China kept interest rates at current levels. The conditions for a rally have formed again for oil

December 20, 2023

As of Tuesday’s stock market close, the Dow Jones Index (US30) was up by 0.68%, while the S&P 500 Index (US500) added 0.59%. The NASDAQ Technology Index (US100) closed positive by 0.66%. Meanwhile, the Dow Industrials (US30) and NASDAQ (US100) indices rose to new all-time highs. Stocks rose on Tuesday as bond yields fell amid optimism of a Fed rate cut. FRB Richmond President Barkin opined that the Fed will cut interest rates if inflation progress continues. His colleague, FRB Atlanta President Bostic, also supported speculation that the Fed will cut interest rates soon. Markets rate the odds of a 25 bps rate cut at 10% at the next FOMC meeting on January 30-31 and 83% at the next meeting on March 19-20.

The US real estate news on Tuesday was mixed. On the upside, construction starts unexpectedly rose by 14.8% m/m to a 6-month high of 1.56 million in November, which was stronger than expectations for a decline to 1.36 million. Building permits in November, an indicator of future construction, conversely fell by 2.5% m/m to a 4-month low of 1.460 million, which was weaker than expectations for a decline to 1.465 million.

Boeing (BA) is up more than 1% after Deutsche Lufthansa AG ordered 40 Boeing 737-8 Max airplanes.

Equity markets in Europe were mostly up yesterday. Germany’s DAX (DE40) rose by 0.56%, France’s CAC 40 (FR40) gained 0.08%, Spain’s IBEX 35 (ES35) added 0.52%, and the UK’s FTSE 100 (UK100) closed positive by 0.31%.

Unlike the US Fed, ECB policymakers are more hawkish. ECB Governing Council representative Kazaks said yesterday that the ECB needs to keep interest rates at current levels for some time to ensure that wage growth slows and prevents new risks to inflation, so it is too early to declare victory over inflation and, therefore, not the time to cut interest rates. His colleague Simkus noted that while Eurozone consumer prices were a positive surprise in November, the medium-term outlook has not changed much, so expectations of a quick interest rate cut may be too optimistic. The ECB’s hawkish stance will have a positive impact on the Euro and a negative impact on European indices.

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For oil quotations, the situation is in the direction of continued growth. Firstly, the rally of US indices indicates confidence in economic prospects, which supports energy demand and crude oil prices. Secondly, geopolitical risks support crude oil prices after several major shippers stopped shipping crude oil through the Red Sea due to attacks on ships in the region. Third, OPEC+ countries are still on track to cut production, which reduces supply in the global market.

Asian markets were mostly up on Tuesday. Japan’s Nikkei 225 (JP225) gained 1.41% yesterday, China’s FTSE China A50 (CHA50) rose by 0.15%, Hong Kong’s Hang Seng (HK50) ended the day down by 0.75%, and Australia’s ASX 200 (AU200) increased by 0.84%.

Yesterday at the BoJ press conference, BoJ Governor Ueda said that the side effects of negative rates are not serious enough to warrant an immediate policy adjustment, and there is little chance that the BoJ will announce a rate hike next month. As a reminder, the BOJ voted 9-0 to keep the policy rate at minus 0.1% and maintain the 10-year JGB yield target at around 0% and said it would patiently continue to ease monetary policy amid extremely high uncertainty in economic activity and prices.

China left benchmark lending rates unchanged during its monthly fixing on Wednesday, matching market expectations. The one-year prime rate (LPR) was kept at 3.45%, while the five-year LPR was left unchanged at 4.20%. Last week, the People’s Bank of China (PBOC) increased liquidity injections through medium-term loans while keeping the interest rate unchanged. However, market watchers still expect Beijing to continue easing monetary policy in the new year to support a faltering economic recovery as deflationary pressures push up real borrowing costs.

New Zealand Central Bank governor Adrian Orr said on Wednesday that unexpectedly weak third-quarter economic data was a challenging situation for the RBNZ. Gross Domestic Product (GDP) data released last week showed that the New Zealand economy unexpectedly contracted by 0.3% in the third quarter, while historical growth figures were also revised down significantly. Thus, there is a growing likelihood that the RBNZ will start considering options for a rate cut as early as spring 2024.

S&P 500 (US500) 4,768.37 +27.81 (+0.59%)

Dow Jones (US30) 37,557.92 +251.90 (+0.68%)

DAX (DE40) 16,744.41 +93.86 (+0.56%)

FTSE 100 (UK100) 7,638.03 +23.55 (+0.31%)

USD Index 102.14 −0.42 (−0.41%)

News feed for 2023.12.20:

– Japan Trade Balance (m/m) at 01:50 (GMT+2);
– China PBoC Loan Prime Rate at 03:15 (GMT+2);
– German GfK Consumer Confidence (m/m) at 09:00 (GMT+2);
– UK Consumer Price Index (m/m) at 09:00 (GMT+2);
– UK Producer Price Index (m/m) at 09:00 (GMT+2);
– US CB Consumer Confidence (m/m) at 17:00 (GMT+2);
– US Existing Home Sales (m/m) at 17:00 (GMT+2);
– US Crude Oil Reserves (w/w) at 17:30 (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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China kept interest rates at current levels. The conditions for a rally have formed again for oil