Habemus Papam

The battle on the oil field is getting heated as Joe Biden is expected to start releasing the strategic oil reserves as soon as today, to tame the upside pressure in oil prices, which also boost inflation and leaves the Federal Reserve (Fed) with a decision that it doesn’t want to make: hike rates. And Biden is not playing alone; the world’s biggest oil eaters, like Japan, India, South Korea and even China consider making similar statements in the coming days. So, this is a war declaration to OPEC+ which refused to answer Biden’s call to increase supply to cool down the rally in oil prices over the past months. As a result, the US will help itself, and release 35 million barrels over time to help easing the energy crisis.

US crude eased to $75 a dollar following the US announcement. The selloff was moderated as most of the information was already priced in. But the downside pressure may continue depending on what’s coming next.

OPEC thinks that the US move is unjustified by the current market conditions – which is of course nothing but a bad faith, but the cartel will likely scrap its plans to pump 400’000 barrel of additional daily supply when it meets next Thursday. Until then, we will probably see the oil traders’ heart pounding between larger strategic supply from the biggest oil consumers and prospects of lower OPEC supply. Therefore, there is little chance we see oil breaking important price levels. On the downside, the $74 pb level should act like a solid support, while offers should come in play into the $80 psychological level.

It is also important to note that the rising Covid cases is also weighing on demand prospects for the winter, as the lockdown measures and travel restrictions are being brought back on the table.

In other and much-awaited news, the new Fed Chair is, drum roll, Jerome Powell! The weeks of wait is now over, and Jerome Powell will be keeping the helm of the Fed and Brainard will be the Vice-Chair.

But in reality, we all know it doesn’t matter, as the Fed has no alternative regarding the direction it will take in the months ahead: the rising inflation won’t temper itself in the environment of zero rates and loose monetary policy, so an eventually faster QE taper and higher rates are on the menu of 2022.

The S&P500 and Nasdaq hit a fresh record before closing the session in the negative. Investors loved the idea of keeping the Republican Powell at the head of the Fed instead of bringing in his Democrat alternative Brainard. But the US 2-year yield jumped to 0.60% on rising prospects of an upcoming rate hike in the US. The fed funds futures now price in the first-rate hike in June this year, and the pricing is quite modest because if the inflation keeps accelerating at the current speed, the expectation of the first rate hike could be brough earlier to as soon as February next year. This means, there is still room for a further hawkish pricing in the market, which would push the short-term yields, and the US dollar higher across the board.

Gold dropped near $50 per ounce yesterday on the back of the jump in the short-term US yields and is now back around the $1800 level. Now, because the north is the only possible direction for the US yields, gold will likely remain under the pressure of rising yields, and the US dollar may again be a better safe haven if we say any selloff across the equities as well.

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