Inflation continues to dominate market movements with the latest US inflation printing slightly higher than market expectations and coming in at 8.2%. This seems to be enough to reenforce the Feds hawkish stance and the market now expects the aggressive hiking to continue. This is driving many economies into recession, and together with China’s continued zero Covid approach does not bode well for the commodities complex, hence the sea of red in the tables below. Oil may however yet prove to be the outlier.
OPEC+ took the decision to cut production by a further 2 million barrels per day at their most recent meeting in Vienna, earning the frosty displeasure of the USA who have been selling their strategic reserves in an attempt to cool oil prices. Saudi Arabia who depends on the USA to provide protection against Iran, comes in for specific ridicule from the Biden administration, despite the oil rich country protesting that the decision to cut was unanimous. Brent crude has rallied as a result. Uncertain economic outlooks are weighing on fossil fuel prices, but the fact remains that capacity remains limited and under investment in fossil fuel infrastructure over the prior 10-years remains a bullish factor for the fossil fuel complex. Europe’s attempts to reduce reliance on Russian supply will also be tested as winter in the northern hemisphere sets in. Gasoil is a particular refined product worth watching, should ship borne LNG not prove sufficient to plug the Russian gas hole. Note in particular the dislocation between the Brent and Gasoil 52-week price changes in the table below.
Recession concerns are well entrenched, and the base metals complex is baring the brunt of the uncertain future. Don’t expect any help from China as the pursuit of the holy grail of zero Covid continues. China also has other problems such as a need to transition to more domestic consumption and increase per capita wealth for a population of vast size and low birth rate. Their prodigious growth rates are now a thing of the past.
Flight to safety and high yields on US bonds leaves Gold on the back foot. High inflation should have provided more support for the yellow metal, but an unprecedented rate of Fed hikes will keep it under pressure for now. Palladium and platinum are backing the trend with gains with the former approaching it’s August highs of $2,300. If it manages to break this technical barrier, the next resistance level would be at $2,482 and $2,500. Some of the rationale for the rally is due to South African miner, Sibanye Stillwater disputes over wage hikes.
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