Trail 41 — Just for a dollar
Written by — Aashish Singh; Editor — Sylvia Lo
Recession fears continued to drive volatility in markets this week. Oil in particular was very volatile. Tight supply in the short term and concerns over falling demand in a likely recession led to oil trading in a 15% range. Emerging markets credit risk continued to widen, prompting concerns of a debt crisis for these nations. US Dollar meanwhile continued its upward rally against major peers, notably EUR where its nearing parity (1 for 1) after nearly 2 decades and is likely to rise above.
With energy costs remaining elevated, and a strong dollar further exacerbating these costs, inflation in most economies will continue run hot near term. A deepening credit crisis from rising interest rates, particularly in peripherals such as crypto and smaller developing economies, means credit wont be getting cheap anytime soon. Keep hoarding that cash, preferably in USD.
Volatile Oil
Oil is set for a weekly loss after choppy trading in which concerns over a demand-sapping slump clashed with signals of tight supply.
West Texas Intermediate was below $103 a barrel, putting the US benchmark on course for a weekly fall of more than 5%. Prices have swung in a range of more than $16 this week, which saw both WTI and Brent briefly drop below $100.
Investors remain concerned that restrictive US monetary policy could herald a recession, and oil has been dragged lower alongside other commodities. Two of the Federal Reserve’s most hawkish policy makers, Christopher Waller and James Bullard, backed raising interest rates by another 75 basis points this month to curb red-hot inflation, while also playing down concerns of a slump.
EM distress grows
A quarter-trillion dollar pile of distressed debt is threatening to drag the developing world into a historic cascade of defaults.
Sri Lanka was the first nation to stop paying its foreign bondholders this year, burdened by unwieldy food and fuel costs that stoked protests and political chaos. Russia followed in June after getting caught in a web of sanctions.
Now, focus is turning to El Salvador, Ghana, Egypt, Tunisia and Pakistan — nations that Bloomberg Economics sees as vulnerable to default. As the cost to insure emerging-market debt from non-payment surges to the highest since Russia invaded Ukraine, concern is also coming from the likes of World Bank Chief Economist Carmen Reinhart and long-term emerging market debt specialists such as former Elliott Management portfolio manager Jay Newman.
“With the low-income countries, debt risks and debt crises are not hypothetical,” Reinhart said on Bloomberg Television. “We’re pretty much already there.”
Dollar surge continues
The European economy’s lurch toward recession is making traders ever more convinced the euro will drop below parity with the dollar for the first time in 20 years.
Shorting the single currency has become one of the most popular trades, with strategists from Nomura International Plc to HSBC Bank Plc telling clients to expect more losses ahead. There’s around a 50% implied probability of the euro hitting parity in the next month, according to a Bloomberg options-pricing model.
U.S. Dollar Index (DXY)
Other interesting stories this week were — this piece on Nickel’s ‘Big shot’ , how Inflation differs amongst key global economies and Crypto broker Voyager Digital Ltd. filed for bankruptcy protection.
Until next week.
Financial markets are fascinating, and I see them amalgamating the subjective and objective worlds. They are constantly evolving, follow no predetermined path and much like humans and society in general, their behaviour at most times is irrational. Yet, their day to day functioning is seemingly driven by facts and reasoning. They are filled with plenty of stories of triumph, tragedy and comedy. Every day they are thoroughly analysed and tried to make sense of. Yet, their future steps or directions cannot be predicted based on history. They follow a random walk. Therein lies their beauty.
If enjoying making sense of their randomness is as appealing to you as it is to me, each week, I briefly recap a few stories that captured my interest, with embedded source links available for those who wish to read more.
