The ECB will remain hawkish until the summer. UAE plans to exit OPEC

March 6, 2023

The recent string of strong economic data has caused investors to rethink how much more Fed tightening is needed to slow the economy significantly. Investors have begun to realize that the Fed will stop raising rates probably before early summer, and the current price levels in the stock market are a great opportunity to buy or average portfolios. This caused the indices to rise sharply at the end of last week. At the close of the stock market on Friday, the Dow Jones Index (US30) increased by 1.17% (+1.47% for the week), and the S&P 500 (US500) added 1.61% (+1.33% for the week). The NASDAQ Technology Index (US100) jumped by 1.97% on Friday (+1.49% for the week). The S&P 500 (US500) broke a three-week losing streak, and the Dow Jones Industrial Average (US30) posted its first weekly gain since late January.

The fourth-quarter reporting season is coming to a close, and all but seven companies in the S&P 500 have reported. According to Refinitiv, results for the quarter beat consensus forecasts 68% of the time.

Federal Reserve Bank of Richmond President Thomas Barkin said Friday that he could envision a scenario in which the central bank would raise the US benchmark interest rate to a range of 5.5%-5.75%. Barkin also added that inflation might cool faster than he expects, implying a shallower rate trajectory. But it is more likely that inflation will persist, requiring the Fed to do more. That said, the policymaker does not expect a rate cut before the end of 2023.

(DE30) gained 1.64% (+1.48% for the week), French CAC 40 (FR40) added 0.88% (+1.48% for the week), Spanish IBEX 35 (ES35) jumped by 0.47% (+2.29% for the week), British FTSE 100 (UK100) closed on Friday with 0.04% (+0.87% for the week).

The latest Eurozone inflation report showed that price pressures remain persistently high in the single block, especially for core inflation. The ECB will meet in mid-March to announce its next 50bp interest rate hike. And this scenario is already almost entirely factored into prices. Several ECB policymakers have recently warned that ECB rate hikes should continue until core inflation turns around. With the head of the ECB expecting core inflation to remain high through the summer, there is a high probability that the ECB will undertake another 0.5% rate hike at its May meeting.

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On Friday, the Wall Street Journal reported that there is an internal debate in the United Arab Emirates over the prospect of leaving OPEC. The UAE’s decision to leave the Organization of Petroleum Exporting Countries would reduce the group’s authority to set oil prices, which account for nearly 38% of global production. The Emirates produces more than 3 million barrels a day and is OPEC’s third-largest oil producer. Analysts say oil prices are likely to be in the $75 to $80 a barrel range.

Saudi Arabia raised oil prices for Asia and Europe for April. The reason is rising demand from China, the world’s biggest oil importer. Aramco sells about 60% of its crude supply to Asia, mostly under long-term contracts whose prices are reviewed monthly. China, Japan, South Korea, and India are the biggest buyers. According to some experts, as the heat approaches, demand will only increase, which, given the current supply, could push oil prices back up to $100 a barrel.

Asian markets mostly declined last week. Japan’s Nikkei 225 (JP225) jumped by 2.21% over the week, China’s FTSE China A50 (CHA50) gained 1.90%, Hong Kong’s Hang Seng (HK50) jumped by 3.77%, India’s NIFTY 50 (IND50) added 0.89%, and Australia’s S&P/ASX 200 (AU200) was negative by 0.32%.

China maintained its language on Taiwan in its annual report to the country’s legislature, suggesting that President Xi Jinping maintains his policy on the self-governing island even as global tensions rise. “We must promote the peaceful development of relations on both sides of the Taiwan Strait and advance the process of China’s peaceful reunification,” Premier Li Keqiang said in a work report to the National People’s Congress. On the one hand, this is great news for the de-escalation of relations between China and Taiwan along with the United States. On the other hand, at the same time, China has increased defense spending by 7.2%, which contrasts slightly with plans to resolve things diplomatically. But it should be noted that since Russia’s invasion of Ukraine, the world has begun “military reform” – almost all countries have begun to increase military budgets, especially European countries.

For its part, the Biden administration is close to tightening regulations on some foreign investments by US companies in order to limit China’s ability to acquire technology that could improve its military power. This is another attempt by the White House to hit China’s military and technology sectors at a time of increasingly strained relations between the world’s two largest economies.

In the commodities market, futures on natural gas (+18.37%), platinum (+8.37%), gasoline (+6.76%), sugar (+6.41%), palladium (+5.06%), WTI oil (+4.63%), Brent oil (+3.42%), copper (+3.01%), silver (+2.76%) and gold (+2.51%) showed the biggest gains last week. Futures on orange juice (-8.82%), coffee (-5.06%), and wheat (-1.84%) showed the biggest drop.

S&P 500 (F) (US500) 4,045.64 +64.29 (+1.61%)

Dow Jones (US30)33,390.97 +387.40 (+1.17%)

DAX (DE40) 15,578.39 +250.75 (+1.64%)

FTSE 100 (UK100) 7,947.11 +3.07 (+0.039%)

USD Index 104.53 -0.50 (-0.48%)

Important events for today:

– Switzerland Consumer Price Index (m/m) at 09:30 (GMT+2);
– UK Construction PMI (m/m) at 11:30 (GMT+2);
– Eurozone Retail Sales (m/m) at 12:00 (GMT+2);
– Canada Ivey PMI (m/m) at 17:00 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

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The ECB will remain hawkish until the summer. UAE plans to exit OPEC