A new quarter begins after a topsy turvy Q3 that ended with sharp declines in stocks and bonds, extending the year-to-date losses to some of the heaviest in years. Along with the bearish impacts from soaring inflation, aggressive central bank rate hikes, and rising recession risks, conflicting policy dynamics are exacerbating market instability. Indeed, fiscal policymakers with a vested interest in boosting growth and employment are working in opposition to central bankers who are working hard to weaken demand. All this is leaving investors with near impossible choices near term and bulls on the sidelines looking for shelter.
UNITED STATES
In September, the FOMC increased the tempo of its campaign against inflation. The Committee gave a more hawkish projected path for short-term rates through this year and next, along with a 75 bps increase in the fed funds target range, as was largely anticipated. The fed funds rate is now anticipated to increase by an additional 125 basis points at the FOMC’s final two meetings this year. The median forecast for the fed funds rate ending in 2023 is 4.6%, and the FOMC expects rates to remain high through the rest of the year.
The FOMC should have a tighter stance on policy as above-target inflation is perceived by the Committee as becoming more entrenched. The FOMC members now anticipate core PCE to stay at over 3% during the next year and above 2% until 2025. Although higher rates are anticipated to hurt the economy more, policymakers anticipate that inflation will gradually decrease over the next few years. Real GDP growth projections for the following year were lowered, and with a median of 1.2%, they now plainly fall below the economy’s potential growth rate.
Even though headline inflation has shown signs of peaking, underlying measures of core inflation have yet to turn decisively enough for the Fed to slow the pace of rate hikes. Fed members have signaled even more hikes are on deck over the next few months and into 2023. This has Treasury yields rising, with the US 10-yr yield now at 3.72% & the 30-year US mortgage rate having moved up to 6.29%, its highest level since October 2008.
The Federal Reserve and other global central banks are acting similarly. Despite growing unfavorable sentiment, particularly worries that an increase in global interest rates could lead to a worldwide recession next year, the USDIndex remains strong as a reserve currency.
With annualized inflation in the US falling for the second month in a row to 8.3% in August from 8.5% in July, and the Fed’s favorite indicator, the PCE Index, retreating slowly to 6.3% y/y in July from 6.8% y/y, and core PCE inflation to 4.6% from 4.8%, there is no reason for the Fed not to act aggressively until their wishes are met. The majority of the decline was caused by a drop in commodity prices, particularly crude oil and gas, which corrected sharply. USOil is currently trading above $80 per barrel. Despite the decline in prices due to the prospect of slowing growth, oil producers are still trying to contain prices by not increasing production quotas excessively.
On the 13th of October, the FOMC will hold a meeting before deciding monetary policy in early November. The increase in Fed interest rates is making inflation slowly decline. If the surge in employment can be maintained and unemployment continues to decline, then the feared recession will cease to be a frightening prospect and the decline in the US economy for 2022 and Q4 can be anticipated.
The USDIndex, with its peak for 2 decades at 111.55 in September, has not shown any changes in trends. The Index increased by more than 6% in Q3 and by more than 16% in 2022. A further increase is projected to test the peak of 2001 at around 120.00, but the prospect remains bullish despite a deep correction, as long as the trade remains above 103.82 support.
EURO AREA
From the Ukraine-Russia geopolitical tension, supply chain disruptions, increasing inflationary pressures, and central bank monetary tightening, to disruption of natural gas supplies and recession risk… uncertainties surrounding the eurozone shall continue to unfold in the coming quarters.
Latest headline HICP inflation pointed up to 9.1%, driven mainly by surging prices in housing, electricity, gas, etc, as well as reopening of the economy, a strong rebound in tourism and tightening of labour markets. The ECB projected the data to “remain above 9% for the rest of 2022”. The possibility of higher energy demand in the coming winter serves as the key risk, especially after Russia choked off gas supplies to Europe while the Euro members struggle to access immediate alternatives. Gas rationing may be unavoidable should demand exceed the sum of gas inflows, thereby primarily impacting the energy-intensive sectors, and eventually affecting employment and the overall economy. While the impact of gas rationing could possibly be reduced through a 15% reduction in total gas consumption by households and firms, as well as effective use of Europe-wide gas reserves in solidarity among EU members, to some extent the GDP in the eurozone would still be negatively affected.
