Global Financial Markets in Brief
According to the Arab Federation of Capital Markets, over the previous week, US stocks surged while treasury yields plunged and the US dollar retreated after the latest consumer price index report showed that inflation slowed in October, a hopeful development for American consumers and welcome news for the Federal Reserve after months of stubbornly persistent price increases, and reinforcing hopes that the Federal Reserve would slow down rate increases. In parallel, oil prices picked up on Friday on easing recessionary fears, while gold prices jumped immediately on a weaker US dollar, to record their best weekly performance since March. In parallel, most cryptocurrencies continued to fall sharply over the week, as the markets reacted to the latest news surrounding FTX being hacked.
US Treasury yields tumble after promising inflation report
US Treasury yields tumbled across the board on Thursday after the October consumer price index report, a key inflation measure, showed that inflation cooled more than expected in October, signaling that price increases have possibly peaked and that the Fed will begin scaling back its hefty interest rate increases. In addition, US Treasury yields fell on Wednesday as market attention turned to the congressional midterm elections and traders anticipated inflation data. As such, the 10-year US Treasury yield plunged more than 35 basis points to 3.819%, falling below the psychological 4% level, while the yield on the 2-year Treasury fell by 37 basis points to 4.324%, to record the biggest daily drops in over a decade. However, it is worth mentioning that the takeaway from remarks made by a number of Fed officials on Thursday is that they are not going to declare victory in their inflation battle. Loretta Mester, the president of the Cleveland Fed, said the central bank needs to keep raising interest rates until price pressures dissipate more rapidly.
In details, the CPI report released Thursday showed that consumer prices rose 0.4% for the month and 7.7% for the 12 months ending October 31, less than the 7.9% that analysts had expected and down from 8.2% in the year through September. In fact, this was the smallest 12-month increase since the period ending January 2022. While that means inflation is still up, however some investors see this as a sign that inflation has peaked and that the Federal Reserve may pivot from its hawkish path toward raising interest rates. On another note, the energy index rose by 17.6% over the past 12 months. The gasoline index increased by 17.5% over the span and the fuel oil index rose by 68.5%. In parallel, the index for electricity rose by 14.1% over the last 12 months, and the index for natural gas increased by 20% over the same period.
The US Dollar index, which tracks the greenback vs. a basket of its main currencies, deteriorated sharply on Thursday after US inflation data came in cooler than expected. In fact, the US dollar index slumped more than 4.1% over the week, the most in over a decade, to stand at 106.3. In parallel, The US dollar recorded its worst performance against the Japanese yen since 2016, having fallen 5.3% over the week to close at 138.8. The Sterling saw its best daily gain since 2017, jumping over 4.0% to close at 1.183, along with the Aussie, which recorded its largest rise since 2011. The euro pulls back toward parity again to close at 1.035, up by 3.9%, to its highest level since July.
In parallel, stock markets ended the week sharply higher on a sign of cooling inflation, as investors took it as a sign that Fed officials might raise rates less aggressively and inflict less economic pain in their quest to tame inflation. As such, the S&P 500 soared by 5.9%, its best performance since April 2020, which marked the early market recovery from a coronavirus-induced crisis. The Nasdaq gained 8.8% to 11,817 points, while Dow Jones Industrial Average rose by 4.1% to 33,748 points. The Dow has now recovered about 17% from its closing low on Sept. 30, yet it remains down about 9% from its record high close in early January. In parallel, Asian shares spiked higher on Friday, MSCI’s broadest index of Asia-Pacific shares outside Japan jumped by 8.4% and Japan’s Nikkei rose by 3.9% on a weekly basis.
Oil Prices rising on easing US recessionary fears
Oil prices were on track for a sharp weekly decline till Thursday after a jump in COVID-19 cases in top oil importer China raised the environment of weaker fuel demand, as the comments from Chinese health officials over the week made it clear they would continue to strictly curb any outbreaks. However, oil prices erased earlier losses and rebounded on Friday as fears of a US recession eased after the US CPI report, while the weaker US dollar boosts oil demand as it makes the commodity cheaper for buyers holding other currencies. As such, Brent crude futures were down by 2.9% over the week, to $95.8 a barrel, while US West Texas Intermediate (WTI) crude futures dropped by 3.9%, to $89 a barrel. On another hand, Iraq is keen to maintain stable oil prices at not more than $100 per barrel, Prime Minister Mohammed Shia Al-Sudani told reporters on Saturday. In fact, Iraq will have discussions with other members to reconsider and increase its production quota, he added in a briefing.
US natural gas futures dropped about 7.3% last week in what has already been an extremely volatile week on forecasts for less cold and heating demand next week than previously expected. Gas futures were up about 76% so far this year as much higher global gas prices feed demand for US exports due to supply disruptions and sanctions linked to Russia’s invasion of Ukraine. On Friday though, prompt prices fell in Europe. Gas was trading at $30 per MMBtu at the Dutch Title Transfer Facility in Europe and $27 at the Japan-Korea Marker in Asia. On another note, with storage refilling at a faster-than-expected clip ahead of winter, the Energy Information Administration (EIA) has slashed its projected natural gas spot price for the remainder of 2022 and the first quarter of 2023.
EIA now expects Henry Hub spot prices to average around $6 per MMBtu for Q4-22 and Q1-23, a discount of more than $1 versus projections issued a month earlier. In fact, the forecast reflects natural gas storage levels that are 4% below average heading into winter withdrawal season and more demand for liquefied natural gas (LNG) as the Freeport LNG facility comes back online. After the winter, EIA expects the Henry Hub price to decline in 2023 as production growth outpaces both domestic consumption and LNG exports.
Gold Prices rebounding to record the best weekly performance Since March
Gold prices recorded the biggest weekly gain in more than eight months, as US data pointing to slowing inflation boosted hopes that the Federal Reserve would slow its aggressive rate hikes and as the dollar weakened since gold is considered a hedge against inflation, but rising interest rates increase the opportunity cost of holding non-yielding bullion. As such, spot gold prices were up by 5.5% over the week to reach $1,769 per ounce. In parallel, two technical studies, used by Elliott wave theory and a Fibonacci extension to extrapolate a forecasting model to predict the future pricing of gold, concluded that it is quite possible that by the end of next year gold prices could hit new record highs of $2088. In parallel, spot silver went up by 4.9% to $21.8 per ounce, its second straight weekly rise. Platinum prices rose by 7.9% to $ 1,044 per ounce, its biggest weekly gain since February 2021, while Palladium prices increased by 10.0% to $2,047.
In cryptocurrencies, the world’s largest digital token Bitcoin’s price plunged to $15,800 level, its lowest level since November 2020 early last week, to close at $16,757, a drop of 20.7%. On the other hand, Ether, the coin linked to the Ethereum blockchain and the second-largest cryptocurrency, dropped by more than 22% to $1,267 last week. In fact, crypto markets have come under intense pressure this year, as rising interest rates prompt investors to drain risky or speculative assets. However, over the last two weeks, cryptocurrency prices have remained under pressure after crypto exchange Binance said it was pulling out of a deal to purchase failing rival FTX Trading. It is worth mentioning that the collapse of several crypto lenders, including Celsius and Voyager, major tokens terraUSD and Luna, and hedge fund Three Arrows Capital, had rung alarm bells even before the fiasco at FTX, headed by Sam Bankman-Fried.