Financial Markets’ Weekly Recap, January 23-27

The US Dollar Index began the trading week down around the 102 mark, hovering close to levels not seen since May 2022, as concerns about a US recession and prospects of a less aggressive Fed startled investors away from the American currency which closed the week at 101.9.

Oil Price Action

On Monday, The WTI crude oil retreats from multi-day high amid lack of major positives, cautious mood ahead of key data. Sluggish markets, Lunar New Year in China limit energy buyers’ optimism.

On Friday, WTI crude settled at $79.42 while Brent settled at $86.01 per barrel. For the week, WTI fell 2.5% after a cumulative 11% rally in two previous weeks. Month-to-date, the U.S. crude benchmark fell 1%.

All eyes are focusing on the February 1 OPEC+ meeting via zoom encompassing the delegates of the 23-nation coalition of oil producers. In reality, OPEC+ is struggling to balance the market; in other words: The Russians need to sell as much oil as possible and at whatever price they can. The Saudis want to keep Arab Light competitive against Urals but not flood the market; hence their plan for a rollover in December production targets. The G7 will have two more price caps coming into force on February 5 on refined oil products out of Russia. No one knows what effect those will have on the Kremlin.

If WTI does not pop on the theater that OPEC+ pulls at its Febuary 1 meeting, then the US crude benchmark could fall to its recent low under $76 a barrel.

Natural Gas

The front-month March gas contract on the New York Mercantile Exchange’s Henry Hub did a final trade of $2.856 per mmBtu, or million metric British thermal units on Friday.

It settled the day at $2.849 – down 10% from a week ago but virtually unchanged from Thursday’s close.

Gas futures have lost 57% of their value over the past six weeks after an unusually warm start to the 2022/23 winter led to a collapse in demand for heating oil.

Prior to this week’s decline to $2 levels, gas hit 14-year highs of $10 per mmBtu in August, and even traded as high as $7 in December.

Gold Price Action

Gold spares no opportunity to benefit from the US dollar’s casual declines. Despite latest gains, gold for February delivery on New York’s Comex recorded a final trade of $1,928 on Friday after settling the session at $1929.40, down just 60 cents.

The spot price of gold, more closely followed than futures by some traders, settled at $1,928.15 – down 96 cents, or 1%, on the day. Spot gold peaked at $1,949.29 on Thursday before an intraday high of $1,935.40 on Friday.

The $1,950 resistance is a key test for gold’s ability to scale towards record highs of above $2,000 an ounce, which it last hit in April last year, almost repeating its all-time peak from August 2020. Since this year began, both futures and spot gold have gained more than 5% each.

Spot gold’s failure to settle the week above $1,932, with its drop to below $1,928, raises the possibility of a further descent. If selling intensifies below $1,900, a further drop to $1,880 and $1,870 can be witnessed.

Gold benefited from several factors that appeared on the surface over that period, as earnings reports appeared for a number of major companies listed on global stock exchange indices. Inflation data appeared last week, shedding more light on the decline in consumer prices in the United States, which is a blow to the US dollar and is in favor of gold.

Riskier Assets

Last week’s dealings in financial markets ended with a diversified, positive performance in terms of riskier financial assets, with a decline in safe haven assets. The major market drivers of price movement in the week were earnings reports, concern about the damage that the federal budget and Biden Administration’s refusal to negotiate debt ceiling with Republicans, in addition to inflation data that highlighted a continuous decline in US consumer prices.

Earnings reports contributed to the optimism of the markets, as most of them tended to be positive, led by Tesla, IBM, American Airlines, Levi’s, and AT&T.

Debt Ceiling Dilemma

On Thursday, January 19, the US Treasury announced measures that would avoid the United States stumbling after it came close to breaching the debt ceiling, while the Republicans and Democrats failed to reach an agreement, even on a temporary budget to finance government activities until an agreement to raise the debt ceiling, according to a letter sent by the Treasury Secretary Janet Yellen to lawmakers.

In the event that US lawmakers from the Democratic and Republican parties do not reach an agreement on the debt ceiling before next June, markets may see many risks that would impact the US economy in the event of a default, most notably the decline in credit rating, which may cause severe damage to confidence in American assets including US Treasury bonds.

US Economic Data

The US data highlighted the rise in GDP prices in the fourth quarter of last year by 3.5%, compared to a higher rate of 4.4%, which also exceeded the market’s expectations, which indicated an increase of 3.3%.

The preliminary reading of the personal consumption expenditures index, excluding food and energy prices, rose in the last quarter of 2022 by 3.9%, which indicates a lower rise than the previous reading of 4.7%. Market expectations were for the index to rise by 5.3%.

Euro

The Euro ended last week’s trading in an upward direction against the US dollar, based on statements from the European Central Bank and a decline in the US currency’s price movement.

The EUR/USD rose to 1.0865 against the previous daily close of 1.0854. The pair fell to its lowest level in last week’s trading at 1.0835, compared to the highest levels in the same period, which recorded 1.0929.

Last week’s positive earnings reports supported the risk appetite in the markets, which helped the single European currency to rise due to the falling dollar, which was weakened by risk-taking trends.

Three factors will affect the price movement in the global financial markets next week; Which includes major central bank decisions, US employment data, and earnings reports from a number of tech giants.

The Week Ahead

The Federal Reserve will issue monetary policy decisions next Wednesday, most notably the interest rate decision, which most of those interested in the markets expect to include a 25 basis point rate hike, which indicates a further slowdown in the pace of rate hikes. These expectations are based on the decline in the readings of the Fed’s most reliable and accurate indicator, the PCE data.

The Bank of England is also expected to raise interest rates by 50 basis points amid the UK’s struggle with the slowing economy.

Interest decisions will also be issued by the European Central Bank and the Bank of England next Thursday, amid expectations that the European monetary authorities will raise interest rates by 50 basis points, as part of efforts to control inflation, which is rising to record levels.

Next week will witness the emergence of the most important US employment data over the month, which includes indicators of employment opportunities, job change.

The Challenger Index of Job Cancellations in the US will also be released with readings of wage growth, job growth and productivity.

Next Friday is very important, as it will show job growth readings represented by the Non-Farm Employment Change (NFP) and the US Unemployment Index.