Monday, 30 November 2020 / Published in Commodity Insights

Crude oil has lost more than 10% in October, sending WTI and Brent oil prices to a four-month low on growing concerns that the second wave of the pandemic will prompt renewed global lockdowns which will damage the demand and consumption for auto and aviation fuels.

Energy prices dipped to their lowest since June on Thursday, with WTI crude falling to $35 per barrel while the international benchmark Brent crude dropped to $36.50 per barrel. On Wednesday, the EIA inventory report showed a greater-than-expected inventory build of 4.3 mil barrels compared to estimates of 1.5 mil barrels, adding more pressure to the falling oil prices.

Another negative catalyst for oil prices was the rise of the US dollar to fresh monthly highs, making the dollar-denominated crude oil more expensive for holders of other currencies.


Monthly oil losses as coronavirus concerns weigh:

Oil suffers a second straight month of declines and it is on track for the biggest monthly slide since March as the global COVID-19 cases rose by a single-day record of 500.000 on Thursday and hospitalizations broke higher again. US new cases topped at 90.000 yesterday, setting a daily record, with New York, New Jersey, and the Midwest states becoming the epicenters of the pandemic.

With COVID-19 cases surging across Europe, France and Germany announced new nationwide lockdowns to curb the spread. France will require people to stay at home for all but essential activities from October 30th, while Germany will shut bars, restaurants, and theatres from November 02 until the end of the month.


Oversupplied Market adds pressure on oil prices:

As lockdowns begin to bite on energy demand concerns across the US and Europe, the near-term supply outlook starts to deteriorate. Libya has started picking up oil production after the end of the deadly civil war last week. Libyan production is expected to reach 1 million barrels per day in November, almost double from levels earlier in October.

OPEC and its allies including Russia, plan on reducing production cuts on January 01 2021, from a current 7.7 million barrels per day (bpd) to about 5.7 million bpd. However, Saudi Arabia, the de facto leader of OPEC, and Russia are in favor of maintaining the group’s output reduction of about 7.7 million bpd currently into 2021 amid the perspectives for pandemic-related lower fuel demand and higher supply from Libya and US shale producers. OPEC+ is scheduled to hold a virtual policy meeting over Nov. 30 and Dec. 1 to discuss the current developments and decide for the production cuts.


US Elections and Petroleum industry:

Energy traders have started focusing on potential risks in the coming US election on November 03. In the case of a Biden administration, it will cause problems in the growing US Shale oil industry as Biden expressed many times to ban the Fracking drilling method which produces air and water pollution. Also, he will promote his “Green energy program” with more than $2 billion worth of investments in renewable energy technologies.

Monday, 30 November 2020 / Published in Commodity Insights

The precious metals started the new trading week with further losses as investors are losing their appetite for safe-haven assets amid the positive vaccine developments and the growing optimism for a quick vaccine-led global economic recovery in 2021. The appetite for riskier assets increased last week over news for a smooth White House transition which is decreasing the political uncertainty.

Gold dropped 0.50% to $1.775/oz on Monday, while Silver lost more than 2.50% to $22/oz while heading for a fourth monthly drop in a row since July. Both precious metals are posting their biggest monthly declines since November 2016, with Gold losing 6% so far and Silver following with 15% losses.


Market reaction:

Investors are moving away from safe-haven assets and heading into risk-on assets such as stocks and crude oil that propelled the major US indices such as the industrial Dow Jones and the S&P 500 to hit fresh record highs above 36.000 and 3.600 levels, respectively.

Gold prices lost 5% last week, the most since the week of March 13, breaking below the key support level of $1.800/oz. Gold has lost nearly 15% or $300/oz from its August record high of $2.077/oz, while Silver has lost 25% or $8/oz from its August record high of $30/oz.

Gold has lost almost 10% since the first vaccine announcement from Moderna, while its near-term outlook is becoming bearish, especially if the price fall below $1.700/oz in the next weeks.


Vaccine Optimism:

The yellow metal has lost its shine during the Q4 2020 despite the US dollar weakness, the pandemic-related stimulus plans which increase the inflation rates, and the outbreak of the second wave of the pandemic in the North Hemisphere (USA-EE).

