- Wall Street rebounds after Merck covid pill, but sentiment fragile
- Dollar retreats a little as nonfarm payrolls week kicks off
- OPEC meeting today could be crucial amid unfolding energy crisis
Stocks trapped in limbo
Global markets continue to grapple with a variety of risks, from supply chains being in disarray to an energy crisis that has engulfed Europe and Asia, simultaneously threatening to hamstring economic growth and keep inflation hot for longer.
This is precisely what the latest ISM manufacturing survey revealed. The headline index ticked up in September but for ‘unhealthy’ reasons as supplier delivery times lengthened, while prices paid by manufacturers rose at a faster clip. Every single anecdotal comment was either about damaged supply chains or labor shortages.
Risks emanating from China haven’t faded either, with a hangover in the embattled real estate sector likely to amplify any slowdown in the world’s growth engine. On top of that, trade risks are back on the menu following reports the US Trade Representative will announce today that China is not complying with the Trump-era trade deal.
The only piece of positive news was that Merck has developed an experimental pill that can halve the chances of dying or being hospitalized from covid. This helped Wall Street stage a solid rebound on Friday, but futures are back in the red today as even a covid treatment won’t fix supply chains or cool energy prices. Markets have already put the health crisis behind them - the issue now is dealing with its economic aftershocks.
Dollar takes a step back
In the FX complex, the US dollar is on the back foot on Monday, allowing every other major currency to breathe a sigh of relief after being suffocated last week by the reserve currency’s powerful gains. The main event this week will be the US employment report on Friday, which will decide whether the Fed pushes the taper button next month.
Overall, the dollar’s recent gains boil down to three sources: bets that the Fed will begin its rate hike campaign next year, investors searching for shelter from the equity market storm, and hopes the US economy is heavily shielded from the global power crisis.
Elsewhere, the Australian dollar couldn’t capitalize on the greenback’s retreat, ahead of an RBA meeting early on Tuesday that could see the central bank adopt a more cautious tone to reflect the growing risks surrounding China and the global economy.
Meanwhile, gold prices are back under pressure as the new week gets underway, with a rebound in real US yields overpowering the pullback in the dollar.
OPEC holds the keys
With global energy markets going berserk, investors are waiting with bated breath to see whether OPEC and its allies will take action to soften the blow to the global economy. Natural gas and coal prices have gone through the stratosphere amid painful supply shortages, which has inevitably spilled over into oil prices as well.
The current deal is that OPEC+ will steadily increase its daily production by 400k barrels each month, but some reports suggest the producers could frontload that, releasing 800k barrels in November for example and then nothing in December.
Admittedly, that’s just a drop in the ocean - it wouldn’t have any material or long-lasting impact against the global energy shortage. If that’s all OPEC comes up with, or worse yet if the cartel does nothing at all, the upward pressure on oil prices could return with a vengeance.
Technically, WTI needs to pierce above $77 per barrel for buying momentum to accelerate, as that would mark a fresh 7-year high.