Globally, the shift away from Russian resources, in particular gas and oil, has seen many countries seeking alternatives. The United States (US) is looking towards sanctioned Venezuela for oil, while Germany contemplates the use of less environmentally friendly solutions, as the possibility of running out of Russian gas looms.
Germany is moving closer to rationing its natural gas supply, as part of a three-phase plan to ensure supply security. The move to cut 60% of Russian gas supplies is set to place strain on manufacturing output of companies in the EU’s largest economic hub.
Meanwhile, as the US and Europe are both moving away from Russian oil and gas, China’s Russian oil imports soared by 55% year-on-year in May. Russia has now bumped Saudi Arabia off the top spot as China’s largest oil supplier. The UK, which is less dependent on Russian gas than many of its continental counterparts, took steps to ensure energy security by agreeing a deal for natural gas supply from Norway.
South Africa has recently become Europe’s alternative to Russian coal, as imports from Russia come to an end in August. According to data released by Reuters, coal shipments to Europe from South Africa’s Richards Bay Coal Terminal between January and May were already 40% higher than the total for the entire 2021 calendar year.
DATA IN A NUTSHELL
The S&P Global Eurozone Manufacturing PMI (Purchasing Managers Index) dropped to 52 in June, from 54.6 in May, its lowest level in 22 months and below market expectations of 53.9. Output fell for the first time in two years and the rate of decline is expected to accelerate in July, amid a decrease in new orders received during June
The number of Americans filing new unemployment benefit claims dropped to 229,000 in the week ending 18 June, exceeding the forecast drop of 227,000 and indicating a tight labour market. The 10-year US Treasury note yield extended its decline towards the 3% mark, a level not seen in two weeks, as investors continued to flock to safe-haven assets, as investor concerns grow around tightening financial conditions tipping the US economy into a recession. On Wednesday, US Federal Reserve (Fed) Chair, Jerome Powell, said that the Central Bank is fully committed to controlling prices, even at the risk of an economic slowdown.
The annual inflation rate in the UK increased to 9.1% in May, up from 9% in the previous month. Although its highest level since 1982, it was expected. Costs accelerated for housing and utilities, transport, food and non-alcoholic beverages, furniture and household goods, as well as alcoholic beverages and tobacco.
WALL STREET IN THE GREEN
All three major US stock indices opened in the green on Thursday as investors re-evaluated the outlook of rising interest rates, amid slowing economic growth. During the Fed’s Senate hearing on Wednesday, Jerome Powell expressed to lawmakers that the Fed remains committed to reining in inflation. Powell, however, cautioned that higher interest rates could eventually tip the economy into a recession, stating that it is “certainly a possibility.” In spite of this reference to recession, these comments seemed to calm some nerves, boosting riskier assets.
Europe’s major stock indices saw sporadic trade in both directions on Thursday, returning to red towards the end of the trading session, as the risk of recession looms. The DAX lost over 1% and the EURO STOXX 600 wiped out 0.5%, with drag coming from real estate and banking stocks. In individual stocks, real estate company, Aroundtown SA, slumped more than 7% after JP Morgan analysts downgraded the stock to “underweight”.
The FTSE 100 retreated on Thursday, extending a near 1% decline in the previous session, dragged down by commodity-linked stocks, amid growing recession fears. Online gambling firm, 888, shed more than 4%, after saying that it expected to report lower half-year revenue. Conservative Party defeats in two by-elections on Thursday night increased the pressure on an already beleaguered Boris Johnson.
COPPER POINTS TO TROUBLE
Brent Crude continued its decline, dipping to $110 per barrel on Thursday and hovering near a two-week low, as economic growth concerns dampen demand outlooks. As the globe struggles to come to grips with rising fuel prices, US President Joe Biden called on Congress to temporarily suspend the federal gasoline tax to provide Americans with some relief. In addition, Cecilia Rose, Chair of the Council of Economic Advisers, stated on Wednesday that China and India may be buying more Russian oil than previously estimated, which will ease a supply crunch in global markets.
Gold treaded water and lost some ground, as it traded towards the $1,830 level per fine ounce on Thursday, erasing the gains made in the previous session. Powell’s comments that the Fed will do “whatever it takes” to ensure price stability, even if that means hiking rates in larger increments and at a quicker pace, weighed on the precious metal. Gold is used as a hedge against inflation and as a safe-haven asset during economic crises, however higher interest rates increase the opportunity cost of holding the non-yielding metal.
Copper plummeted to below $3.90 per pound, its lowest level since early 2021. The copper price, which is believed to be a good indicator of economic wellbeing, is down more than 20% since its peak in March, as fears of a global economic slowdown mount. Meanwhile, copper stocks held by the London Metals Exchange currently stand at 117,025 tonnes, down 35% since mid-May.
ALL EYES ON US JOBS DATA
The euro continued to hover near $1.05 for the month of June, remaining near the five-year low of $1.04, as bets remain high that the European Central Bank will not be able to hike rates as quickly and as aggressively as their peers. The European economy faces severe headwinds, in the wake of the Russia-Ukraine war.
The British pound also continued its descent, trading at $1.22, approaching a two-year low. The sustained weakness comes after the latest Consumer Price Index report indicated that inflation rose to a fresh 40-year high, fuelling bets that the Bank of England will need to be more aggressive in their monetary tightening despite the looming risk of a recession.
The dollar index traded around 104.1 on Thursday, as it struggled to recoup recently lost ground, while tracking Treasury yields lower. Based on current economic data, analysts expect the Fed to hand down another 75-basis point rate hike in July, followed by a 50-basis point increase in September.
The pound started the day trading at 1.2250/$ and 1.1640/€.
Written by Citadel Global Director, Bianca Botes
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