According to the ECB’s latest macroeconomic projections, real GDP for 2022 is expected to hit 3.1%. All GDP components are expected to decline lower compared to the same period last year. These items are private consumption (3.6%; was 3.7%), government consumption (1.4%; was 4.2%), gross fixed capital formation (3.1%; was 3.8%), exports (6.1%; was 10.5%) and imports (6.5%; was 8.2%). High inflation leads to contraction in real disposable income and thus private consumption, while continuing normalization of interest rates shall continue to hurt the housing and business investments. Easing of supply bottlenecks and Euro currency depreciation may underpin the continental exports. However, as foreign demand remains weak, net exports in 2022 is expected to be neutral.
In the labour market, a global macro model projected the Euro area manufacturing and services PMI to be lower than 50.0 in the coming quarter, indicating contraction in general. The Unemployment rate is also expected to be elevated to nearly 7% (now 6.6%) following the slowdown of economic activity. As a result, the central bank predicted the productivity per person employed to hit 1.1%, down from 3.8% seen in 2021. The latest ZEW Economic Sentiment recorded the lowest reading since October 2008, at -60.7, and is expected to deteriorate further in the near term, indicating an overall pessimistic tone.
Rate hikes by the ECB shall resume over the next several meetings as a means to keep inflation under control. Traders have priced in 70bps of hikes in the coming October and December. It is also worth noting that the effect of the rate hikes might be dissipated gradually, based on how the overall conditions in the Euro area and the global economy develop. In mid-September, Germany’s 2-year yield hit the highest since 2011, while the 10-year and 30-year yield inverted for the first time on record. Technically, the EURO remains traded in a bearish trend, while parity remains at test. On the stock market front, GER40, FRA40 and NETH25 are seen closed below the 20-week SMA. These indices attempted to break the dynamic resistance in August yet failed.
JAPAN
The world’s third largest economy is the topic of focus as we head into the final quarter of a year brimming with unprecedented events that have left market participants scratching their heads. To examine Japan in isolation would be counterproductive though and so we must put it in a global context and consider how other global economies have fared against the backdrop of thematic tropes that 2022 has emitted.
Global economies have had to deal with several major themes this year that have driven the narrative for monetary policy bodies and global economies alike. These include, but are not limited to; the Russia-Ukraine War, soaring commodity and energy prices and Inflationary pressures driven by Covid-19 lockdowns and post-pandemic consumer demand.
Japan is unique from other economies, in that it has managed to “weather the storm” and somehow managed to keep its headline inflation caused by all the above factors below the average 8% other developed economies are experiencing, like the United States and most countries in Europe. Although the Bank of Japan has a 2% inflation target, the consumer inflation experienced by Japan’s economy when you exclude the main drivers (food & energy) hasn’t risen as drastically as in other parts of the world, and this is seen in last month’s CPI print of 3% year on year from the previous August monthly print of 2.4%.
Although the BoJ has been hesitant to raise rates and keep in line with their peers, their stance could change going forward if inflation continues to rise and other central banks continue to hike their interest rates at the expense of a depreciating Yen. “Interventions” into a weakening Yen have been touted, but short-term rates are highly unlikely to be moved out of negative territory, though longer-term interest rates could be allowed to move up slightly if the Yen keeps losing value against the Dollar.
During the course of this year the Japanese currency has been devalued and has fallen by 20% against the US Dollar, however, heading into the final quarter, Japan’s economic recovery is set to strengthen. Factors backing this Q4 recovery are linked to Global supply-chain bottlenecks clearing up, and the relaxing of lockdown restrictions in Japan’s biggest export market (China) that will see a return of demand for Japanese goods, which are backed by a relatively weak Yen, and improve the appeal of Japanese produced goods and services.
Additionally, a rebound in tourism; Japan had less than 300k foreign visitors in Q3, compared to nearly 3 million in July 2019, which leaves room for great upside potential. Energy and commodity prices will contribute to this recovery as they begin to stabilize as well as global inflationary trends showing preliminary signs of a pivot towards normality which will affect global interest rate decisions in the latter half of Q4 heading into 2023.
For the USDJPY the trend has been bullish, with higher-highs and higher-lows being printed out and with each higher-low being respected by the structure. Current price action is beginning to print out a rising-expanding channel which points to the probability of a potential reversal in price occurring, however the trend will remains bullish until price breaks below the 129.38 area impulsively.
UNITED KINGDOM
It was a dramatic quarter for the UK with country headed into recession by the end of this year. The Russia-Ukraine war has increased inflationary pressure resulting in large consequences regarding energy and a reduction in the economic growth of the United Kingdom. The reduction in company expenses coupled with problems in supply chains, along with a new government at the wheel and the death of Queen Elizabeth II make this year-end difficult.
