Chinese COVID-19 unrest, hawkish Fed comments hit sentiment

The week started with a selloff across global equities. Unrest in China due to protests against the Covid zero policy combined with the Federal Reserve (Fed) members’ hawkish comments led to an early week selloff in both Asian, European and US equities.  

In cryptocurrencies, it was another day of bankruptcy news. This time, the crypto lender BlockFi, which had strong ties with FTX announced to file for bankruptcy. 

I told you

… that the latest market optimism was a bit overdone and that investors just wanted to read that the Fed would slow the pace of its rate hikes in the coming months following a softening inflation, but totally ignored the idea that the terminal rate will go higher than previously thought.  

Therefore, the latest Fed minutes were not as dovish as investors read them. At the end of the day, where the Fed goes is more important than at what speed it goes there.  

As a result, St Louis Fed President Bullard repeated that markets are ‘underestimating the chances of higher rates’, as New York Fed’s John Williams said that the Fed have more work to do to curb inflation.  

The S&P500 lost 1.54% on Monday, as Nasdaq slid 1.58%. 

There is still hope that Fed President Jerome Powell talks about slower rate hikes at his speech this week, but again, his words shouldn’t be heard halfway through. The Fed is willing to slow the pace of rate hikes to avoid going too far. But if they slow down, it’s also because they want to go higher than 5%.  

What’s the impact of China’s reopening delay? 

There is great uncertainty regarding the impact of the Chinese unrest on global economy.  

In one hand, the Chinese authorities stood behind the Covid zero policy, which means that the Chinese reopening will be delayed. A delay in Chinese reopening means further negative pressure on energy and commodity prices, and slower inflation for the rest of the world.  

But on the other hand, the Chinese unrest increases the possibility of renewed supply chain crisis – although the US said it doesn’t expect supply disruptions due to the unrest just yet.  

US crude fell to $73pb on Monday then rebounded to flirt with the $80pb this morning, despite the Chinese slowdown worries. 

Chevron is allowed to resume oil production in Venezuela for the next six months, after being forced to stop all activity due to sanctions almost three years ago. Good news is, Venezuela has the world’s largest proven oil reserves, and they used to pump around 3 mio barrels per day before sanctions. But the bad news is, it is said that Chevron could increase oil production by around 20 to 30’000 barrels per day, which is insignificant compared to the daily demand of around 100 mio barrels. Chevron lost almost 3% yesterday. 

Plus, OPEC will take advantage of the Chinese unrest to justify restricted output at its next meeting, which is scheduled for Dec 4.  

And finally, the Europeans still don’t have a clear price cap for the Russian oil, and the clock is ticking louder into the Dec 5 deadline, where the price cap is supposed to become effective.  

In summary, there are both positive and negative drivers for oil prices. US crude will likely see resistance at $80, then near $85pb, where stands the 50-DMA, while dipbuyers should continue buying into the $70pb psychological support.  

One thing is sure, we won’t finish the year having seen $200 as many predicted at the start of the year. Phew!