Weekly Commodities Update Weekly Commodities Update Weekly Commodities Update

Market Insights Today: RBA on tap, Gold downtrend extends ahead of FOMC – 1 November 2022

Equities 5 minutes to read
APAC Research

Summary:  A return to hawkish expectations for the FOMC and risk-off from weak China data as well as possible issues in Russia-Ukraine grain deal saw markets tumble on Monday and US 10-year yields reversed back to 4.10%. Dollar strength returned as well, with gains most pronounced against the sterling and yuan. However, demand concerns returned, while oil also retreated with President Biden’s hopes of a windfall tax on profits of US energy companies weighing as well. Gold extended its downtrend with the surge in yields. Reserve Bank of Australia on watch in the day ahead, with some key Japanese names like Toyota and Sony also reporting earnings.


What is happening in markets?

The Nasdaq 100 (USNAS100.I) & S&P 500 (US500.I) fall on Monday ahead of Fed, but hold onto monthly gains

US stocks fell into the red on their last trading day of the month with end of month rebalancing coming into play, while stocks were also on the back foot as bond yield climbed ahead of Wednesday's Fed decision. Still the S&P500 held onto a monthly gain of 8%, but on Monday the index dropped 0.75%. The Nasdaq fell 1%, but held a 4% October gain. Most Treasury yields rose, with 10-year notes up to around 4.05%, while the dollar climbed against every G-10 partner, save the kiwi. Oil and gold both retreated. Energy shares whipsawed on news that President Joe Biden will call on Congress to consider tax penalties for oil producers accruing record profits. JPMorgan Chase Marko Kolanovic is joining strategists who believe the aggressive Fed hiking is nearing an end. He thinks the Fed will raise rates by 50 basis points in December and pause after one more 25-basis-point hike in the first quarter. Apple (AAPL) shares fell 1.5% with iPhone’s Foxconn plant in central China grappling with virus outbreak.  Fertilizer giant, Archer Daniels (ADM) rose 2.2% with traders expecting higher agricultural prices amid supply concerns from added geopolitical tension.

Australia’s ASX200 (ASXSP200.1) futures suggest a 0.15% rise on Tuesday, ahead of the RBA rising rates today

The Reserve Bank of Australia is expected to deliver its 2nd straight month of 0.25% hikes at today’s meeting, according to Bloomberg consensus, which will take the cash rate from 2.6% to 2.85%. However it will be a tough decision, with stronger-than-expected third-quarter inflation data from last week, and hot retail and credit data yesterday giving room for a potential 50-bp (0.5%) hike. This could trigger a knee jerk jump in the Aussie dollar vs the US (AUDUSD), however we maintain our bearish view of the AUDUSD given the Fed has more ammo to aggressively rise. Also note, Governor Philip Lowe has regularly wrong-footed forecasts. Still, swaps imply only a 20% chance of an outsized move, and Australian 10-year yields are a full 25 bps below similar-dated Treasuries, meaning there are expectations that RBA will take a softer line than the Fed. The RBA will last month previously noting loan arrears and insolvencies have picked up in Australia, while housing loan commitments declined -  ‘demonstrating the effect of high interest rates on housing’. This demonstrates, the RBA has a tough task of rising rates to slow inflation, without compromising the health of the economy.

FX: Dollar returns to gains ahead of FOMC

Dollar started the week on a firmer note as WSJ Timiraos comments turned more hawkish over the weekend after dovish Fed expectations possibly went a bit far. The worst performer was GBP, and we had raised concerns yesterday that it was pricing in all the good news so there was scope for disappointment. GBPUSD broke below 1.1500 with EURGBP also reversing back higher to 0.8620 despite EURUSD weakness to sub-0.99. USDJPY rose back above 148.50, with US 10-year Treasury yields touching 4.1% at one point. Japan’s Finance Ministry data showed a record USD 42.8bln was spent on multiple interventions in the FX market last month to attempt to cushion the Yen’s fall. The Chinese yuan continued to slide, USDCNH rose to 7.34 and the onshore spot USDCNY seen close to 15-year highs of 7.30+ at Monday’s close.