The rotation away from the traditional safe-haven assets such as Gold, Silver, Treasuries, US dollar, Japanese Yen, and Swiss Franc was based on one fundamental catalyst: the drug-makers Moderna, Pfizer, and AstraZeneca announced in early November that their Covid-19 vaccine candidates had a surprising efficacy level up to 95% in their trials, sparking hopes for a strong global economic recovery in 2021.

In addition, the U.S. health authorities are to hold an emergency meeting tomorrow Tuesday to recommend that the Food and Drug Administration allow healthcare professionals and people in long-term care facilities to be the first two groups to get a coronavirus vaccine developed by the Pfizer Inc. and their German partner BioNTech, which is awaiting approval.


Monetary Policies:

The precious metals and especially Gold, are considered the ideal hedge assets against inflation which is likely to increase from monetary and fiscal stimulus plans. Gold gained more than $600/oz in 2020 amid the strong monetary policies from the Federal Reserve and other global Central Banks to support the local economies from the pandemic. All Central Banks reduced their interest rates near zero, increased the liquidity in the market with cheap money, benefiting the non-yielding Gold and Silver.

However, investors are cautious about the outlook of bullions (gold-silver), as they believe that a vaccine-led economic rebound would allow Fed and other Central Banks to slow down or even halt their easing monetary policies-bond purchasing programs.
 

Sunday, 29 November 2020 / Published in Forex Perception

The Turkish lira weakened to a record low of 8.32 against the US dollar and 9.77 against the Euro on Thursday morning, heading further into uncharted territories. The Lira lost more than 27% of its value in 2020 and almost 90% since the financial crisis of 2008 against major currencies and shows little sign of stabilising despite the efforts by its Central Bank to stop the fall.

The sell-off in Turkey’s currency was driven by a cocktail of worries such as the worsened inflation outlook, the unwillingness of Central Bank and President Erdogan to increase the key policy rates above inflation rates, the badly depleted FX reserves, poor macroeconomic fundamentals, ongoing geopolitical tensions in the Caucasus and the Eastern Mediterranean, deterioration of Turkey’s relations with Western allies and the prospect of economic sanctions under a possible Joe Biden presidency.


Central Bank and Inflation risks:

The USD/TRY broke above the symbolic level of 8 for the first time ever, adding additional inflation pressure, just after Turkey’s Central Bank kept unchanged its policy rate at 10.25% last week, saying significant tightening in financial conditions had already been achieved after steps to contain inflation risks.

The Turkish Central Bank has also raised its mid-point inflation forecast for end-2020 to 12.1% from 8.9% in its previous inflation report in September, while the bank forecasts that inflation will fall to 9.4% at the end of 2021, compared with a forecast of 6.2%.

The decision of the Central Bank to leave the key rate at 10.25% has disappointed investors who had expected a big interest rate hike of 175 basis points to support the falling lira. Investors were expecting more monetary tightening after the surprised 200 basis points rate hike in September (first rate hike after 2018) to control Turkey’s chronically high inflation.

President Erdogan had long called for interest rates to be lowered, describing them as the “mother and father of all evil”, raising the concerns about the Central Bank’s independence and fears over presidential control on monetary and economic policies. Erdogan fired the previous central bank chief Murat Cetinkaya in 2019, who resisted the president’s growth-at-all-costs policy and low-interest rates.

The current key policy rate of 10.25% remains below the annual consumer price inflation, which stood at 11.75% in September, leaving real rates negative for the lira. This development forces Turkey’s lira depositors to sell their currency for the more stable US dollar, Euro, or Gold, adding more pressure to the lira.

Turkish retail and government banks have spent more than $135 billion over the past 2 years to support the falling lira in the open market, worsening the country’s foreign currency reserves. Moody’s Analytics has warned that Turkey has almost depleted the buffers that would allow it to stave off a potential balance-of-payments crisis.


Geopolitical Tensions:

The growing geopolitical tensions have further depreciated the lira and weakened the country’s economic conditions. President Recep Tayyip Erdogan has recently opened personal disputes with France’s president Emmanuel Macron in response to some controversial comments about Islam. Furthermore, France recalled its ambassador to Ankara after Mr. Erdogan said that Emmanuel Macron needed mental treatment and called Turks to boycott French goods.

The investment sentiment about Turkey’s lira deteriorated after European Council President Charles Michel accused Turkey of resorting to provocations, unilateral actions in the Eastern Mediterranean, and Caucasus and insultations against European leaders.

