A bit of a flat end to an otherwise eventful week that has seen investors whipsaw between panic and optimism.
Massive vulnerabilities remain in the markets and even the two big success stories this week – debt ceiling and Russia’s gas offer – are far from a solution. That hasn’t stopped investors from celebrating them like a major victory, of course, while blissfully ignoring the multiple other downside risks to the outlook. Some things never change.
The deal on the debt ceiling that was passed by the Senate on Thursday has just kicked the can down the road and while the Democrats could use the time to raise it without Republican support, it is never that simple. They are clearly reluctant to do so without Republican votes ahead of next year’s midterms and I expect we’ll see more games in the interim.
Meanwhile, Vladimir Putin’s comments on Wednesday in which he suggested Russia can stabilize the energy market came at the opportune moment. Natural gas prices were soaring and the stock markets were sliding, spooked by the prospect of a severe global energy crisis.
Energy prices remain extremely high and while promising, Putin’s comments weren’t a firm commitment to fill the shortfall in the market. Although it is a relief to hear it is possible. Which is where Nord Stream 2 enters the equation. Energy Minister Alexander Novak later claimed certification of the project may help cool gas prices. How subtle and convenient.
Given how politically divisive the pipeline is, it’s no surprise that questions are being asked around the motivation of the Kremlin. Not to mention whether the pressure will become unbearable and the approval process accelerated in order to ease the pain this winter. Europe may feel it has little choice at this point after years of backing itself into a corner.
With all that said, there’s certainly no guarantee that certification is accelerated or inevitable, which is why investors shouldn’t get too carried away. Energy prices remain elevated and we are heading into crisis season, it’s just investors that are burying their heads in the sand.
Markets largely give back NFP moves after knee-jerk response to headline number
The jobs report is what we’ve all been waiting for this week and it didn’t disappoint. The headline NFP number was well below expectations and even a little shy of what many deemed the minimum to guarantee a taper this year, of 200,000. I’ll be honest, I think it would have taken much less to trigger a wobble at the Fed. But that doesn’t matter because once net revisions are factored in from previous months, a lot of the September miss was offset, which makes a taper announcement almost certain.
The only thing that can realistically stand in the way now would be a major taper tantrum in the markets. We’ve seen some nervousness this week but not nearly enough to cast much doubt on the decision next month. Unemployment slipped a little more than expected, aided by a drop in the participation rate which should become clearer in the coming months.
While the NFP was good enough, we’ve had an interesting reaction in the markets. The dollar slid after the release but has reversed those moves to trade back where it was ahead of the release. Gold surged on the dollar weakness but has managed to hold on to the bulk of the gains as US stocks remain a little off their pre-release levels. US yields slipped after the release but have also clawed back losses, leaving only gold to have not reversed its knee-jerk move.
Oil rally remains well supported after a brief pullback
Oil prices bounced back strongly on Thursday and are trading back near their highs from earlier in the week. Clearly, energy traders don’t view the crisis as being magically resolved as a result of Putin’s comments on Wednesday. Natural gas is still a little over 10% off its highs but it had made extraordinary gains in the weeks leading up to Wednesday, so this is a little more understandable.
Ultimately, the decision by OPEC+ not to increase output targets at the meeting earlier this week is a major tailwind for the rally and we’re not seeing any loss of momentum at this stage. With the energy crisis contributing an additional 500,000 barrels in daily demand for crude, it’s hard to imagine prices not hitting higher levels.
Gold jumps after jobs report
Gold prices are jumping in the aftermath of the US jobs report. The NFP number was well below expectations and more than offset the large upward revision to August. The dollar fell after the release as US yields declined, which propelled the yellow metal higher, up 1% on the day and not far from $1,800. While the dollar and yields reversed those losses, gold largely hung on.
Despite this, markets appear to be fully pricing in a rate hike by December next year, which is unlikely to settle the taper nerves. The jobs report was not so bad that policymakers will u-turn on their plans to taper this year – that was always highly unlikely – and now they’ll just be hoping to avoid a full-blown taper tantrum in the markets. So far so good.
Bitcoin stable but eyeing record highs
Bitcoin has been relatively stable the last day or so, after spending much of the last week soaring higher. After surviving multiple tests of $40,000, the cryptocurrency broke above $45,000 and from there the bulls were back in control. And they’ve made up some impressive ground on the back of that to now trade around $55,000, with sights firmly set on making new all-time highs.
The prospect of the SEC approving up to four bitcoin ETF’s in the coming weeks may be one thing exciting speculators and contributing to the surge we’ve seen in prices. If the regulator takes the plunge, many will view it as the next huge step towards more cash flowing into the market which could see it end the year on a high.
