Markets Awaiting New Rate Hikes: Business Confidence Continues to Decline as Recession Fears Grow

We have reached the end of another week, but also the end of the second quarter and the first half of the year. A week in which oil and gas prices have slightly increased, as have the prices of oilseeds, while grain and soft commodity prices have fallen. Regarding some general indicators, the dollar index DXY is below 103 points, the S&P 500 index is close to the 4,500 point level, and the fear index VIX is below 14. The Goldman Sachs Commodity Index (GSCI) remains below 540 points in the new week, while the Bloomberg Commodity Index (BCI) is slightly above 101 points.

Several rapid and significant events from the world of macroeconomics and geopolitics have occurred, which have a direct or indirect connection to the world of commodity exchanges, and thus influence the price movements of the same.

Economic growth is declining, and borrowing costs are rising. The middle class continues to shrink, and people will spend less. An interesting comparison in the Wall Street Journal. In 1985, an American family with a single income was considered middle class and could afford to send a child to college by working 39.7 weeks a year. Today, the same family would need to work 62 weeks. The key factor here is inflation. Across all continents and throughout the economic spectrum, business confidence continues to decline as fears of recession grow. Indeed, the more central banks raise interest rates, the more economies will sink.

June inflation in the EU recorded an increase of 5.5 percent and a decrease of 0.6 percentage points compared to May. Lagarde reiterated yesterday that the peak of interest rates is unlikely to be reached in the foreseeable future and that the central bank must not relent in the fight against inflation. Meanwhile, the German Federal Audit Office warned that the Bundesbank may need assistance to cover losses from the ECB’s bond purchase program. This is why recent bank failures in value have already surpassed those of 2008. Many have a portfolio full of bonds with low fixed rates and durations of 10 to 30 years. Either current rates will fall quickly, or we will see more defaults.

Economic data from the US continues to show a very tight labor market, with GDP in the first quarter at +2 percent compared to an estimated 1.4 percent, personal consumption remaining unchanged with a growth of 3.8 percent, while household consumption rose by 4.2 percent, the strongest in nearly 2 years. Because of all this, the FED remains pessimistic about the imminent achievement of the targeted inflation level of 2 percent and a soon change in monetary tightening policy. There are more and more in the market who expect a renewed rise in interest rates. After Powell’s last speech, Morgan Stanley sees a 25 basis point increase as likely at the next meeting scheduled for July 25-26, raising its terminal rate estimate to 5.375 percent.

We should already be in a recession

Pakistan, Sri Lanka, Bangladesh, and Nepal are facing balance of payments problems. Bangladesh is struggling to pay for fuel imports due to a shortage of US dollars. Sri Lanka has already breached its international obligations, and Pakistan is on the brink of default. Besides the shock of commodity prices, which is only partially caused by the war in Ukraine, the real trigger is due to exchange rate policies, both from the FED’s monetary decisions and those made by the respective countries. As is well known, the increase in interest rates in the US results in the devaluation of currencies in developing countries and leads to capital flight.

Will we all be surprised by China’s appetite for purchases as they now try to stimulate their economy? Does it really seem that we could all save by avoiding a global recession? It seems that both the US and the EU have walked a tightrope long enough; perhaps we are still moving well? Looking at consumer habits, it seems so. By many standards we should have been in a severe recession in 2022, then in mid-2023, and now it is late 2023.

In November 2022, QatarEnergy signed a 27-year supply contract with the Chinese company Sinopec. This is the largest LNG storage in history. In December 2022, the Chinese president suggested that Gulf countries use the Shanghai Oil and Gas Exchange for their energy transactions. These transactions should be conducted in yuan. Beijing signed two major LNG supply contracts with Qatar last year. Two weeks ago, Qatar signed a 27-year gas supply contract with China National Petroleum Corporation.

Qatar is the world’s leading LNG exporter. China is the world’s largest LNG importer. Beijing prioritizes its energy security and the internationalization of its currency. China is significantly investing in its nuclear energy production capacity. China currently has 55 operational nuclear power plants. Another 22 plants are under construction, and another 70 facilities are in the planning stage. Additionally, China plans to build 30 nuclear reactors in ‘Belt and Road’ initiative countries by 2030. China plans at least 150 new reactors in the next 15 years, more than the rest of the world has built in the past 35 years.

