On July 4, oil prices rebounded despite concerns of tight supplies, leading to world stocks receiving a much-needed push during the US holiday weekend. The development comes as a relief, as lower oil output from the Organization of the Petroleum Exporting Countries (OPEC), unrest in Libya, and sanctions on Russia have outweighed the fears of a global recession. Warren Patterson, the head of commodity research at ING said, “Oil fundamentals remain supportive… Clearly OPEC is still struggling to hit its agreed output levels.”
As per a Reuters survey released on July 1, the output of 10 OPEC members fell in June by 100,000 barrels per day (BPD), to 28.52 million BPD, off their promised increase of about 275,000 BPD. Brent crude remained constant at $111.59, and US crude eased 12 cents to $108.32 per barrel, while both fell over $1 in early trade. Rising inflation and interest rates led to global equities hitting an 18-month low in June, however, there have been minor gains since then. “Some markets are starting to find their footing but there’s a lot of volatility right now,” said Sebastien Galy, senior macro strategist at Nordea Asset Management, pointing to risks from the release of key US non-farm payrolls data later this week.
This week saw the MSCI’s world equity index rise by 0.25 percent, and the MSCI’s broadest index of Asia-Pacific shares outside Japan increased by 0.14 percent, after losing 1.8 percent last week. European stocks recovered by 0.7 percent, and Britain’s FTSE rose over 1 percent, due to the gains in oil and gas companies. Chinese blue chips closed 0.7 percent higher, due to a 4.65 percent surge in Chinese healthcare stocks. Japan’s Nikkei added 0.84 percent, though South Korea fell 0.22 percent. S&P 500 futures and Nasdaq futures fell 0.7 percent and 0.8 percent respectively, however, recent soft US data suggested downside risks for this week’s June payrolls report.
Warnings of the US going through a technical recession have surfaced due to the Atlanta Federal Reserve’s much-watched GDP Now forecast sliding to an annualised -2.1 percent for the second quarter. Job growth has been forecasted to slow down to 270,000 in June as per a payroll report on Friday. Further, the report suggested that average earnings are expected to slowly touch 5.0 percent. The Fed’s June policy meeting minutes on June 29 are expected to sound hawkish, even though the committee chose to hike rates by a super-sized 75 basis points. The market is pricing in around an 85 percent chance of another hike of 75 basis points this month, and rates at 3.25-3.5 percent by year-end. Analysts at NAB said, “But the market has also moved to price in an increasingly aggressive rate cut profile for the Fed into 2023 and 2024, consistent with a growing chance of recession.” They further added, “Around 60bps of Fed cuts are now priced in for 2023.” Cash Treasuries were shut but futures extended their gains. This means that 10-year yields were holding around 2.88 percent, having fallen 61 basis points from their June peak.
German 10-year government bond yields, the benchmark for the eurozone, bounced 5 basis points to 1.276 percent after falling last week, as investors rushed to safe-haven bonds. Bond yields move inversely to price. Investor demand for most of the liquid safe harbour has favoured the US dollar, which remains steady with a nearly two-decade high against competitors at 105.09. In other currencies, the euro was flat at $1.0425, not far from its recent five-year trough of $1.0349. For the first time in a decade, the European Central Bank plans to raise interest rates in July, and the euro could get a push if it decides on a more aggressive half-point move. The Japanese yen also attracted safe-haven flows late last week, dragging the dollar back to 135.38 yen from a 24-year top of 137.01, though it was up 0.18 percent on the day. Gold, however, was trading at $1,808 an ounce, down 0.13 percent after hitting a six-month low at $1,784 last week, indicating that the lack of impact of a high dollar and rising interest rates have not been kind to non-yielding gold.