Sample Category Title

The primary focus on the markets switched to the energy sector, where prices are making new multi-year highs. The price of natural gas in the US on Tuesday morning was over $6.3 per MMBtu, the highest since 2008. The price of gas surpassed $1,000 per thousand cubic metres in European trading - a new psychological and historic high. Coal is now as expensive as it was 12 years ago. Brent futures have surpassed the $80 mark, while the spot market is only getting closer to that level.

While there are very tangible reasons behind this rise in energy prices, there is still plenty for long-term buyers to worry about. Stock markets have moved away from the ‘stocks only go up’ motto, and we see more signs of bears advancing on different fronts. Energy - has remained the last refuge of the bulls.

This kind of trend acceleration and price sweeping away everything in its path are often the final points in the trend.

Two of the most striking examples from recent history come to mind. The first such example was the similar spike of energy prices in 2008 when a barrel of Brent set an all-time high of $147, and then the wheel had turned. By then, equity markets had already been dominated by a ‘sell’ mood for many months.

Another example was the dynamic in April 2020. At that time, oil prices continued their decline, rejecting the reversal of stock indices to growth. The final chord was struck at the monthly expiry of the WTI contracts in the US when prices temporarily went into negative territory, and Brent fell to $16, which was clearly below economically sound levels. That was a turning point.

That is not to say that oil prices are astronomically high right now. Much more worrying is the jump in gas and coal. The chances are high that the market will reach a breaking point in the coming weeks, with sharply lower coal and gas prices pulling oil with them.

From that perspective, potential technical targets near $100 per barrel Brent should not be taken as sustainable long-term targets. The world remains within artificial constraints on oil production. Rising prices and demand promise to push producers to increase production and investment in the industry, easing those constraints.

Moreover, high fossil fuel prices are the best driver for the payback of alternative energy projects.

It is probably too early for investors and traders to bet on falling energy prices, but it is already worth bearing in mind that prices now seem to be detached from reality. Further, signs of falling demand for fossil fuels, which could well coincide with rising supply, are worth keeping an eye on. A shift in the balance of market forces could result in one of the most significant selloffs in the energy market in recent years.

Markets

US Treasuries continued underperforming German Bunds at the start of the new trading week. US yields added 0.8 bps (2-yr) to 4.3 bps (7-yr) with the belly of the curve underperforming the wings. The US 5-yr yield trades north of 1% for the first time since March 2020. The US 10-yr yield takes out the psychological 1.5% barrier with the next real test arriving soon at 1.53% (62% retracement on March/July decline). Although a plea of heavyweight Fed governors confirmed that tapering is coming (very) soon, it were (higher) inflation expectations that were responsible for the lion share of yesterday’s move. Take a quick look at oil prices and wonder no longer. Brent crude tops $80/barrel for the first time since October 2018. Global commodity price indices like CRB are even stretching to highest levels since mid-2015. The broad-based rally, combination of pent-up demand but also and especially continuing supply-side issues significantly raises upward inflation & downward growth risks. Other factors causing US Treasuries’ underperformance are this week’s end-of-month refinancing operation and the political battle over lifting the US debt ceiling. The US Treasury yesterday sold $65bn 2-yr Notes and $61bn 5-yr Notes. The 2-yr sale stopped above the cut-off bid side with a below-average bid cover in a sign that the repositioning at the front end of the curve has further to go. The 5-yr Note auction went average. The Treasury wraps up today with a $62bn 7-yr Note deal. The US Senate blocked the Democratic-led bill to suspend the debt ceiling into December 2022 in a vote largely among party lines. The bill thus didn’t get the 60 votes needed in the split Senate (50-50). Republicans don’t want to be accountable for President Biden’s trillion dollar spending agenda and force Democrats to go alone on the debt ceiling issue via the reconciliation process. Agreeing on short term funding to keep the government running is no issue, as long as it is separated from raising the debt limit. The US dollar profited from the rising yield differential (despite the inflation driver), forcing EUR/USD below 1.17 again. A weaker euro played as well as the German parliamentary election shut the door on the possibility of (short term) additional fiscal spending. Key EUR/USD 1.1664 support remained out reach though going into this week’s ECB forum on central banking. One day – perhaps sooner rather than later – the single currency will get the normalization boost as well. EUR/GBP drifted lower in the 0.85 big figure with a marginal touch of sterling strength as well after BoE-governor Bailey floated the option of lifting policy rates already this year (from 0.1% to 0.25%). Today’s eco calendar contains US trade balance, consumer confidence, and Richmond Fed manufacturing index. We don’t expect them to interfere with current trading dynamics (higher bond yields; USD to test resistance levels). Speeches by central bankers are a wildcard.

