Market sentiment is fragile on uncertainty regarding whether China would make a U-turn on its Covid reopening plans.
The widening spread between the US 2- and 10-year yields, which hit the widest inversion since the middle of 80s, and between the US 3-month and the 10-year yields warn that recession will be inevitable.
In the past decades, when we had such sustainable inversions – and they are sustainable, a recession followed the next year.
Oil rebounds from $75pb
Recession fears were already weighing on fragilized oil on Monday morning, when news that OPEC+ would increase oil production by half a million barrels per day on the upcoming December 4th meeting wreaked havoc yesterday.
The barrel of US crude tanked to $75 per barrel, below the September dip.
Later, Saudi denied the report and we are back to $80 this morning.
But the fear of another round of Covid lockdowns, and the broad-based recession pricing shall continue playing against oil bulls.
Still, bulls see two positive factors. First, the US will stop selling its strategic petroleum reserves. And second, the EU sanctions against Russian oil will become effective in December. Both, should support another leg higher in oil.
While the first idea seems plausible – as not only the Americans will have to stop selling their reserves at some point, but also start thinking about refilling them, the effect of the European sanctions on oil are uncertain. According to latest news, Russia already lost around 90% of its European oil market, even before the sanctions began.
Therefore, the outlook for oil remains neutral to slightly negative in the short-run. There is now a double bottom near the $75/76 range, that OPEC+ will fight to hold. On the topside, a recovery above $95 before the year end seems unlikely.
Dollar up, equities down
Yesterday, the latest German PPI data printed a monthly drop of 4.2% in October. Softer oil and gas prices certainly played a role, but the sharp drop has also been interpreted as a sign of an imminent, or an already-in recession.
The EURUSD dived to 1.0222, and could retreat further, as we see the US dollar picking up momentum since it rebounded from an important technical support last week.
The US dollar index bounced higher after getting very close to the 38.2% retracement level on 2021-2022 rally, and mixed Fed comments tilt the balance to the upside for the greenback.
San Francisco Federal Reserve (Fed) President Mary Daly warned about a too much tightening that could be ‘unnecessarily painful’ for the economy, but that couldn’t send the US stocks in the green.
The S&P500 closed 0.39% lower, while Nasdaq slid more than 1%.
Cryptic fall
Cryptocurrencies remain under stress of the FTX collapse.
Genesis warns investors that it could file for bankruptcy if it can’t raise cash to save its lending unit that went down along with FTX.
Bitcoin is now below the $16’000 mark. And if those who prefer to hold on to their coins prevent the price from a free fall, it’s hard to convince new money to join the market in the middle of the turmoil.
We could see Bitcoin fall as low as $12’000.