Global Financial Markets in Brief Week August 22
The Arab Federation of Capital Markets reported that, over the previous week, financial markets reacted negatively to Powell’s speech at Jackson Hole Symposium, with the major indices of Wall Street plummeting on the prospect of a sustained period of higher interest rates and the associated economic pain, with slower growth, higher unemployment, and financial pressures will unavoidably impact households and businesses due to the anticipated tighter policy. In parallel, U.S. natural gas prices surged to above $10/MMBtu for the first time since 2008, following the hike in European prices as supply worries are intensified by Russia’s plan to halt gas flows on the Nord Stream 1 pipeline to Germany for three days of maintenance. However, gold prices fell on Friday to near US$ 1,750 per ounce following Powell’s signal that the central bank will raise interest rates further to combat high inflation.
10-year US Treasury yields to above 3% for the first time in a month
U.S. Treasury yields climbed to above 3% between Tuesday and Thursday, as investors digested a series of economic data, mainly weaker-than-expected PMI and housing data, with the former falling to 51.3 in August of 2022 from 52.2 in July, below forecasts of 52, and pointing to the lowest growth in factory activity since July of 2020, while new home sales fell by 12.6% in July. As such, the yield on the benchmark 10-year Treasury note rose nearly 6 basis points to 3.111%, on Wednesday, while the yield on the 30-year Treasury bond gained 6 basis points to 3.318%, and the yield on the short-term 2-year Treasury note was about 7 basis point higher, trading at about 3.401%. However, U.S. Treasury yields fell slightly again on Thursday ahead of the Federal Reserve’s annual meet at Jackson Hole Symposium, when the yield on the benchmark 10-year Treasury note dropped by nearly 8 basis points to 3.031%.
It is worth mentioning that the Federal Reserve won’t stop raising interest rates until the economy is under control, as per Powell’s speech on Friday, warning that the central bank’s mission to tame inflation will result in some pain for US households and businesses and, probably, weaken the job market. Powell also highlighted the greater sense of urgency about calming inflation than he has in previous remarks, calling price stability the bedrock of the economy. However, and while Powell did not clearly indicate whether the Fed’s 75 basis points hike would be repeated next month, he sent the clearest message yet that the central bank was unambiguously committed to a more restrictive policy in order to calm inflation.
The US dollar held onto recent gains against the euro and sterling on Friday ahead of Federal Reserve Chair Jerome Powell’s speech, which traders hoped will offer clues on the U.S. central bank’s tightening plans. The euro was at $0.9963, having failed in several attempts this week to break back above parity against the dollar. Sterling was down at $1.175, as UK energy regulator Ofgem announced a big jump in price cap on British household bills which will face an 80% jump in electricity and gas bills. This left the US dollar index, which tracks the currency against its six main peers, at 108.53, on track for a 0.4% weekly gain.
In parallel, Wall Street fell on Friday to close well down, as investors keen for a more modest interest rate path were disappointed by Federal Reserve Chief Jerome Powell. The Dow Jones Industrial Average sank more than 1,400 points Friday and lost 4.2% on a weekly basis, the S&P 500 lost 4.0%, its biggest drop since mid-June, while the Nasdaq composite ended 4.8% lower, leading declines among the three U.S. benchmarks and reflecting a broad sell-off led by technology stocks since higher rates help to abate inflation but also hurt asset prices. It’s worth mentioning that, in the span of just eight minutes, Federal Reserve Chair Jerome Powell generated a market retreat that erased around $78 billion from the fortunes of America’s richest people.
Oil prices jumping above $100 per barrel on possible OPEC supply tightening
Oil prices jumped by nearly 4% on Tuesday after signals from Saudi Arabia that OPEC could cut output to support prices within the prospect of resuming Iranian crude supply and recession fears, along with consecutive weekly builds at the U.S. crude oil storage hub and easing gasoline demand which has pushed prices lower in recent weeks. As such, Brent crude settled at $100.2 a barrel, up by 3.9%, while US West Texas Intermediate crude closed at $93.7 a barrel, higher by 3.7%. However, oil prices dropped again by about $2 a barrel between Thursday and Friday, after the head of the US Federal Reserve warned there is no quick cure for inflation, enhancing worries that rising US interest rates would weaken fuel demand. It is worth mentioning that US demand for gasoline declined sharply over the last week, leaving the four-week average of daily gasoline product supplied 7% below the year-earlier period, according to the Energy Information Administration (EIA).
European and Asian natural gas prices surged sharply on Monday amid escalating global competition for fuel, as countries try to prepare for the coming winter. In fact, natural gas futures flew higher at the beginning of the week, on the back of surging global gas prices, with US natural gas prices rising above $10 per million British thermal units for the first time since 2008, extending a strong rally driven by persistent concern that global stockpiles of the heating and power-plant fuel aren’t enough to meet winter demand.
However, US LNG exports have played a key role in helping to meet global demand this year. In fact, American liquefied natural gas facilities are operating at or near capacity, and this is expected to continue even after the Freeport LNG plant returns to service later this year after a fire in June. In parallel, it is worth mentioning that earlier this month, Gazprom announced that it would halt all gas flows to Europe via NSI for three days beginning Wednesday (Aug. 31), with the need for maintenance, yet this sparked new worries about Europe’s reliance on Russia and its ability to stockpile enough gas to heat homes and power industrial production this winter.
Gold prices slightly retreating as the US dollar started picking up some steam
Gold prices were somehow stable over the week at near US$ 1,760 per ounce as investors adopted a cautious stance ahead of US Federal Reserve Chair Jerome Powell’s speech, before retreating on Friday by near 1.7%, as the dollar held on to gains following US Federal Reserve Chair Jerome Powell’s signal that the central bank will raise interest rates further to tame high inflation. As such, spot gold inched down by a weekly 0.7% to $1,750 per ounce, from near $1,780 per ounce on Thursday. However, gold prices fell sharply on Monday of this week, to below $1,730 per ounce, as the US dollar index held close to a two-decade high of 109.29, making the bullion expensive for those holding other currencies.
Bitcoin extended its drop below $20,000 on Friday, from its Thursday late-afternoon level to trade at $21,082, to reach a six-week low, as part of a wider cryptocurrency-market retreat amid concern about the Federal Reserve’s rate-hike path, while Ether, the second-largest cryptocurrency by market value, dipped by 7.7% on a weekly basis. In fact, Ether had been outperforming the crypto market in recent weeks amid optimism over a pending network software upgrade called the Merge. As such, the global crypto market cap fell on Monday of this week to below the $1 trillion mark, as it was down over 2% in the previous 24 hours at $994 billion, since cryptocurrencies mirrored global markets and declined after Jerome Powell warned against pre-maturely loosening policy.