News headlines

The Czech government approved a 2022 central budget bill that would entail deficit of CZK 376,6 bln, only slightly lower than the shortfall of about CZK 400 bln that is expected for this year. The Finance Ministry expects a budget deficit of 5% for 2022. The Budget was only approved by the Ministers of the ANO party. The Social democrats didn’t agree as they asked a bigger rise in public sector wages. The Government of Prime Minister Babis this year also ran an expansionary fiscal policy that received remarks from the central bank. Babis argued that the fiscal expansion was allowed as the country still runs a low public debt. The Finance Ministry expects public debt to rise to 46.2% next year from 43.5% this year. The proposal will have to be brought to Parliament after the October 8-9 election. So, it remains unsure whether the ANO party of PM Babis will have a government majority at that time.

Profit growth at China’s industrial companies decreased further in to 10.1% in August from 16.4% in July, indicating growing headwinds for the world’s second largest economy. The statistics bureau commented that ‘"A sustained and stable recovery in corporate profits is facing more challenges," "The epidemic is still spreading in some areas, overall prices of bulk commodities are high, the cost of international logistics is elevated, and the shortage of chips is pushing up corporate costs." Still, for the first eight months of this year, profits rose 49.5%, easing from 57.3 YTD growth over the first seven months of the year.

Daily Pivots: (S1) 1.2602; (P) 1.2637; (R1) 1.2664; More...

Intraday bias in USD/CAD remains mildly on the downside. Fall from 1.2891 is seen as the third leg of the pattern from 1.2947. Deeper decline would be seen to 1.2492 support and possibly below. On the upside, above 1.2729 minor resistance will turn bias back to the upside for 1.2891/2947 resistance zone instead. Overall, with 1.2421 support intact, rise from 1.2005 should still be in progress for another rally through 1.2947 at a later stage.

In the bigger picture, fall from 1.4667 is seen as the third leg of the corrective pattern from 1.4689 (2016 high). It should have completed after hitting 1.2061 (2017 low) and 50% retracement of 0.9406 to 1.4689 at 1.2048. Sustained break of 38.2% retracement of 1.4667 to 1.2005 at 1.3022 will pave the way to 61.8% retracement at 1.3650 and above. Overall, medium term outlook remains neutral at worst with 1.2048/61 support zone intact.

EUR/USD

Current level - 1.1687

The bears prevailed during yesterday’s trading session, but the pair could not breach the support at 1.1686. During the early hours of today’s trading, the attack on behalf of the sellers continues and a breach of the mentioned level is a highly probable scenario that would easily lead to future losses and a move towards 1.1614. If the bulls re-enter the market, their first target can be found at the level of1.1708, but only a successful breach of 1.1752 could lead to a change in the current market sentiment. The announcement of the consumer confidence data for the U.S. (today;14:00 GMT) could lead to an increase in volatility. In addition to this, the head of the ECB will be speaking at 12:00 GMT, while overseas, the head of the FED will be testifying in front of the Senate at 14:00 GMT.

USD/JPY

Current level - 111.10

After the successful breach of the level at 110.77 and a minor retracement before that, the rally for the USD/JPY continued and the pair blew past the resistance at 111.00. However, a confirmation of the breach is still needed in order to strengthen the positive expectations for a move towards the highs from the beginning of July 2021 at around 111.60. In case a corrective move develops, it should be limited to the support at 110.77.

