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Marketmind: Judgement Day for the Fed

A look at the day ahead from Saikat Chatterjee.

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Marketmind: Judgement Day for the Fed
© Reuters. FILE PHOTO: The Federal Reserve building is seen in Washington, U.S., October 20, 2021. REUTERS/Joshua Roberts

A look at the day ahead from Saikat Chatterjee.

One of the most anticipated market events of the year is here.

The U.S. Federal Reserve is expected on Wednesday to detail plans to end its pandemic-era bond purchases by mid-2022 with a $15 billion per month “taper” broadly priced in.

What will be more decisive for traders is whether Chair Jerome Powell sticks to the view of transitional inflation based on one-time effects such as supply chains shortages or signals that these factors will have a more persistent and sustainable effect on inflation.

If he leans towards the latter, money markets which are already pricing in an astonishing 80 basis points of rate hikes by the end-2022, would get a further boost. That would increase pressure on policymakers to advance their projection for a first rate increase from 2023.

But even if the Fed manages to strike a delicate balancing act, the greenback is likely to hold on to a sizeable chunk of 2021’s near 4.5% gain for another year, according to a Reuters poll. That’s because of a widening rate differentials versus its rivals.

Equity markets, which have been largely impervious to the fireworks in bond markets in recent weeks, could take a tumble meanwhile if yields resume their rise again.

Ahead of the Fed decision, U.S. stock futures are drifting lower and European stock futures are consolidating gains. Risk appetite is slightly on the back foot as new locally transmitted COVID-19 cases in China spiked to a near three-month high and Premier Li Keqiang warned of downward pressure on the economy.

Benchmark yields on 10-year U.S. debt is holding well below last week’s highs while stock and currency market volatility, though slightly higher, remain pinned near 2021 lows.

Elsewhere, oil prices fell as industry data pointed to a big build up in U.S. oil stocks and pressure mounted on oil producing group OPEC to increase supply.

Key developments that should provide more direction to markets on Wednesday:

– Central bank speaker corner: Lagarde, Centeno, Villeroy

Credit Suisse (SIX:) to tighten the reins after string of scandals

– Composite PMIs: UK, U.S.

– ADP private payrolls

– Lufthansa returns to profit as travel curbs ease, Online fashion retailer Zalando’s profit falls

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Economy

Oil Prices Fall amid Protests in China

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Oil prices decline

Oil prices fell on Monday amid a general decline in investor appetite for risk amid information about the ongoing protests in China against vested restrictions.

The cost of January futures on Brent crude oil on London’s ICE Futures exchange was $81.31 per barrel on Monday, down $2.32 (2.77%) from the close of the previous session. At the close of trading on Friday, those contracts fell $1.71 per barrel to $83.63.

Oil prices decline – what’s going on in the market?

The price of WTI futures for January crude fell by $2.31 (3.03%) to $73.97 per barrel in electronic trading on the New York Mercantile Exchange (NYMEX). By closing of previous trades, the cost of these contracts decreased by $1.66 (2.1%) to $76.28 per barrel. Brent and WTI gained 4.6% and 4.8%, respectively, last week.

According to Bloomberg, protests were held in cities across the country, including the capital Beijing, as well as Shanghai, Xinjiang, and Wuhan, which was originally the epicenter of the COVID-19 spread.

That contributes to a stronger U.S. dollar, which reduces the attractiveness of investments in crude, and also raises the possibility of even more significant tightening of restrictions by Chinese authorities, the agency said.

“The outlook for the oil market remains unfavorable and the events of this weekend in China do not add to the positive,” notes Warren Patterson, who is in charge of commodities strategy at ING Groep NV in Singapore.

According to the forecast of analytical company Kpler, oil demand in China in the fourth quarter will decrease to 15.11 million barrels per day (bpd) compared to 15.82 million bpd a year earlier.

Earlier we reported that Russia will ban the sale of its oil to countries that have imposed a price ceiling.

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Economy

Oil Russia ban news: Russia will ban the sale of its oil to countries that have imposed a price ceiling

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oil Russia ban

Will Russia sell oil to Europe? The administration of President Vladimir Putin is preparing an order prohibiting Russian companies and any trader from buying Russian oil to sell raw materials to countries and companies that have imposed a price ceiling on Moscow. Bloomberg news agency wrote this, citing a report from sources.

“The Kremlin is preparing a presidential decree banning Russian companies and any traders buying national oil from selling it to anyone who participates in the price ceiling,” the publication wrote.

According to the newspaper’s interlocutors, this would prohibit any mention of the price ceiling in contracts for Russian crude, as well as transferring it to countries that have joined the price ceiling for the natural resource.

In the first half of September, the press service of the US Treasury Department said that the USA, together with its allies from G7 (Great Britain, Germany, Italy, Canada, France and Japan) and the European Union (EU) would impose a ban on marine transportation of Russian oil on December 5 and oil products – on February 5.

Earlier we reported that EU negotiations on limiting the prices of Russian oil reached a deadlock today.

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Economy

EU talks on restrictions on Russian crude oil prices today stalled

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russian crude oil price today

Negotiations between the European Union countries about the “ceiling” of Russian crude oil prices today reached an impasse; Bloomberg reported, according to its sources.

Representatives of the bloc cannot reach an agreement on the ceiling price of Russian oil. According to the agency, the proposed European Commission limit of $65-70 per barrel, Poland and the Baltic countries believe “too generous,” while Greece and Malta, which is actively engaged in transporting fuel, do not want the limit to fall below $ 70. Recall that the Russian response to the oil price cap was negative. The Russian government has officially said that it will only sell oil at market prices.

“We are looking for ways to make this solution work and we are trying to find a common ground to implement it in a perfectly pragmatic and efficient way, while avoiding that it may cause excessive inconvenience to the European Union,” said German Chancellor Olaf Scholz.

Earlier, we reported that the SEC fined Goldman Sachs $4 million for non-compliance with ESG fund principles.

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