“Turbulent” is the word that would best describe the first trading days of 2022 and, like the nervous start of 2021, was a sharp rise in US Treasury yields, which provided an initial direction for the various classes of trades. active.
Rising bond yields in Japan, Germany and the United Kingdom gained momentum after minutes of the December Fed meeting raised expectations for an accelerated pace of Fed interest rate hikes to combat inflation, while the FOMC also discussed ways to – it totally reduces its balance sheet, indicates a Saxo Bank analysis, informs Mediafax.
These moves have signaled interest from the Fed to guide bond yields up the curve. The ten-year benchmark yield jumped to a close of 1.77% last April.
Precious metals, especially gold being one of the most interest-sensitive commodities, traded lower, but not to the extent that a 0.3% increase in real US ten-year yields would dictate otherwise. Part of the explanation is the relative cheapness of gold relative to real yields over the past six months, while a weaker dollar, increased stock market fluctuations, and geopolitical and virus-related risks have also helped offset which otherwise could have been a very challenging start to the year.
Meanwhile, silver has been plagued by declining appetite for risk, as well as a weakening of industrial metals such as copper. After showing some resistance at the end of the year, white metal gave way to technical sell-offs, which helped raise its relatively low price for gold to a three-week high of more than 81 ounces. silver to an ounce of gold.
The outlook for 2022 remains bleak, with most bearish gold forecasts driven by much higher real yield expectations. Real yields have shown, as seen below, a high degree of inverse correlation with gold over the past few years, and the risk of the Fed leading higher yields is what the market is currently worried about.
Gold remains stuck at around $ 1,800 over a wide range of $ 1,740 to $ 1,860, and the key to short-term direction is to balance the opposite attractions mentioned by increasing yields and increasing market uncertainty.
Oil traded higher during the first days of trading, extending the rise at the end of December, contrary to the general trend of risk aversion observed in other commodities and asset classes. The supply disruption in Libya, with more than 400,000 barrels per day compared to 2021, and the geopolitical risks associated with the rise of protests in Kazakhstan, a producer of 1.9 million barrels per day, have helped offset any concerns about demand over time. caused by the rise in Coronavirus cases, not least in China, where aggressive management of Wuhan’s worst Covid-19 outbreak could lead to a weakening of short-term demand.
OPEC + has agreed to maintain its current growth rate of 400,000 barrels per day, and the market, despite the outlook for an emerging surplus supply this quarter, has grown with the prospect that more producers will not be able to meet their targets. production. In addition to the prospect of a global supply surplus, both according to the International Energy Agency and OPEC, which appeared in early 2022, the futures market is also sending a signal of low participation.
However, despite these signals, we maintain an optimistic long-term view of the oil market, as it will face years of likely investment, the major oil powers are losing their appetite for large projects, partly due to an uncertain long-term outlook. for oil demand, but also more and more due to credit restrictions imposed on banks and investors due to the focus on ESG and green transformation.
Global oil demand is not expected to peak any time soon, and this will add further pressure on unused capacity, which is already reduced monthly, due to increased OPEC + production. Added to this is the prospect of a resumption of stock declines in the second half, and the risk that higher energy prices will keep inflation high is the most likely route prices will take in 2022.
The European energy crisis is showing no signs of finding a gas solution, and energy prices remain at the forefront of weather developments, the level of Russian supplies and the pace of LNG shipments to Europe.
In the last two weeks, the gas market has witnessed an extreme roller coaster ride. Before Christmas, very cold weather in Europe and the United Kingdom helped raise the EU’s gas reference price tenfold above the long-term average. This was followed by a 65% drop in price in response to news that several LNG carriers have shifted their course from Asia and South America to Europe to sell their gas at the highest price on the planet. A abrupt return to milder than normal winter weather has also helped, at least in the short term, to alleviate current concerns about very low levels of gas stocks.
In January, the price of gas resumed its rise, again with the prospect of colder weather, which will lead to a very low seasonally high demand for heating and supply from Russia, especially through two major pipelines through Poland and Ukraine. It is difficult to say whether Russia is deliberately withholding supplies due to delays in approving the Nord Stream 2 pipeline and the crisis on the border with Ukraine. But it highlights the failed energy and storage policies in Europe and the UK, which have left the region heavily dependent on gas imports, especially given the still uncertain level of renewable energy production.
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