GBP/USD

Current level - 1.3704

The Cable did not manage to find a clear direction during yesterday’s trading session and, at the time of writing, it is consolidating around 1.3700.. If the bulls prevail, a test of the resistance level at 1.3752 is highly probable, but only a successful breach of the upper target at 1.3803 could lead to more sustained gains for the sterling against the dollar. Given the current fuel crisis in the United Kingdom, it is more likely that the bears will take the reins, but only a successful attack of the support zone at 1.3609 would paint a more bearish picture for the future path of the GBP/USD.

Daily Pivots: (S1) 0.7260; (P) 0.7277; (R1) 0.7304; More...

AUD/USD is staying in consolidation from 0.7219 and intraday bias remains neutral first. On the downside, below 0.7219 will resume the fall from 0.7477 to retest 0.7105 low. Firm break there will resume whole decline from 0.8006 for 0.6991 support next. On the upside, above 0.7320 minor resistance will turn bias back to the upside for 0.7477 resistance instead.

In the bigger picture, with 0.6991 cluster support (38.2% retracement of 0.5506 to 0.8006 at 0.7051) intact, we're seeing price action from 0.8006 as a correction only. That is, up trend from 0.5506 low would resume after the correction completes. In that case, main focus will be 0.8135 key resistance (2018 high). Sustained break there will carry larger bullish implications. However, sustained break of 0.6991 will argue that the whole medium term trend has indeed reversed.

The 50– hour simple moving average pressured the USD/CAD currency pair lower on Monday. As a result, the US Dollar declined by 46 pips or 0.36% against the Canadian Dollar.

As for the near future, the exchange rate could continue to edge lower in a descending channel pattern. Sellers may target the 1.2550 area within Tuesday's trading session.

However, the currency exchange rate might encounter support at 1.2602 in the shorter term.

Daily Pivots: (S1) 1.1678; (P) 1.1703; (R1) 1.1720; More...

EUR/USD's breach of 1.1682 suggests resumption of fall from 1.1908. Intraday bias is turned back to the downside for 1.1663 low first. Decisive break there will resume the fall from 1.2265, and the pattern from 1.2348, to 1.1602 key support next. On the upside, however, above 1.1749 minor resistance will turn bias back to the upside for 1.1908 again.

In the bigger picture, rise from 1.0635 is seen as the third leg of the pattern from 1.0339 (2017 low). Further rally remains in favors long as 1.1602 support holds, to cluster resistance at 1.2555 next, (38.2% retracement of 1.6039 to 1.0339 at 1.2516). However sustained break of 1.1602 will argue that the rise from 1.0635 is over, and turn medium term outlook bearish again. Deeper fall would be seen to 61.8% retracement of 1.0635 to 1.2348 at 1.1289 and below.

On Monday, the British Pound surged by 101 pips or 0.67% against the Japanese Yen. The currency pair breached the upper line of an ascending channel pattern during the Asian session on Tuesday.

Everything being equal, the exchange rate could continue to trend bullish during the following trading session. The potential target for buyers would be near the 153.50 level.

However, the currency exchange rate could encounter resistance at 152.50 within this session.

On Monday, the Australian Dollar edged higher by 37 pips or 0.52% against the US Dollar. A breakout occurred through the upper boundary of a descending channel pattern during the Asian session on Tuesday.

Given that a breakout has occurred, buyers could continue to drive the exchange rate higher within the following trading session. The potential target for bullish traders would be near the 0.7350 level.

However, the currency exchange rate could make a brief pullback towards the 0.7280 area within this session.

During Monday's trading session, the common European currency edged higher by 40 pips or 0.30% against the Japanese Yen. The currency pair was pressured higher by the 50– hour simple moving average on Monday.

All things being equal, the exchange rate could continue to surge in an ascending channel pattern during the following trading session. The potential target for buyers would be near the 130.60 area.

However, the currency exchange rate fails to break the resistance level at 130.20, a decline towards the 129.60 level could be expected within this session.