PM Truss and her government started with a bang, and not a good one. The government’s first big policy announcement sparked dramatic market reactions and a U-turn in the BoE’s policy. QT was postponed and bond buying is back on, thanks to Chancellor Kwarteng’s package of unfunded tax cuts. The UK government announced a U-turn on its 45% tax rate, with Chancellor Kwarteng confirming that the government will scrap plans to abolish the 45% top tax rate that applies to earnings over 150K. That means that the tax rate for high earners will be just 40%. The basic income tax rate was lowered to 19% from 20%. Kwarteng also confirmed the expected cancellations of the increase in National Insurance contributions and the planned hike in corporation tax rates. The stamp duty will also be lowered. The budget contained more details on the government’s focus on deregulation and tax cuts as a way to boost the struggling economy. Kwarteng asserts that the biggest round of tax cuts in decades, coupled with a de-regulation push, will facilitate growth of 2.5% per year.
The move won’t slash too much of the total cost of the government’s mini-budget, but it was seen by many MPs as a sign that Truss and Kwarteng have lost touch with voters and faced a defeat in parliament after a revolt of back benchers. Truss initially ruled out a U-turn, but seems to have given into the pressure from party members as the Conservatives slumped in the polls.
From a data perspective, Inflation, which is currently high at 9.9% (5 times the BoE target and the highest in 40 years), is expected to continue rising to 14% by the end of the year and to more than 20% by winter, figures that we haven’t seen since 1975-1976. This is thanks to the energy crisis, which is expected to increase billing by 80% from October, which would imply an average of $4k per year per household in energy expenses, mainly due to high gas costs and the increase in demand that will depend on the harshness of the winter. How much inflation rises will depend on whether or not the government is willing to support households by freezing energy bills or offer some stimulus. A decrease in inflation is expected throughout 2023 to 5% and to reach the 2% target of the BoE by the end of 2024.
The decline in GDP is expected to continue, sending the UK into recession by the end of the year thanks to soaring costs of living and energy that have made consumers more thrifty. Consumer spending is expected to drop by 3.9% by the end of the year. The annual GDP growth prospects that were at 4.5% have been lowered and are now forecast at 3.3%-3.6% by the end of the year. Recovery expectations are low, as general investment is expected to position itself at 4%-5.4% for Q4 and drop to 0.4% for 2023.
For now markets are still banking on a 100 basis point rate hike from the BoE at the November meeting while it is expected to breach 2%-2.25% by the end of the year and 3% by 2023-2024. Whether the BoE can and will go through with it, and whether it will indeed be able to start QT early in November, remains to be seen. The bank certainly is not getting any help from the government, though even within the Conservative Party there seem to be few who buy into the official line that the turmoil wasn’t caused by the budget plans, but by global market turmoil. Some Conservative MPs are also worried that it will be difficult to sell the scrapping of the top income tax rate, while the prospect of sharply higher mortgage costs is hitting a large part of the party’s base voters.
Kwarteng’s unfunded tax cuts and the BoE’s objective of bringing down inflation are at odds, and investors are not the only ones worrying. With the government sticking to its budget plans, the Treasury seems to be calling the shots and the BoE is left to pick up the pieces. The IMF’s warning to the Chancellor to “re-evaluate” the plan as the “untargeted” measures risked pushing inflation even higher, was rebuffed. The chances that Kwarteng and Truss will contemplate a U-turn seem slim at the moment. For some that means we have come one step closer to Sterling-Dollar parity.
GBPUSD price has taken a sharp drop from its highs at 1.42472 in late May driving below the weekly 20p SMA currently at 1.20154, and has broken the Feb 2020 lows at 1.14088 and is currently at 1.12330, a price that has not been seen since March 1985. Currently the price remains low, and due to the world energy crisis which will continue in January and the incoming recession it is very likely that the price will continue to fall. The closest support is at 1.10000 followed by the historical low at 1.05200 which could go to test and even mark a new one thinking that we are already close to parity. RSI is at 24.3210 without strength and MACD is growing lower below the 0.0 line
AUSTRALIA & NEW ZEALAND
As with all major economies, the Antipodean pair is having to cope with post pandemic supply chain problems, rising inflation tight jobs markets and potentially overheating housing markets.
