Sun, Dec 04, 2022 @ 14:19 GMT
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US Rail Strike Risk Weighs on Sentiment

US equities eked out small gains yesterday as dip buyers timidly came in, but risks remain tilted to the downside with the disappointing inflation figures, and the risk of the largest rail strike in the US since 1992.

Released yesterday, the US producer price data didn’t enchant investors. The headline figure fell for the second consecutive month and came in at 8.7%, slightly lower than the analyst expectations. Yet, the broader story was similar to the CPI read. The core PPI strengthen last month, hinting that most of the easing in producer inflation was due to cheaper energy prices – which however remain very volatile, and which, more importantly carries a decent upside risk.

The barrel of American crude flirted with the $90 mark yesterday, without however being able to clear resistance at this level. The recession worries, and prospects of slower global demand keep the oil bears in charge for now, while the bullish bets on tight supply remain on standby. But the winds could rapidly change direction.

For now, the latest EIA data revealed that the US crude inventories rose by 2.4 million barrels last week versus 1.9 million rise expected by analyst. The higher inventories hint at lower-than-expected demand, and help cool down the positive pressure.

So yes, we saw the S&P500 recover a part of losses yesterday, as Nasdaq gained 0.84%. But the risks remain clearly tilted to the downside, as the Federal Reserve (Fed) expectations will remain hawkish as long as we don’t see a material softening in inflation. And this week’s figures showed that we are not there just yet.

Plus, negotiations between the freight-rail companies and unions showed no progress to avoid an eventual rail strike by Friday, which could result in about 125’000 workers walk off their jobs. It is said that it would be the largest stoppage of its kind since 1992. And an eventual strike would not only cost the US economy about $2 billion per day but would also boost the inflation expectations for this month, and make sure that the hope of seeing inflation ease would be postponed by at least another month.

As a result, the US dollar remains relatively strong near the 20-year highs, the EURUSD consolidates below parity as the latest industrial production data, released yesterday showed a 2.3% decline in activity last month, versus 1% contraction expected by analysts, meaning that the energy crisis is took a bigger toll on the European industrial activity, and the crisis has not even, really, begun yet!

The European leaders are doing their best to get ahead of the game with the crisis. The European Union is now looking to raise more than 140 billion euros from energy firms to help households and businesses afford the otherwise unaffordable cost of energy.

Interestingly however, the European energy companies which should see their superprofits taxed, like BP or Total, didn’t react heavily to the news. BP closed the session slightly higher yesterday, while Total Energies rallied 2.5% on firm oil prices, whereas the FTSE and the EuroStoxx were under a decent selling pressure. The price action gives you an idea on how profitable the European energy companies are, despite the risk of being taxed their additional profits this year. Let’s all hope that they wouldn’t restrict output to pay less taxes, which, then, would backfire on politicians, and worsen the energy crisis by further weighing on supply.

Gold baffled

Gold is back below the $1700 mark, as improved risk appetite has again got investors to bypass the precious metal and opt for better yield assets yesterday. Gold continues being baffled by the hawkish Fed expectations – which push the dollar and US yields higher and weigh on gold, and by the dovish Fed expectations, which eases the strong dollar pressure, but get investors on board of riskier and better yielding assets. The price of an ounce could extend toward the $1650 in the continuation of the actual negative trend.

USD/JPY?

One pair we could see some material easing is the dollar-yen. The USDJPY was softer yesterday on news that the Bank of Japan (BoJ) conducted a rate check, which has been perceived as a preparation to intervene directly in the market to stop the depreciation in yen. If the BoJ intervenes, we could rapidly see the price of dollar-yen ease at least toward 125/130 region, which is April to June trading range. That would allow the BoJ to buy time, and take it easy on its rate policy, while preventing the dollar from pushing inflation into an undesired positive spiral in Japan.

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