By Deepta Bolaky
It was a busy week on both geopolitical and economic front. At the start of the week, the drone attacks on Saudi Arabia had initially set a bearish tone in the markets where much attention was geared towards the heightened tensions in the Middle East.
“Locked and Loaded”, and “All-out War” are among the tough words we have seen dominating headlines following the drone attacks on a major oil facility and fields in Saudi Arabia.
The attacks have wiped out half of the Kingdom’s oil capacity and 5% of the world’s crude oil supplies. Fears of supply disruptions have gripped the markets and caused a rally in oil prices. After a few conflicting reports that Saudi Arabia will take weeks or months to get back on track, there were more reassurances from the Saudis and the US that the oil market will remain well-supplied.
After a jump of more than 10% in oil prices on Monday, WTI and Brent Crude have pared some gains but have still not dropped enough to erase the bullish gap in prices. Towards the end of the week, we note that the US has adopted a more cautious approach and is seeking a “peaceful resolution” over Saudi attack.
As of writing, WTI and Brent Crude is trading in the vicinity of $58 and $63 accordingly.
There was some positive news on the trade front coming from Japan. As trade talks with China have stalled, President Trump rushes to finalise trade deals with other countries in his attempt to reshape the country’s international trade landscape.
The US announced plans to enter into an initial trade agreement with Japan on Monday night. At this stage, the finer details of the trade agreement are still unknown to the markets.
Market participants are keeping track on any developments as an agreement could be announced in the coming days.
China’s trade negotiators also met this week in Washington to set some groundwork for high-level talks in early October. It is reported that the Chinese delegations are even planning a trip to meet farmers.
However, the optimism from the trade events this week was mostly overshadowed by the other geopolitical risks and the situation in the Repo market.
Markets digested various rate-setting decisions by central banks across the globe this week. There were increasingly dovish signals coming from the central banks as the ongoing slowing global growth are forcing policymakers to ease monetary policies further.
However, the Fed was the main starrer. As widely expected, the Fed has delivered a 25-basis point rate cut, marking its second rate cut in a decade-long. As widely expected, the Fed made no commitment on future rate cuts as recent economic data were relatively strong. The rate cut was viewed as an “insurance” cut in “the light of the implications of global developments for the economic outlook as well as muted inflation pressures.”
In addition to caution coming from central banks, the Organisation for Economic Coorperation and Development (OECD) fuelled fears as it has lowered its growth forecasts for major economies due to the intensifying trade tensions. The mass downgrades are adding more pressure on central bankers to adjust policies to stimulate their economies.
On Friday, we saw China cutting its one-year Loan Prime Rate (LPR) for the second month in a row to 4.20% to lower borrowing costs for an economy hit by the Sino-US trade war. Until now, the small 5 bps cut disappointed investors and failed to give a major boost to risk sentiment.
The Repo market soared to record levels on Tuesday creating panic in the money markets and caused the average Funds rate to rise to the top end of the Fed’s current target range. The Fed quickly intervened in the markets and injected billions of dollars in the financial system to calm the markets.
On Friday, investors were expecting more repo operations from the Fed. Some market observers also think that the Fed may have to start buying bonds again as the repo operations might not be enough.
As the week comes to an end, investors will continue to focus on the outlook for negotiations between the US and China. The trade officials from both countries are carrying talks that will set the tone for the meeting in October. As of writing, the Asian stock market were trading in positive territory. However, we note that volumes were thinner which may suggest a lack of conviction in the markets.
The Australian share index is poised to end the week in the green after the RBA minutes increased expectations of another rate cut before the end of the year. The mixed labour report also shows that there is spare capacity in the labour market.
|Monday, 23 September 2019|
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