May 6, 2022

“A rising dollar triggered a slump in the Yuan, followed by a scramble by Chinese companies to hedge against risks of further depreciation – this also tracked a fall in global stocks driven by concerns that central banks’ efforts to tame inflation, by raising interest rates, could overwhelm economic growth.”

Sam Cornford, Partner – Head of Trading

Main Headlines

The Biden administration has laid out plans for what amounts to a 60mn-barrel spread trade in oil markets, buying back crude at lower prices to replenish supplies sold from the US government’s emergency stockpile this year for more than $100 a barrel. The Department of Energy’s blueprint for the strategic petroleum reserve would serve dual goals: adding back barrels for future supply emergencies while giving oil companies a signal to produce more. The US government has been selling a record 180mn barrels of crude oil from the SPR this year in a bid to tamp down fuel prices that have surged owing to strong demand and shortfalls linked to oil embargoes and sanctions on Russia. Meanwhile, investors are pressing US shale oil producers to use windfalls from high oil prices to fund dividends and share buybacks rather than make longer-term investments in drilling.

The Bank of England has warned the UK economy will slide into recession this year as higher energy prices push inflation above 10 per cent, a forecast that pushed sterling to a two-year low. Despite forecasting a severe fall in household incomes, the bank’s Monetary Policy Committee voted on Thursday to squeeze them further, raising the main interest rate a quarter-point to 1 per cent, its highest level since February 2009. Three of the nine MPC members voted for a half-point rate increase. With the gloomy outlook, financial markets now expect fewer interest rates rises, leading to a fall in government borrowing costs. Andrew Bailey, BoE governor, said there would be a “very sharp slowdown” and he understood that higher energy prices and borrowing costs would hurt.

GBP

Sterling is weaker than most major currencies in the early morning trade. According to data released yesterday, rising prices of energy and raw materials are hitting UK businesses hard, particularly in the hospitality sector, that fuel concerns about a further rise in consumer inflation and a new economic downturn. British Prime Minister Boris Johnson’s Conservative Party lost control of traditional strongholds in London and suffered losses elsewhere in local elections, early results showed this morning, as voters punished his government over a series of scandals. Figures from mortgage lender Halifax showed that British house prices rose for a tenth consecutive month in April, although the annual rate of growth eased slightly from the 15-year high recorded in March.

EUR

Euro is stronger against sterling and weaker against the dollar this morning. France’s Socialist Party on Friday sealed a coalition deal with the hard-left La France Insoumise party to run together in June’s parliamentary elections to try to deprive newly re-elected President Emmanuel Macron of a majority. Hungary cannot support the European Union’s new sanctions package, which includes an embargo on oil imports, in its present form, Prime Minister Viktor Orban said this morning. Orban said the European Commission’s current proposal banning Russian oil imports would amount to an “atomic bomb” dropped on the Hungarian economy. German Chancellor Olaf Scholz and US President Joe Biden agreed in a call yesterday they would not recognize any Russian territorial gains in Ukraine.

USD

The dollar is well bid against most major currencies overnight. The US economy’s long era of cheap shale gas is showing signs of fading, with prices hitting the highest in more than a decade and Europe and Asia ready to pay more to import American supplies. The Henry Hub natural gas benchmark settled at $8.415 a million British thermal units on Wednesday, more than double the price at the start of the year and far above the $3 average of the previous 10 years. Thousands of people told to flee the largest wildfire burning in the United States have chosen to stay and defend generational homes in the mountains of northern New Mexico, even as some run out of food and water, officials said. April US jobs data are expected to show solid but slowing growth, and wage pressure running at a 5.5% annual pace.

Markets

Stocks slid with bonds this morning and the dollar rose as inflation, rising borrowing costs and China’s Covid lockdowns depressed sentiment. European stocks extended their losses, falling more than 1%, and were set for the worst weekly drop in two months. Asian stocks retreated, although the overall loss was smaller than Thursday’s slide of more than 3.5% in the S&P 500 index and 5% in the Nasdaq 100 gauge. US futures were lower. Treasuries extended a tumble that’s lifted the US 10-year yield past 3% while a dollar gauge neared a two-year high. Risk aversion has swept away the relief rally that followed the Federal Reserve decision Wednesday. The US central bank raised interest rates by the most since 2000 while pushing back against talk of super-sized increases.

Main Economic Data/Central Banks/Government (All Times CET)

8:00 a.m.: Germany March industrial production
8:00 a.m.: Sweden March industrial orders, household consumption
8:45 a.m.: France first-quarter private sector payrolls
9:00 a.m.: Switzerland April FX reserves
9:00 a.m.: Spain March industrial production
9:30 a.m.: Riksbank minutes from April 27 meeting
9:30 a.m.: ECB’s Villeroy speaks
10:00 a.m.: Italy March retail sales
11:30 a.m.: Bundesbank’s Nagel speaks
12:00 p.m.: Riksbank’s Skingsley speaks
1:15 p.m.: BOE’s Pill speaks
2:30 p.m.: US April nonfarm payrolls
3:00 p.m.: ECB’s Elderson answers Twitter Q&Q
3:00 p.m.: Poland central bank’s Glapinski speaks
5:00 p.m.: BOE’s Tenreyro speaks
5:00 p.m.: ECB’s Rehn speaks
7:00 p.m.: Baker Hughes U.S. rig count
Ukraine April Reserve Assets
UN’s world food situation monthly report for April

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