Commodities
Morning bid: Fed fears overwhelm AI theme, gold recoils
A look at the day ahead in U.S. and global markets from Mike Dolan
And then there was one.
In an extraordinary turnabout in just five months, financial markets now fully price just one quarter-point interest rate cut from the Federal Reserve this year – compared to the six built into futures prices at the start of 2024.
The good news is that’s largely down to the sheer strength of the ongoing U.S. expansion – the bad news is that very strength makes it harder for the Fed to see inflation hitting its target and keeps it hesitating on a first rate cut.
Thursday’s reversal of fortunes on Wall St reflected all that clearly, with surprisingly strong business and labor market updates seeding the worst day of the month for despite Nvidia (NASDAQ:)’s near 10% surge on another blowout earnings report infused by the artificial intelligence boom.
Even though the broader tech sector ended the day higher, the 10 other major stock sectors were left in the red. And the equal-weighted S&P500 lost 1.4%.
Fed fears 1 – AI 0.
With just 35 basis points of Fed easing now priced for the year, two-year Treasury yields climbed back to within 4bps of the 5% threshold. The dollar jumped back to its best level since mid May and that in turn triggered a reversal in lofty gold prices – clocking their worst day in month and worst week of the year.
The bounced back more than a point from pre-pandemic lows.
A so-called “bear-flattening” of the yield curve saw the inversion of the 2-10 year yield gap deepen to its most negative this year – with yields at both tenures rising but short rates up by more.
The yield curve has been inverted for almost two years solid now and its reliability as a harbinger of recession has been shot to bits – underscoring the peculiarity of this particular cycle and how the Fed may be struggling to cool it down.
Ahead of the U.S. Memorial Day holiday on Monday, all the major price indicators have given back a bit of Thursday’s moves – with up 0.2% ahead of the bell and both Treasury yields and the dollar off a touch.
But the Fed rate jitters rippled across the world overnight, with bourses in Tokyo, Seoul, Hong Kong and Shanghai losing more than 1% on Friday.
China’s ongoing military exercises around Taiwan have not helped investor confidence.
Europe’s two-day loss continued – with regional interest rate and political concerns of its own.
Even though the European Central Bank is still nailed on to deliver its first rate cut next month, unexpected strength in May business readings and a surprising acceleration of negotiated wage settlements in the first quarter have dragged market pricing for full-year ECB easing back below 60bp.
The rethink of the Bank of England’s trajectory this week has been even more dramatic as sticky UK inflation readings combined with news of a snap election for July 4.
Although Friday’s data showed UK retail sales plunging far more than forecast last month, money markets have wiped out chances of a BoE cut next month and now only see a 1-in-3 chance of a move in August.
Sterling, whose broader trade-weighted index is back up at 8-year highs to pre-Brexit referendum levels, recaptured some of Thursday’s losses against the dollar.
Elsewhere, traders monitored the G7 finance meeting in Italy and a Friday speech from Fed governor Chris Waller in Iceland.
In company news, a 7.55% tumble in Boeing (NYSE:) on Thursday after the U.S. planemaker forecast negative free cash flow in 2024 accounted for over 90 points to the downside for the blue-chip .
Ticketmaster-owner Live Nation slumped almost 8% after the U.S. Justice Department along with a group of 30 states and the District of Columbia Thursday sued to break up the concert promoter.
In Europe on Friday, shares of Renault (EPA:) rose 4% after the French carmaker announced a share buyback plan. And Britain’s National Grid (LON:) regained nearly all of Thursday’s 10% plunge on plans to raise about 7 billion pounds ($8.9 billion) in a rights issue.
Abrdn shares slipped after the UK fund manager’s CEO Stephen Bird stepped down.
Key diary items that may provide direction to U.S. markets later on Friday:
* U.S. April durable goods orders, University of Michigan’s final May household survey reading
* G7 finance ministers and central bank Governors meet in Stresa, Italy
* Federal Reserve Board Governor Christopher Waller speaks
* U.S. corporate earnings: Workday (NASDAQ:)
(By Mike Dolan, editing by Nick Macfie mike.dolan@thomsonreuters.com)
Investing.com — Oil prices settled lower Friday, ending the week with a loss as weaker U.S. nonfarm payrolls stoked concerns about an economic-led slowdown in crude demand.