Turkey has been accused of its role in the re-eruption of fighting in the disputed Caucasus region of Nagorno-Karabakh between Azerbaijan and Armenia. Furthermore, it has an ongoing dispute with Greece and Cyprus over maritime rights and ownership of natural resources while it has supplied weapons and soldiers to support its proxy groups into Libyan and Syrian civil wars.


US elections add pressure on Turkey’s lira:

The relation between Turkey and the USA has deteriorated after Turkey had started testing a Russian-made S-400 air defense system, while it also antagonizes the US in the Middle East and the Mediterranean Sea with its aggressive foreign policy. The Turkish lira slid further this week after President Erdogan challenged the United States to slap sanctions over his government’s decision to test the S-400 missiles.

Forex traders fear that a win for the Democratic candidate Joe Biden in the US presidential election of November 03, could increase the likelihood of economic sanctions against Turkey. Joe Biden has recently referred to President Erdogan as an autocrat and stated he was in favor of supporting political opponents to defeat him in elections.

Investors believe that a Biden administration would work with European allies to impose extra aggressive sanctions against Turkey into 2021. The last time the US imposed sanctions against Turkey was in 2018 when Turkey imprisoned U.S. pastor Andrew Brunson on terrorism charges, sparking a currency crisis for the lira that led to a deep recession in the Turkish economy.


Turkish Economy:

Turkey’s economy contracted nearly 10% in the second quarter of 2020 as it was significantly affected by the coronavirus pandemic and measures to combat it. The local retail market was hit hard from the lower consumption combined with the Lira’s depreciation and higher inflation rates. In addition, the lira sell-off comes as Turkey earns fewer dollars and euros due to a massive drop in tourism and slumping exports amid the virus pandemic.

Given the ongoing uncertainties around the economy, the pandemic, and geopolitical tensions, Fitch ratings expect the Turkish economy to remain volatile, forecasting the GDP to contract by 3.2% in 2020, but grow more than 5.0% in 2021.


Rating houses downgrade Turkish companies:

Many rating houses have already started downgrading the outlook for the Turkish companies amid the depreciation of the Turkish lira, the fragile local economy, and the weak corporate revenues from the effects of the Covid-19 pandemic.

The downgrades reflect mainly the material foreign currency risk as most of the Turkish companies have large debts denominated in US dollars (loans) or Euros (Eurobonds), but their corporate revenues are in Turkish lira. The heightened FX exposure has weakened the credit metrics of the companies while some of them have already been facing difficulties to meet their debt obligations.

Tuesday, 17 November 2020 / Published in Equities & Indices

The Dow Jones and S&P 500 indices posted fresh all-time closing highs on Monday after the drug-maker Moderna announced positive data for its COVID-19 vaccine candidate, raising expectations of a strong global economic recovery. The financial markets reacted to the Moderna vaccine news in the same way as the Pfizer announcement last week, with similar rotation play into cyclical sectors taking place.


Market Reaction:

Investors celebrated the upbeat results from Moderna’s vaccine candidate, pushing the US stock indices to fresh all-time highs, and building strong gains from last week. The Dow Jones index rose 1.3% to hit a new intraday all-time high just above the 30.000 level before close lower, while the S&P 500 index gained 0.90%, and the NASDAQ Composite index added 0.55%.

Investors continue to rotate and move out of stocks and sectors such as technology that have rallied during pandemic, and move into economic sensitive cyclical sectors that suffered the most in the last months such as financials, travel, airlines, energy, and others.

The best performers of the session were Boeing and Chevron which rose 7%, while American Airlines and Walt Disney were up 4%. The worst performers were Zoom Video and Netflix with 1% losses.

WTI and Brent crude oil prices jumped by 3%, finishing the day at $41.30 and $44 per barrel respectively, on the hopes that a vaccine would increase the global economic activity and rise the demand for petroleum products in 2021.


Moderna Vaccine:

The Cambridge, Massachusetts-based company released yesterday its preliminary Phase 3 trial data, showing that its coronavirus vaccine is more than 94% effective in preventing Covid-19. As a result, Moderna’s shares gained 10%, closing at $98 per share on Monday and up 500% since the start of 2020.

