Saudi Arabia and Russia couldn’t wait the next OPEC meeting to announce further production cuts. Saudi announced that it will extend the 1mbpd cut into August – and maybe further – while Russia said it will reduce its production by half a million. Further cuts came within the knowledge that the oil market will tighten in the H2 as world oil inventories are on track to drain at a quick pace of around 2mbpd. Pricewise? Not much. US crude shortly tested the 50-DMA to the upside, but gains remained limited, there is a crowd of sellers above the $70pb level, any OPEC-led price rallies are seen as opportunities to sell the top.
Elsewhere, China imposed restrictions on exports of two chipmaking metals, gallium and germanium, that are used in EVs, defense and displays. The Chinese exporters must apply for licenses at the commerce ministry and report details regarding to whom they are selling their metals. The direct implication of the export ban is higher gallium and germanium prices. These metals are not particularly rare, but China accounts for a good part of the world’s production. China stands for 94% (!) of the world’s gallium production, for example, as they can make them cheaper than the others. Therefore, restricting supply will undoubtedly put a positive pressure on global prices – and maybe on global inflation. Stock prices of companies that make compound semiconductors like Wolfspeed and NXP Semiconductors saw their prices boosted by the news yesterday.
Other than that, it was yet another day of gains – though moderate gains – in the US stock markets. Although the US ISM manufacturing index contracted for the 8th month in June to the weakest levels in more than three years, unemployment showed and ISM prices shrank faster, two things that the Federal Reserve (Fed) is certainly glad to see!
The RBA stays pat
The Reserve Bank of Australia (RBA) kept rates unchanged at today’s monetary policy meeting, as encouraging inflation numbers of late made policymakers think twice before putting more pressure on the already suffering housing market. The AUDUSD sold off from an important technical range of 0.6670/0.68 which includes all 50, 100 and 200-DMAs. No action from the RBA could give a certain relief to the Fed hawks as well, which pushed the US 2-year yield to very close to 5% yesterday before American markets closed for July 4th holiday. The probability of a 25bp hike in July is now at 90%. We shall see some buying at the short end of the curve, simply because the Fed expectations could hardly get more hawkish than this.
In the FX
The US dollar remains sold despite the robustly hawkish Fed expectations and rising yields. This could be because traders look past the Fed’s hawkish words and sell the dollar as they remain focused on the risk of hawkish policies elsewhere that make the US dollar look less attractive against other currencies – like the euro for example. But the EURUSD remains in a wait and see mode at about the 1.09 level, while Cable remains downbeat on multiple political problems that hint at more trouble in the UK’s grey skies.
In precious metals, gold traders feel the pain of gradually mounting US yields, but buyers are still willing to enter the market below the $1900 in hope that we are nearing a top in the US yields’ upside trajectory.
Today, the US will be off due to Independence Day holiday, but the rest of the world will continue digesting the latest news and get positioned for the FOMC minutes due Wednesday and a series of US jobs data between Thursday and Friday. While the potential for further hawkish pricing for the Fed seems limited, there is a good chance of a dovish readjustment in the case of soft jobs data.