For the last three months, the RBA has been on a rate hike spree prior to raising its cash rate by 50 bp to 2.35% in its September 2022 meeting as expected, bringing interest rate to levels not seen since January 2015. However, as the fourth quarter starts the RBA surprised markets and slowed down its tightening path. Australia’s central bank surprised with a smaller than expected 25 bp rate hike. Markets had been expecting a 50 bp move, but it seems mounting concerns about the health of the global economy and the fact that rising yields are starting to bite a household sector that has to deal with pretty large debt burden, prompted the central bank to stick with a 25 bp move that brought the policy rate to 2.6%. Bonds as well as stocks rallied on the decision and there were knock-on effects to wider markets as investors scale back tightening expectations.
In the months ahead that is the fourth quarter of this year, interest rates are expected to be hiked by policy makers, but the RBA is not on a pre-set rate hiking path because the size of the hikes and the timing too will be informed by incoming economic data. The RBA will be paying attention to the global economy and look for signs of deterioration as a result of interest rate hikes in many countries. Close attention will also be paid to the war in Ukraine and the anti-covid policies and other policy challenges in China, Australia’s largest market. According to overnight-indexed swaps 4.1% will be the peak of RBA cash rate by April 2023. Economists anticipate RBA will end its tightening campaign at around 3.35%, compared with 4.2% for the Fed and 3.75% for New Zealand and Canada.
The all-important trade surplus narrowed to a six-month low of AUD 8.32 bln, falling short of market expectations and adding to signs that the slowdown in growth across key centers if hitting demand. Exports still lifted 2.6% m/m, but imports rose an even stronger 4.5% m/m, as domestic demand picks up.
The Reserve Bank of New Zealand raised its official cash rate by 50bps, to 3.5% a level not seen since April 2015, to begin the fourth quarter. This was the fifth consecutive increase of this type and the eighth annual increase, and the rate is expected to reach 4% by the end of the year and rise to 4.5% by the first or second quarter of 2023. The RBNZ declared that they will continue with the tightening of their monetary policy with increases at the current rate, with the possibility of increases of up to 75bp to stabilize inflation at the 1%-3% target.
The extremely difficult global situation and the labor market maintain upward pressure on the country’s general inflation, standing at 7.3% y/y with an accumulation of 3.5%, led by the 14.4% y/y increase in transport prices thanks to the increase in oil prices (consequence of the Russia-Ukraine war), followed by housing at 9.2% y/y and food at 6.9% y/y. A decrease to 5.2% is expected by the end of 2022 and to be reduced to the range of 4.2%-3.0% in 2023. Likewise, tradable goods inflation is expected to decrease from 8.7% to 5% by the end of the year and the non-tradable from 6.3% to 3%.
New Zealand was saved from entering a recession as GDP rebounded in the second quarter to 1.7% y/y. However, it is expected to drop to 1.2% by the end of the year and be in a range of 0.8%-1.2% in 2023. Shortages of labour and materials (as a result of supply chain disruptions and closure of ports and borders) is the main obstacle for production, retail businesses and construction companies, slowing down the country’s economic growth. Building permits have been reduced from 4,574 to 3,800 for the last quarter. Meanwhile the opening of borders has given a substantial boost with a positive injection of tourism.
The unemployment rate remains at a low level at 3.3%, 0.1% from its historical low of 3.2%, but is expected to reduce to 3.0% by the end of the year and the beginning of 2023, although it may vary by 0.1%-0.2% from the second quarter to go up to 4%. The labor market indicates that the economy is well above maximum sustainable employment. Wage growth will be overshadowed by the rising cost of living until inflation goes down.
In other data, house prices are expected to continue falling to 16%, and mortgage payments have not yet adjusted to the cash rate, negatively increasing consumption in households that have resisted thanks to pandemic savings and government incentives. Retail Sales at -2.30% is expected to rise to 1.7% by the end of the year. Consumer confidence is expected to rise as well as business confidence, however, with businesses feeling bearish on current business conditions and inflation. Goods export prices will decline 7% on a weighted basis as a result of the decline in global demand and the recovery in food supply after the Russian invasion.
CANADA
Canadian GDP growth in 2022 and 2023 has been revised down significantly to 3.5% and 1.75%, respectively. The forecast for growth has been lowered by about ¾ of a percentage point in 2022 and by about 1½ percentage points in 2023. Growth in 2024 has been revised up by ¼ of a percentage point to 2½%. These revisions leave the level of real GDP about 1¾% lower in 2024.
Growth has slowed largely due to the impact of high inflation and tighter financial conditions on consumption and housing activity. A weaker outlook for global growth also weighs on exports and business investment.