Oil Prices Fall

Oil prices have slightly fallen in a significant balance between fears for the global economy and further interest rate hikes by central banks on one side and expectations of reduced supply from OPEC+ countries on the other. At the beginning of the new week, oil is at around $75/bbl. Saudi Arabia announced that it would extend its voluntary reduction of one million barrels per day into August. The country will now produce about 9 million barrels per day, the lowest in several years.

Additionally, Russia has stated that it will reduce oil exports by half a million barrels in August, aiming to cut production by the same amount. However, concerns about demand still exist. Factory activity in the US fell more than expected and at the highest rate in nearly three years. Also, production in China has slowed, while in the eurozone and Germany, it decreased more than initially expected in June.

Brent crude oil fell by nearly 5 percent in the second quarter of 2023, extending the total decline in the first half of the year to 12 percent. Futures prices for natural gas in Europe are below €35/MWh, down from a two-month high of €42/MWh reached in mid-June, but remain firmly above a two-year low of €23/MWh from early June as markets assessed the prospects for solid gas supply against rising demand.

Surveys by Rystad Energy indicate that Europe is likely to reach its goal of 90 percent gas storage capacity by early November, alleviating concerns about shortages ahead of the second winter on the continent without key Russian supplies. Meanwhile, maintenance delays at Norwegian gas fields are expected to end by mid-July, removing concerns about reduced supply. Nevertheless, hot weather in Europe has supported demand for air conditioning on the continent and supported prices.

The USDA report had a significant impact on the markets, after all, it is one of the most important of the year. The surprises were significant, especially regarding the planted areas in the US. The market reaction was bearish for corn and bullish for soybeans, while wheat shared the fate of corn. The European market followed the US market last week. First due to weather reasons, with a sharp drop in prices caused by the return of rain in the so-called corn belt, and secondly due to the aforementioned report on Friday.

More Surprises in July

A sharp upward revision in corn planting intentions in the US for 2023 and a sharp downward revision in soybean planting intentions in the US for 2023 created a significant deviation between grains and oilseeds. As a result, rapeseed rose again on MATIF, while corn sharply fell, and wheat followed. Is this a sign of a new trend? No, July has many more surprises for us, such as the release of the USDA World Report on July 12, the expiration of the agreement between Russia and Ukraine for the export of grains from Ukrainian ports on July 18, and the FED meeting on July 25 and 26. There is also the ECB meeting on July 27. All of this is in a period we call the ‘weather market‘ in the US, the main “market mover” in the northern hemisphere.

The three largest mining companies are valued at approximately $320 billion. The three largest technology companies are worth about $7 trillion. But without raw materials, there is no technology! The appeal of gold is growing. The market resonates that it is better to have substitute goods than currencies without fundamental backing and unlimited issuance. In July last year, Qatar made the largest recorded purchase of gold; 14.8 tons. With that purchase, gold reserves reached a record level. However, since then, acquisitions have continued to increase, and today the country’s gold reserves amount to 91.8 tons.

China has increased its gold reserves for seven consecutive months, leading to widespread speculation about the true extent of its gold holdings. Gold stabilized at around $1,920/oz at the start of another week as investors continued to assess the direction of US Federal Reserve monetary policy. The metal strengthened by 0.6 percent on Friday after data showed that inflation in the US slowed, and consumer spending sharply slowed in May.

Bolivia has finalized lithium contracts with Russia and China, for a total investment of $1.4 billion. The South American state possesses 21 million tons of the 89 million tons of global lithium reserves. Almost 24% of known global lithium reserves. If we thought that oil availability was limited to a relatively small number of countries, what can we say about key industrial metals or even better trace elements? The key countries can be counted on one hand (China, Australia, DR Congo, Bolivia).

Copper futures prices have fallen below $3.7/lbs, the lowest in the last month, under pressure from a stronger US dollar and expectations of low production demand amid a concerning macroeconomic situation. The Chinese government has refrained from announcing specific support for its struggling manufacturing sector, while the FED, ECB, and BoE are ready to continue raising interest rates and further restrict industrial production.