Oil at new highs, Nasdaq and Banks down again

Nasdaq and the Bank sector lead markets lower for a second day, down 0.6% and 1.0% at time of writing. The VIX, Wall Street’s fear index is back to 18, a 4-week high. Crude oil prices were again the standout, rising 1.0% to $83.4 per barrel, fueled by continuing Saudi and Russian production cuts, and strong US economic demand. Meanwhile, the inflation outlook highlights a major gulf between the US, with sticky inflation, and China, now in deflation.

Bottom-line: risk-off.

TODAY’S MAJOR NEWS

OPEC’s oil price targeting good for oil, bad for economies and equity markets

StoneX energy analyst Harry Altham recently discussed tight conditions in the oil sector which might lift crude to $90 per barrel. Peak oil prices were $105.8 in June 2022. While we have yet to see evidence in the forward curve that demonstrates the degree of tightness which could justify this price, we have seen the oil price add $10 in the last four weeks. The next four weeks will be telling as export cuts by Russia, and an additional 140,000 parrel per day cut from Saudi Arabia, come into play. Altham concludes that “price determinism” by OPEC+, targeting higher prices, opens the door to anomaly price levels and a continuing upward bias. Historically, high oil prices have been bad for economies and equity markets alike.

Worse US inflation data tomorrow would be bad for markets

Analyst estimates for tomorrow morning’s consumer price index – 3.3% headline inflation, 4.8% core inflation – will hardly pleaser the Fed, but traders are choosing to look past that, as it has for much of the past 18 months. It’s interesting to see the average analyst estimates so low, considering that the Cleveland Fed’s inflation nowcaster tool, which predicts 3.4% headline, and 4.9% core. The Cleveland Fed’s model has a decent track record, and its numbers suggest the increased possibility of a surprise in tomorrow’s numbers to the upside, with a negative impact on financial markets.

China in deflation, is this its ‘lost decade’?

China today looks eerily like the Japan of the lost decade (1991-2001), when deflation and sluggish economy sapped confidence. China officially in a period of deflation, according to analysis by the StoneX Shanghai office, raising additional concerns about the health of its economy. Analysts worry about a deeper contraction once the boost from holiday related expenses fades.

China’s CPI rose 0.2% month-on-month in July, reflecting a seasonal uptick in holiday spending by consumers, but it was down 0.3% year-on-year, signaling a period of deflation over the past year. Core CPI inflation, excluding food and energy, remained positive, rising 0.8% year-on-year, but that was far below the 3% target set by the government at the beginning of the year.

Holiday driven entertainment and travel provided the biggest boost for prices over the past month, rising 1.3% month-on-month. Gains were more modest for rental prices, which rose 0.1%. Similar gains were seen for medical care, while clothing prices fell 0.3% on the month, and food and beverage prices dropped by 0.6% on the month.

China’s producer price index ex-factory fell 4.4% year-on-year in July, after falling by 5.4% in June. China’s PPI was down for the eighth consecutive month in June. Much of the decline is tied to China’s declining demand for exportable goods as Europe and the United States decouple from China.

TODAY’S MAJOR MARKETS

Equity markets sell off again

• Equity markets sold off again this morning, with the Nasdaq and Russell 2000 down 0.6%, while the S&P 500 was off 0.2%
• Global markets were mixed, with the FTSE 100 and DAX up 0.8% and 0.7%, respectively, while the Nikkei 225 was off 0.5%
• The VIX, Wall Street’s fear index, rose to 18, its highest level for 4 weeks

Currencies and Bonds unchanged

• The dollar index was unchanged against a basket of currencies to 102.5
• The Euro and Yen fell by 0.2% against the dollar, while Sterling was up 0.1%
• Bonds were unchanged, with 2-year and 10-year Treasuries yielding 4.81% and 4.00%

Commodities see oil reach new highs

• Gold and Silver prices were off 0.5% and 0.3% respectively, at $1,950 per ounce and $22.7 per ounce
• Crude oil prices were again the standout, rising 1.0% to $83.4 per barrel, a new year-to-date high
• December grain and oilseed markets are mixed to weaker ahead of Friday's USDA WASDE crop report
• Soybeans have the tightest balance sheet going into Friday's report, leaving traders holding short positions with perhaps the greater risk, supporting prices today
• Meanwhile, wheat prices continue to get weighed down by weak demand as Russia continues to dump cheap supplies on the market
• Cheap wheat is a drag to corn prices, which also have weak exports.

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]

Market outlook by Paul Walton, Financial Writer: [email protected]