The outlook for CPI inflation has been revised up by almost 2 percentage points to 7.2% in 2022, by 1.8 percentage points to 4.6% in 2023, and by 0.2 percentage points to 2.3% in 2024. These revisions mainly reflect more persistent and broad-based inflationary pressures than previously estimated. They also reflect higher commodity prices and wider-than-usual gasoline refinery margins as well as rising inflation expectations. In addition, higher estimates of excess demand in 2022 have raised the inflation forecast in 2022 and into 2023. Inflation is expected to decline as the impact of higher energy prices dissipates, supply challenges recede, and monetary policy in Canada and abroad reduces domestic and foreign demand.
The Canadian economy is in excess demand. A broad set of measures indicates that the economy is operating beyond its productive capacity and the labour market is tight, with labour shortages pushing wages higher. The ratios of vacancies and job postings to unemployed workers have also risen to record levels. As a result of this tightness, wage growth is strengthening and broadening across sectors. Businesses continue to report capacity constraints, including labour shortages and supply chain challenges. Supply constraints are still weighing on production and sales. This is particularly acute in the auto sector, where it continues to be difficult to source semiconductors and get motor vehicles to retailers.
Supply growth is projected to be around ¾% in 2022 and to average roughly 2¾% over 2023–24.The disruptions are reducing the supply of goods and services. These factors are assumed to have a maximum negative impact of about 2½% on the level of supply in Q3 of 2022. This effect is expected to start decreasing in Q4.
Consumption growth is anticipated to slow from its current strong pace. High inflation means that households will allocate more of their disposable income to necessities such as food and gasoline, leaving them with less money to spend on other items. And higher interest rates mean that some households will postpone major purchases, pay down debt or save more. In addition, some households — particularly those that took on a sizable mortgage when rates were lower — will face significantly larger payments when they renew their mortgages. The slowdown in housing activity will also weigh on the consumption of goods such as furniture and appliances.
Export growth is expected to remain strong throughout Q4 of 2022, boosted by elevated commodity prices and a pickup in international travel. Later in the projection horizon, export growth is expected to slow as foreign demand declines (Chart 17). Non-energy exports should grow solidly as global supply disruptions dissipate. However, exports of motor vehicles will slow growth in the second half of 2023 and in 2024 when some manufacturing facilities close temporarily to retool for the production of electric vehicles. Exports and imports of services will strengthen and reach pre-pandemic levels in 2024 while international travel continues to recover.
USDCAD is trading at 1.3770, having broken through the 61.8% fib retracement level (1.3649), which was resistance on 23rd Dec 2018. Next resistance level is the 70.7% fib level at 1.3882. On the downside, 50% is a key support at 1.3323 followed by 38.2% at 1.3021.
Both the Canadian and US interest rate is at 3.25% and the central banks are on the path to increase the rate to lower inflation to the target level. The equal level of rate doesn’t give one currency an advantage over the other, however the USD becomes a safe haven in times of fear and recession, and CAD is being affected negatively by dropping oil prices.
EMERGING ECONOMIES
China: The Chinese economy has been heavily troubled this year following the resurgent COVID cases and the resulting lockdowns in respect of China’s Zero-COVID policy, the debt crisis in the property sector and the record hot temperatures and drought that have led to power shortages and shut down of some factories. The economy contracted by 2.6% in Q2, off the 1.4% growth that analysts expected and barely a 0.4% growth vs the 4.8% expected y/y. The Youth unemployment rate is at record levels near 20% as lockdowns weigh on the job market; and with the government seemingly more focused on curbing the virus spread despite the risk to the economy, we can expect the pain to extend to the last quarter of 2022.
In Q4, 2022 the main event to look out for will be the 20th Communist Party Congress that is scheduled to start on the 16th of October; President Xi Jinping is expected to secure a third term, and if he does, current policies are expected to continue to hold. The US-China relationship is another factor to look out for with the recent strain following Nancy Pelosi’s visit to Taiwan – how that develops will also be a key factor in Q4 alongside Oil prices, where rising Oil prices will remain a negative for China as they maintain their position as the world’s largest Oil importer.
The PBOC have maintained an ultra-loose monetary policy in 2022 to provide support for the slowing economy but took a pause in their latest decision and left rates unchanged. Economists expect the easing to continue in the latter part of the year and while that is designed to support the economy which faces several headwinds, it also means capital flight out of China could increase as other major Central Banks, particularly the Federal Reserve of the US, tighten aggressively.
