The oil price remains bid over $75, OPEC cuts and broader Middle Eastern war may push the price to $80. MArkets are overstretching expectations that rates will be cut in 2024 on a China/U.S. slowdown. Not with unemployment rates at all time lows and higher energy prices. Coffee futures are bid, Brazil is suffering from the worst drought in history. Climate Change should be priced into markets.
(Chart 1)
(Chart 2)
The markets are not that smart, just faster than you. From sniffing through news reports through to statistical trading, all achieved in microseconds. Doesn't mean they get it right, far from from it, they in an institualized money world, can get it very wrong. Central Banks are mostly clueless, but powerful, they control the yield curve and money supply. Backstopping on debt swaps and adding to their already bloated balance sheets, that through the inflation surge of 2022 and 2023, the Federal Reserve balance sheet did not reduce by that much, in fact it actually took on more 'assets' when rates blew up speculative lending banks such as Silicon Valley Bank, which is testament to money printing in a higher rate environment. It could be argued that we are already in stagflation, but as some pundits have decreed that its is stagflation lite, with unemployment rates at historical all time lows. So far with the rate increases throughout 2022 and 2023, everything has been trading sideways on the precursor that the Fed will cut rates in 2024. Which, could be indicative of a recession emanating from China and spreading to America and the rest of the world. China is already at recession/deflation levels with their economy, with a property sector that has probably already total collapsed, only propped up with massive Chinese government stimulus programs.
The markets has priced in and priced out a wider conflict in the Middle East, thus the oil price has been trading between $75 and $78, falling from $89 (20th Oct 2023), please refer to Chart 1. Although, a wider conflict in the region cannot be ruled out, refer to the Yemen Houthi militant group who hijacked a Israeli owned fright ship in the Red Sea (19/11/2023). China slowing down has also affected the oil price as demand has fallen off, probably in light of their construction industry in a state of collapse. OPEC output cuts have drawn a line under the oil price at $75, but any further bids towards $80 will be on a broader war between Iran and Israel/U.S.
Note Chart 2, which shows the Dow and NASDAQ, including current interest rates, both lit up when the Fed decided to pause rates in October and November, there was speculation that the Fed would offer one last rate increase before the end of 2023. This hasn't been the case instead, it looks they will hold at 5.50% until 2024. The question is; Will they cut? Not with the oil price bid over $75, the market is getting way ahead of itself. Regardless, money is pouring back into speculation trades via the NASDAQ and cyclical 'buy and hold' stocks on the Dow.
Bonus chart are Coffee futures, which as you can see have been trading above 142 since May 2021, on par with December 2022 highs of 170. Indicative of environmental conditions i.e, droughts in South America, which are becoming worse because of climate change and being the inflation hedge/indicator of sorts. It does point to imbedded inflation. Brazil is experiencing one of its worst droughts on record. Climate Change may have the last laugh on the markets expectations that inflation has been contained.
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