The CEO Stephane Bancel called the results a “game-changer” event and a pivotal moment in the development of their Covid-19 vaccine candidate. He added that the positive interim analysis from their Phase 3 study had given them the first clinical validation that Moderna’s vaccine can prevent COVID-19 disease, including severe disease.

Moderna’s vaccine candidate, like that of the Pfizer-BioNTech partnership, is using similar new messenger RNA technology, or mRNA, a technology which is a new approach to vaccines that uses genetic material to provoke an immune response. Also, the company plans to apply for emergency use authorization with the U.S. Food and Drug Administration in the following weeks.

According to the data, the analysis evaluated 95 confirmed Covid-19 infections among the trial’s 30,000 participants, showing a vaccine efficacy of 94.5%. Moderna, which developed its vaccine in collaboration with the National Institute of Allergy and Infectious Diseases, said 90 cases of Covid-19 were observed in the placebo group versus 5 cases observed in the group that received its two-dose vaccine.

The company expects to have approximately 20 million doses of the vaccine ready to ship in the U.S. by the end of 2020 and remains on track to manufacture 500 million to 1 billion doses globally in 2021.


Moderna vs Pfizer vaccines:

Similarities:

The first two Covid-19 vaccine candidates are more than 90% effective in preventing COVID-19 based on their interim data from late-stage trials. Furthermore, both vaccines have developed with the new technology known as messenger RNA (mRNA) that has never been used before to develop an approved vaccine. The vaccines are designed to transform the body’s own cells into vaccine-making factories. The vaccines instruct cells to make copies of the spike protein of the coronavirus, stimulating the creation of protective antibodies.


Differences:

The two vaccines have some storage and transportation challenges which are very important for the investors and societies to immunize hundreds of millions of people in 2021. The big difference compared to Pfizer’s vaccine is that Moderna’s vaccine can be stored at normal refrigerator temperatures for 30 days, which should make it easier to distribute. Moderna expects the vaccine to be stable at normal fridge temperatures of 2 to 8 degrees Celsius for 30 days and it can be stored for up to 6 months at -20 degrees Celsius.

Pfizer’s vaccine, meanwhile, must be shipped and stored at -70 degrees Celsius, the sort of temperature typical of an Antarctic winter, while It can be stored only for up to five days at standard refrigerator temperatures, or for up to 15 days in a thermal shipping box. This is the main reason why shares of Pfizer and its partner BioNTech fell 4% and 16% respectively yesterday as their vaccine must be transported at far colder temperatures.

Monday, 16 November 2020 / Published in Equities & Indices

The S&P 500 index posted an all-time closing high on Friday amid the growing optimism on an effective COVID-19 vaccine by Pfizer which will lead to a global economic recovery. All major global stock markets surged last week despite concerns over the record daily COVID-19 infections and hospitalizations in the U.S and Europe together with the fear of further restrictions to curb the spread of the virus.


Vaccine News:

When Pfizer Inc. and its partner BioNTech SE announced last Monday that their Covid-19 vaccine candidate prevented more than 90% of infections in a large-scale study, it caused one of the most dramatic equity rotations of the coronavirus era.

The Pfizer vaccine announcement was a “game-changer” event for the financial markets as the vaccine could put an end to the prolonged pandemic-related crisis and spark a broader reopening of the global economies.

Investors have quickly started shifting out of stay-at-home trades such as technology which have held during the pandemic and getting into cyclical stocks. The sectors such as energy, financial, industrials, travel, airlines, cruise operators, hotels, restaurants, leisure, casino operators, and entertainment are economically sensitive cyclical sectors that would benefit greatly from a vaccine as it would allow the global economy to start reopening completely.

In addition to the positive Pfizer’s vaccine development, Moderna Inc said last week that it acquired enough data for a first interim analysis of its late-stage trial.


Market Reaction:

The market participants showed their excitement last week, discounting a potential economic rebound in 2021 and the slowdown of the pandemic. S&P 500 index hit a fresh record high of 3.587 on Friday to an all-time high, gaining more than 2.5% over the week, while the industrial index Dow Jones added 4% weekly gains. The Russell 2000, which tracks small-cap stocks gained +2% on Friday and up 6% for the week,

The tech-heavy Nasdaq gained only 0.60% on Friday while it posted 1% losses for the week as investors rotated away from tech names into cyclical names. “Stay-at-home” stocks such as Zoom Video, Peloton, and Netflix ended the week with significant losses.