This policy divergence as well as the negatives facing the Chinese Economy have seen the Chinese Yuan fall about 12% against the USD with USDCNH rising close to 7.15 around levels last seen at the peak of the pandemic in March 2020. The trend remains bullish on the chart as the price heads for the highest levels since 2008 around 7.19. Already at overbought regions on the RSI, price is at lofty levels considering the sharp rally all year and while the drivers point to further upside, it may be due some correction.
South Africa: At its latest meeting, the SARB hiked the interest rate by 75bps, back to pre-COVID levels at 6.25% in a further attempt to curb high inflation in South Africa that reads close to 8%. The drop in Oil prices saw inflation edge down to 7.6% in August from a multi-year high of 7.8% recorded in July, but this remains above the 6% higher end of the bank’s inflation target which means there is more tightening to be done in Q4.
The economy in South Africa contracted by 0.7% in Q2 from a revised Q1 growth of 1.7% while the unemployment rate remains near 34% as heavy flooding in Eastern South Africa and blackouts from the electricity supply cut by Eskom hit major sectors in the economy like Agriculture and Manufacturing among others. The effect of these disruptions will clearly weigh on the South African economy heading towards the latter part of 2022 amid central bank tightening alongside issues around the world like global supply chains disruption resulting from China lockdowns.
USDZAR has steadily moved higher by about 13% in 2022 clearing the high of 2021 and is currently trading around 18.000. Strength in the USD which is currently leading the Major currencies in 2022 as well as the troubles in the South African economy are the factors responsible for the upside in the pair, and while the tighter policies from the SARB could provide some support for the ZAR, the USD should overshadow it. The chart continues to show a bullish trend with price trading well above the 20 SMA and in bullish territory on the MACD; now it is close to overbought region on the RSI, there could be some corrections.
Mexico: The Bank of Mexico remains committed to maintaining price stability with the latest rate hike of 75bps in the month of August, the second one in a row to slow down the pace of inflation in the country, bringing the rate to 8.50%.
Banxico kept its growth forecast the same, with GDP expected to grow between 1.7% and 2.7% in line with the initial 2022 forecast of 2.2% but cut down its growth forecast for 2023 with the central bank seeing growth between 0.8% and 2.4% vs 1.4% to 3.4% previously. A revision in headline inflation forecast from 8.62% to 8.1% y/y and core inflation falling to 7.6% by year end suggest that the central bank is on the right path to bringing down inflation and will likely keep up with further hikes in interest rates.
The USDMXN has been all-round choppy the whole year with both central banks committed to bringing down inflation through an aggressive path of policy tightening. With the FED delivering another 75bps rate hike in the past week, the USD has since strengthened to the upside against the Peso, but the technical levels suggest that the price could remain trapped within 20.387 and 19.887. The picture could not be clearer as RSI has remained constricted within the 40-60 range since last year, but the relative strength index shows the current push to the upside by the USD is not strong enough, with a figure lower than 25.00.
If Banxico and the Fed continue to deliver similar sized rate hikes to their economies and similar policy guidance, then USDMXN could remain trapped in a range for the remaining part of 2022.
Russia: The Central Bank of Russia cut its interest rate by 50bps in its September meeting to further stimulate consumer spending with inflation declining and consumer demand subdued. The internal business environment is getting better but external factors including the tensions in Ukraine still add constraints on economic growth and activities. According to the Bank of Russia’s forecast, annual inflation is expected to stay within 11% and 13% in 2022 and drop to between 5% and 7% in 2023 while returning to 4% in 2024.
The economic outlook for the Russian economy is weak given the circumstances surrounding the country as well as the current situation of the global economy at large with recession one of the major topics in the last few months. A statement from the policy guidance from the central bank that “Supply-side constraints may strengthen because of problems with the procurement of equipment, a slow replenishment of stocks of finished goods, raw materials and components in the event of intensifying negative trends in import dynamics. In turn, the materialization of growing risks of a global recession may further weaken external demand for Russian exports and, as a result, provoke a weaker Ruble” suggests a weaker route for the Ruble in the last quarter of 2022.
USDRUB currently trades below the 20 SMA around 58.090 as price remains pressured but the policy divergence between the Federal Reserve who pledge to remain hawkish after hiking rates by 75 bps in their latest meeting and the Central Bank of Russia who cut interest rates by 50bps could potentially push the price higher from the support level around 50.7500.