At 2:30 p.m. ET (1430 GMT), the futures (WTI) traded fell 2.1% to settle at $67.67 a barrel, while contract fell 2.2% to $71.06 per barrel.
U.S. economic slowdown worries resurface after weak jobs report
The US economy added fewer jobs than anticipated in August, but rose from a sharply revised July figure, according to Labor Department data that could factor into the Federal Reserve’s next policy decisions.
Nonfarm payrolls came in at 142,000 last month, up from a downwardly-revised mark of 89,000 in July. Economists had called for a reading of 164,000, up from the initial July mark of 114,000.
Following the release, bets that the Fed will introduce a deeper 50 basis-point rate cut — rather than a shallower 25 basis-point reduction — increased.
Concerns about the demand come just a day after OPEC+ said it had agreed to postpone a planned increase in oil production for October and November.
U.S., Europe working on Iran sanctions
Geopolitical tensions ratcheted up on Friday after the U.S. and Europe they were working on sanctions to impose on Iran after the Tehran sent missiles to Russia.
The U.S. had previously warned Iran about transferring missiles to Russia, saying it would represent a major escalation in Iran’s support of Russia’s war against Ukraine.
(Reuters) – Goldman Sachs adjusted its expectations for OPEC+ oil production saying it now expects three months of production increases starting from December instead of October, the bank said in a note on Friday.
OPEC+ has agreed to delay a planned oil output increase for October and November, the producers group said on Thursday after crude prices hit their lowest in nine months, adding it could further pause or reverse the hikes if needed.
However Goldman Sachs maintained its range of $70-85 per barrel and a December 2025 Brent forecast at $74 per barrel.
The investment bank expects the effects of a modest reduction in OPEC+ supply in the upcoming months to be counterbalanced by easing effects from the current softness in China’s demand and faster-than-expected recovery of Libya’s supply.
“We still see the risks to our $70-85 range as skewed to the downside given high spare capacity, and downside risks to demand from weakness in China and potential trade tensions,” Goldman Sachs said.
Brent crude futures were down $1.63, or 2.24%, to $71.06 a barrel on Friday, their lowest level since December 2021. U.S. West Texas Intermediate crude futures fell $1.48 on Friday, or 2.14%, to $67.67, their lowest since June 2023. [O/R]
Investing.com — Strategists at Citi Research said oil prices could decline to around $60 per barrel by 2025, citing a significant market surplus as the primary driver.
While recent supply disruptions in Libya and a delayed production cut unwinding by OPEC+ have offered short-term support for Brent prices in the $70-72 range, Citi views this as temporary.
“At the time of writing, markets have not reacted to the OPEC+ decision, with Brent around flat to the 4 September close. Still, the Libyan situation could take months rather than a week to resolve, strategists wrote.
They highlight the likelihood of a strong market surplus emerging next year, pushing prices lower.
“We recommend selling on a bounce toward ~$80 Brent, as we look ahead to moves down to the $60 range in 2025 as a sizeable market surplus emerges,” the note states.
OPEC+ has delayed the start of its planned production cut unwind from October 2024 to December 2024, with the process now set to conclude by the end of 2025. This decision comes in response to recent market weakness and price declines, despite ongoing disruptions to Libyan oil supplies and broader economic concerns in the U.S. and China.
Separately, Bank of America’s Commodities Research team has revised down its price forecast to $75 per barrel for the second half of 2024, down from nearly $90, and for 2025, reduced from $80.
The team cites concerns about growing global oil inventories despite assuming OPEC+ will delay planned production increases. They note that weaker demand growth, combined with record OPEC+ spare capacity exceeding 5 million barrels per day, has dimmed the outlook for oil prices.
“In effect, we now see Brent oil prices moving from the top toward the middle of our unchanged $60-80/bbl medium-term range faster than previously warned,” BofA strategists said. This surplus in capacity, along with slower demand, also reduces the risk of price spikes from potential geopolitical disruptions.
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