On Monday, the US stock futures continue their rally with Dow Jones futures adding another 300 points or 1% up, while S&P 500 futures hit another record-breaking above 3.610 level, up 1%. The Nasdaq Composite also rose 0.5%, trading just above the 12.000 level.


Energy Boost:

Energy giants such as Chevron, Exxon Mobil, Phillips66, and Valero provided the biggest boost to the S&P 500 index on Friday despite the fall in the WTI & Brent crude oil contracts. Overall, the energy sector gained more than 15% last week based on the hopes that an effective vaccine and the stimulus plans under the Biden administration could benefit the oil refining companies from the rising consumption of jet and gasoline fuels in 2021.

On the other hand, crude oil futures fell 2% on Friday and gained only 8% last week, underperforming the energy stocks. Investors worry that the new wave of lockdowns in the US and Europe could damage the demand for petroleum products in the next few weeks.

Monday, 09 November 2020 / Published in Equities & Indices

The US stock indices continue their post-election rally hitting fresh all-time highs as investors react to Democrat Joe Biden’s win in the U.S presidential election race against Republican President Donald Trump together with the news that an experimental vaccine from Pfizer Inc found to be over 90% effective in preventing COVID-19.


Pfizer-BioNTech Vaccine: 

Appetite for riskier assets such as stocks, crude oil and industrial metals increased on Monday after Pfizer Inc and BioNTech announced that their experimental vaccine was more than 90% effective in preventing COVID-19 based on initial data from a large study. This is a major victory in the fight against a pandemic that has killed over 1 million people, roiled the world’s economy and upended daily life.

Pfizer and German partner BioNTech are the first drug makers to show successful data from a large-scale clinical trial of a coronavirus vaccine. The companies said they have so far found no serious safety concerns and expect to seek U.S. emergency use authorization later this month.


Market Reaction: 

The post-election rally continues this week as the US futures implying an opening gain of 5%, responded on Biden’s victory and positive news around Pfizer’s experimental vaccine. European markets are tracking their global counterparts higher on Monday with the pan-European Stoxx 600 and German DAX climbing 5% and erasing lockdown losses.

Asia-Pacific stock markets closed with significant profits on Monday, with Nikkei 225 gaining 2.2% while Kospi, Aussie ASX 200 and Shanghai indices finished the day up by 1.8%. 

Crude oil prices gained more than 7% with WTI crude rising above $40 per barrel while Brent climbed above $42 per barrel. 

Safe haven assets such as Gold and Bonds suffered some major losses after vaccine announcement. Gold, Silver and Palladium lost more than 2%, while the US 10-year Treasury yields jumping from 0.81% to 0.85% currently as risk assets rally on the headlines above.

In the forex market, the US dollar weakened against major indices as the Biden administration could increase the fiscal and monetary stimulus and keep the interest rates near zero, devaluating the greenback. As a result, the DXY-dollars index dropped near 92.30, pushing the EUR/USD to 1.19, a two-month high. In addition, other riskier currencies were boosted form the risk appetite such as the Australian and New Zealand dollar, the Turkish Lira and Russian Ruble. 


US Elections:

US equity indices gained more than 7% last week, posting their biggest election week gain since 1932. Market euphoria increased on investor expectations for more monetary and fiscal stimulus measures to support the pandemic-hit US economy. Investors believe that Biden could reduce the spread of COVID-19 as it reaches record high levels, killing more than 230.000 people in the country so far. In addition, market participants expect that a Biden administration could improve global trade with fewer economic conflicts and trade tariffs, especially with major business partners such as China and the European Union. 

Meanwhile, investors have also cheered the failure of the so-called “blue wave” (Democrats to win the majority of both the Senate and the House). Markets favour a Democratic presidency and a Republican-controlled Senate. Biden’s promising drastic policy changes such as tax hikes and significant investments in healthcare, education and infrastructure projects would be less likely to pass from a Senate controlled from the Republicans.   

The Democrat candidate Biden claimed victory after he collected the 270 electoral college votes required for victory in the presidential race during the weekend by winning the states of Nevada and Pennsylvania. The call came four days after Election Day (Tuesday) amid close counts in other battleground states such as Michigan, Arizona, Georgia. However, Trump refused to accept the election results, launching lawsuits in many key states such as Michigan and Pennsylvania to recount the votes.