The RSI also currently shows a steady decline from its overbought region since March 2022 but is now very close to its oversold region as the RSI carries a figure of 41.66 which suggests a potential upside in price as the economic forecast for the Russian economy remains bleak. The MACD agrees slightly with the RSI as the histogram is starting to shrink and at the brink of another crossover to the upside in favor of the USD.
COMMODITIES
Gold: The coordinated global central banks tightening and US Dollar strength have weighed heavily on the gold market so far this year, and with further tightening expected there is room for more downside by year’s end. However, the medium-term outlook saw the precious metal in September in its biggest advance since March as traders scaled back tightening expectations amid mounting concern of slowing growth. The shift in market sentiment at the beginning of Q4 was bolstered by the speculation that major central banks will have to be more cautious than markets had feared. With the USDIndex correctively pulling back from 20-year highs and the US Treasury yield correcting further, the bullion turned to $1700 an ounce with the 50-day moving average and $1800 coming into view in the near term.
However, recession risks are mounting, and bullion remains at the mercy of US Dollar and rate hike expectations. However, it may find a footing if growth outlooks continue to be revised down. National governments are under pressure to try and compensate struggling consumers and businesses. The need to boost government funding while central banks are removing stimulus and starting to sell assets accumulated through their QE programs means fiscal and monetary policies are set to be out of sync for the foreseeable future. On top of all this, UK markets in September was a taster of how fragile markets are, and Gold for once managed to benefit as the ascent of the US Dollar was halted.
The central bankers’ fight with inflation and growth could keep Gold in a bear market as the Fed is expected to hike by 75bp in November and another 50bp in December, which would leave the rate at 4.25-4.5%. The more the Fed hikes, the more US yields rise, which have been at their highest level in more than 10 years. On the flipside, the strong negative correlation between the yellow metal and yields, as high yields increase the opportunity cost of holding gold, is pushing investors away from gold.
Chinese gold demand has suffered so far this year with consumer demand down by 23% y/y. However, lately the consumer demand has started to pick up slightly, with expectation for a strong demand for the final quarter. Elsewhere, India, another major gold consumer, is expected to see stronger gold demand as we head towards Diwali in late October. Hence these could provide some near term floor to Gold at least for October.
Copper: After a very neutral Q3, Copper holds at the mid of its 2020-2021 rally, at 3.50, as ongoing supply issues provided some floor to Copper prices after a very sharp fall seen in Q2. The fundamentals excluding the supply woes continue to add further pressure to Copper for the upcoming quarter.
However, the Chinese manufacturing sector is vital for the Copper Q4 outlook, as Chinese demand has returned and shows slow growth, something that will support this key manufacturing metal. The Chinese Copper smelters have also increased the floor price for Q4 for treatment charges to $93/t from $80/t in Q3. Further slight production surplus is expected for 2022 in China, while it is expected that the metal will reach deficit next year as the demand will keep increasing sharply due to the green transition, with Copper a necessary metal for this change. The protests in large mines of Peru and in general in Latin America are expected to continue in Q4, creating further supply disruption, which reflect another potential support to the prices.
On the flipside, the stronger USD has capped demand for the commodity, which is traded in the currency internationally, as the accelerated fear of global recession and weaker global demand turns investors off commodities, which is expected to continue adding pressure to the asset and in general to the commodity market.
Therefore, Copper could prolong the neutral bias, and remain range-bound in the coming quarters.
OIL: Oil remains largely driven by geopolitics, as escalating tension between Europe and Russia provided some near term support to the USOIL at the end of the Q3. Q4 started with great support for the Oil, as OPEC+ is expected to proceed with a sizeable output cut to support prices but another key factor for Oil’s bounce is the imposition of new Russian sanctions.
EU member states have agreed a new package of sanctions against Russia, which also include a ceiling on the price of Oil shipped to countries outside of the union. The price cap on Oil has been under negotiations among the G7 countries for months, while the exact details of the price cap were not included in the package yet. Adoption by the G7 and a fresh unanimous agreement would be required to implement them. A signaling effect for now then. The new sanctions package also includes additional import and exports restrictions and further sanctions against Russian government officials.
Hence Gas markets remain the main focus and the key driver of the energy market, especially in Europe. The IEA Gas Market Report for Q4 not surprisingly highlighted “unprecedented uncertainty of supply”. That uncertainty has impacted LNG markets in particular as governments hunt for alternative supplies. “The IEA forecasts that Europe’s LNG imports will increase by over 60 billion cubic meters (bcm) this year, or more than double the amount of global LNG export capacity additions, is keeping international LNG trade under strong pressure for the short-to-medium-term. This implies that Asia’s LNG imports will remain lower than last year for the rest of 2022. However, China’s LNG imports could rise next year under a series of new contracts concluded since the beginning of 2021, while a colder-than-average winter would also result in additional demand from northeast Asia, further adding to market tightness.”
