all other currencies, with India’s rupee hitting a record low in April and other currencies like Argentina’s peso and Brazil’s real also falling. A strong dollar can make U.S.-denominated debt harder to service and make imports more expensive, potentially leading to inflation. These currency concerns may make rate cuts less likely in emerging markets.

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🔥News releases on THIS WEEK :

07/05 Tue 8:00pm CAD Ivey PMI

08/05 Wed All Day EUR French Bank Holiday

08/05 Wed Tentative GBP 30-y Bond Auction

08/05 Wed 11:01pm USD 10-y Bond Auction

09/05 Thu All Day CHF, EUR(French,German) Bank Holiday

09/05 Thu 5:00pm GBP BOE Monetary Policy Report 

09/05 Thu 5:30pm GBP BOE Gov Bailey Speaks

09/05 Thu 6:30pm USD Unemployment Claims

09/05 Thu 11:01pm USD 30-y Bond Auction

10/05 Fri 9:35am JPY 30-y Bond Auction

10/05 Fri 12:00pm GBP GDP m/m & Goods trade balance

10/05 Fri 6:30pm CAD Employment Change

10/05 Fri 8:00pm USD Prelim UoM Consumer Sentiment

N.B. Time mentioned here is on Gmt +6

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Sources :
– CNBC, Bloomberg, Reuters, Fastbull, Yahoo Finance, CNN, ForexFactory News, Myfxbook News etc

Prepared to you by “Akif Matin“

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