Crude oil (CLX2 & LCOZ2) worried about oil demand

Crude oil prices were lower on Monday as concerns of weaker demand weighed on sentiment with the Fed commentary from whisperer Nick Timiraos shifting towards a hawkish stance again. Meanwhile, China’s PMIs fell below the 50 mark which separates expansion and contraction. On the other hand, OPEC’s World Oil Outlook estimates demand will climb 13% to reach 109.5mb/d in 2035, then hold around that level for another decade and secretary-general Haitham al Ghais said that the oil supply surplus was the main reason for the decision to cut output. There were also some reports suggesting that President Biden is considering a potential windfall tax on US energy companies. WTI futures slid towards $86/barrel.

Gold (XAUUSD) in a downtrend

Gold (XAUUSD) fell for a third consecutive day approaching the recent support area $1,625 as US dollar broadly strengthened with 10 year treasury yield touching 4.10% at one point on Monday. With the Fed poised for another 75bps rate hike this week, pressure on gold could increase, but we continue to see fundamental strength in gold especially given the higher-for-longer inflation expectation. But as a minimum gold needs to break above $1730 before an end to the month-long downtrend can be called.

 

What to consider?

What next for the RBA after peak hawkishness?

The Reserve Bank of Australia meets today and is expected to continue with a smaller pace of rate hikes with 25bps priced in despite a hotter than expected Q3 CPI. Q3 CPI rose by 7.3% YoY from previous print of 6.1%, coming in higher than expectations. RBA’s preferred Trimmed Mean CPI was seen at 6.1% vs. expected 5.6% (prev. 4.9%), while PPI also accelerated in Q3 to 6.4% from 5.6% previously. There are, therefore, some calls for an outsized 50bps rate hike as well as inflation continues to inch above the central bank’s 2-3% target range. An update on the latest growth and inflation projections will also be seen along with today’s rate decision. AUDUSD will need a clearly larger than expected rate hike of 50bps, or a very hawkish commentary with a 25bps rate hike to make any substantial gains. If RBA tows the line, focus shifts to USD and the Fed meeting on Wednesday. AUDNZD is also key to watch, with the 1.1000 handle on test.

Eurozone GDP and inflation prints continue to make the ECB’s job tougher

Eurozone inflation data for October YoY printed another record as it soared to 10.7% (prev. 9.9%), and well above the median Bloomberg expectation of 10.3%. Meanwhile, Q3 GDP growth slowed to 0.2% QoQ or 2.1% YoY (prev. 0.8% QoQ, 4.1% YoY). While mild whether and full storage hasn’t unleashed the full effects of energy shortages this year, the threat continues to loom and this could mean the macro story could deteriorate further.

China PMIs and Hong Kong GDP growth send red flags

China’s manufacturing and non-manufacturing PMI both plunged into contractionary territory in October with Covid curbs likely continuing to weigh on demand and manufacturing ahead of the CCP meeting. China's official manufacturing PMI declined to 49.2 in October after a brief rebound to 50.1 in September following a two-month decline. Meanwhile, services activity fell to 48.7 in October from 50.6 last month. Also, Hong Kong recorded its worst quarter in over two years, with Q3 GDP growth coming in at -4.5% YoY vs. expectations of -0.8%. The QoQ growth was also in negative territory at -2.6%, signalling recession concerns if such a performance continues despite the economy’s reopening.

Key Japanese earnings on watch

Big Japanese names Toyota (7203) and Sony (6758) report earnings today. While high inflation and interest rates remain a key consideration to watch for consumer spending trends, the effect of a weak yen will also be key to consider. Sony will be key to watch after the US tech tumble last week, and consensus is looking for a 10% drop in its operating profit from a year ago. Toyoto will likely continue to highlight the supply chain pressures, but possible buyback announcements could support.

 

For a global look at markets – tune into our Podcast.

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.