The IEA conducted a resilience analysis of the EU’s gas market in the case of a complete Russian supply shutdown starting from 1 November 2022. The analysis shows that without demand reductions in place and if Russian pipeline supply is completely cut, EU gas storage would be less than 20% full in February, assuming a high level of LNG supply, and close to 5% full, assuming low LNG supply. Storage falling to these levels would increase the risk of supply disruptions in the event of a late cold spell. A reduction in EU gas demand through the winter period of 9% from the average level of the past five years would be necessary to maintain gas storage levels above 25% in the case of lower LNG inflows. And a reduction in demand of 13% from the 5-year average would be necessary through the winter period to sustain storage levels above 33% in the case of low LNG inflows. Therefore, gas saving measures will be crucial to minimise storage withdrawals and keep inventories at adequate levels until the end of the heating season.
Therefore, USOIL could remain range-bound the final quarter of the year, amid OPEC+ efforts and rising Chinese demand on the one side and geopolitical tension on the other, keeping the asset sidewise.
STOCKS
US100: The US100 has been on an upswing over the past several weeks following a precipitous drop in the first half of 2022. With inflationary pressures and Russia’s invasion of Ukraine, the index has given up much of its 2021 gains. These factors aren’t only bad for the economy, but also for the US100, which consists of more tech stocks, as tech stocks have been the worst performers in the broader market in 2022. So, we can expect the US100 to stay in red for the last months of 2022. A highly unpredictable 2022 threatens the substantial achievements made in 2021.
With annual rates of 9.1% in the US, 8.6% in the eurozone, and 9.4% in the UK in July 2022, inflation is starting to appear to be a major problem for Western economies. However, the stock market might continue its bearish trend, however whether we see this cycle all boils down to the Fed rate hikes and the overall economic situation.
The index shows that investors are evenly divided between those who see the hitches in the market so far this year as temporary and those who fear much worse times ahead for stocks. Uncertainty will likely keep the US100 neutral on the technical front. On the weekly chart, US100 is just above the 20 Moving Average, and the MACD is close to its neutral level. We expect the index to retest June levels around 10565. If the index breaks through this level, the next support lies around 10519, the levels seen in September 2020.
On the other hand, the next resistance for the index lies around 13181. If it manages to break through this level, it could reach 14534, the level seen in March 2022.
US500: The index’s trajectory over the next few months will revolve largely around the Fed’s monetary policy decisions. As inflation remains high and the Federal Reserve takes serious efforts to restrain price rises by raising interest rates, many of the same economic worries persist, causing historic losses for the stock market.
Following a significant shift in the view for interest rates heading higher, Goldman Sachs Group Inc. reduced its year-end goal for the US500 from 4,300 to 3,600. Rising interest rates will have a negative impact on the market value of US stocks. Still, the index could make a turnover. The US500 is down by 20% YTD, implying that at least part of the potential loss has already been priced in. While Goldman’s forecast reduction comes after numerous strategists polled by Bloomberg lowered their year-end projections for the US500, those same strategists still expect the index to rise by 16% from current levels by year’s end. The confidence of the US500 is also affected by a wide variety of other variables. Consumer spending is predicted to drop as a result of the prolonged conflict in Ukraine, and the market is showing signs of anticipating a recession in the near future.
A market rebound in the second half of 2022 is possible if any of these components performs better than projected. In terms of market technical aspects, the market may swing either way. The MACD is close to neutral and the price is below the 20-MA on the weekly time frame. The next support lies at 3628. If the index dips below this level, it could reach 3219 (61% Fibonacci).On the upside, the next resistance lies around 4326. If the index breaks above this level, it could reach 4639, the level it achieved in March 2022.
US30: The US30 had a precipitous decline, falling more than 700 points. It entered bear market territory, which is generally characterized as a drop of more than 20% from recent highs. US30 could face several hiccups as we move into the final quarter. As investors become increasingly concerned about the Federal Reserve’s increasingly hawkish tone and the possibility of a recession in the near future, the central bank announced its third straight 75bp increase in interest rates. The Consumer Price Index (CPI) data for the month of August also contributed to the precipitous market fall.
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HF Market Analysis Team
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