Oil Has the Leading Role
13 June 2022
After the Fed, the ECB is also in the game, but Oil has the leading role As we enter the summer, there are three important issues affecting the global markets. One is the European Central Bank (ECB) interest rate decision, the other is the US May inflation rate, and the third is the Fed's interest rate decision. The first two are already gone, the Fed decision will be announced on Wednesday. Normally, the effect of the three issues on the markets is not unidirectional. However, all three have developed in a way that will affect the markets negatively. As a matter of fact, as the EU economies are heading towards recession, the ECB reduced its growth forecast to 2.2 percent for this year. The bank, which has increased its inflation forecast to 6.8 percent for the end of the year, expects 3.5 percent inflation next year.
ECB TO INCREASE INTEREST RATES ECB gave the clear signal that it will increase the interest rate by 25 basis points in July. The rate will be increased by a quarter point in September. ECB will increase interest rates in the remaining 4 meetings of the year. In total, the expected increase for this year is 125 basis points. Therefore, an increase of 50 basis points is required at a meeting. This is likely to be in September as well. ECB ends its bond-buying program at the end of this month. In other words, monetary expansion is stopped. However, he did not express any opinion on balance sheet reduction. So there is no tightening phase for now. It can be said that the hawk side of the ECB outweighs. A development that should normally add value to the Euro. However, this value gain seems to have been completed in May. After rising to 1.0788, the euro/dollar parity remained flat for a while and decreased to 1.05 with the ECB decision. The euro depreciated.
3 times 50bps NOW It is necessary to draw attention to the appreciation of the dollar rather than the depreciation of the Euro. The dollar also gained 1.2 percent against emerging currencies in June with the MSCI index. The reason for this lies in the increase in US interest rates. Last Thursday, the ECB signalled a rate hike. The interest it will raise is 25 basis points. However, when the US inflation was announced on Friday, we saw that it exceeded the expectations. On an annual basis, consumer inflation was expected to remain at 8.3 percent, rising to 8.6 percent. This refuted the thesis that “inflation peaked and fell”, as it could not sustain the inflation that fell to 8.3 percent after it had risen to 8.5 percent and increased it to 8.6 percent. Nothing has improved in US inflation, but optimism has deteriorated. The jump in inflation increased the number of two 50 basis point rate hikes expected from the Fed to three. Or, an increase of 75 basis points may be made instead of 50 in July. As a result, the interest rate balance with the Euro was still intact. We have seen the correction of this in the pair as well. THE IMPORTANCE OF JULY AND AUGUST FOR THE FED This will be a bit of a challenge for the Fed Chairman, who has announced that he has removed 75 basis points from the table and tied himself. But in the past, the Fed has also untied itself, just as it tied itself. Because we have entered critical months in terms of US inflation. It should be seen in July and August that the rate hikes that started in March accelerated inflation. Otherwise, the belief that interest rates are useless and that inflation is out of the range of the Fed's interest rate weapon will become widespread. Hopes will be shattered. In this case, even if it continues to increase interest rates, it will not work. The Fed will follow inflation with its steps, and it will not be able to stop it. Politicians in the USA cannot do anything about inflation. Because the control of the money is in the hands of the central bank. The Fed has to prove itself or its weapon working this summer.
China's trade surplus stood at $78.7bn in May, thanks to exports, which rose 16.9%. The expectation was $57.7k. We can say that this is a positive development as imports increased by 4.1%, above the expected 2.8%. A recovery was expected due to the partial openings in Shanghai, the trade performance of the surrounding countries and the base effect, but a performance far above the expectations. As a result of the easing of the embargo by the USA, Eni and Repsol are buying Venezuelan oil after 2 years. However, since the country's infrastructure has collapsed, it is not possible for the oil industry to recover and close the gap left by Russia. Therefore , we see the continuation of the upward movement in prices . GS yesterday naturally suggested oil producing countries against importers in pair trades. However, the problem is not between the manufacturer and the importer. As many analysts have pointed out recently, the "normal" of this business is that the dollar, namely DXY, is low during periods of high oil demand. Because these are the periods when the economy is lively and the risk appetite is high. However, this time, we see that both demand is high and the dollar appreciates.
WHAT ELSE TO WATCH FOR FED INTEREST RATE INCREASE? While the Fed is increasing by 50 basis points, its statement regarding the coming months will also be important. Because, with the expectation of the increase in inflation until this point, it was estimated that the Fed would raise interest rates to 2.5-3 percent and then stop. With the latest inflation announced, it has carried this waiting zone up, but there is no clarity on where it has moved. The event is new and has been priced over one day. In the US bond market, 10-years increased to 3.165 percent and 2-years to 3.0673. Considering that the level of 2-years was 2.5626 10 days ago, it can be said that it has entered a sharp upward trend. Where the actual 10-years will stand, rather than the 2-year, may actually be a good sign of where the Fed rate hike will take a break. RUSSIA AND OIL - CHANGE IN THE GAME The conjuncture is not in favor of the Fed, even the wind is blowing from the opposite direction. Because the Russia-Ukraine war is getting longer and longer like chewing gum. Prices for commodities from grain to metals to energy rise or stay high as the war drags on. USA, Europe and the West pushed Russia out of the energy equation. But there is no actor who can fill the vacant place in this country in the short term. It will take years of time. OPEC, on the other hand, is slowing down, naturally wanting to make money and increasing production one step at a time. Supply is limited in oil, and demand is lively. Demand increases with summer months and individual and collective vacations. People who have been closed for 2.5 years due to the corona epidemic want to wander around, have fun and shop. This brings with it an increase in airplane, ship and automobile travel and the revival of oil demand. Demand in September-October