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Oil markets are bearish but the downside is limited

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Prices for WTI and Brent crude fell for the third straight session on Tuesday, with the US benchmark now at its lowest in a year. Nymex crude for January delivery today closed -3.5% at $74.25 a barrel, its lowest in nearly a year, while Brent crude for February ended up 4% at $79.35 a barrel, the weakest close since Jan. 3. The broader market sell-off and concerns about more aggressive monetary tightening by the Federal Reserve have overshadowed any positive impact from New price ceiling for Russian oil sales.

Oil traders have been waiting anxiously to see how the Russian oil price cap will affect the market, but this measure has yet to affect prices.

Meanwhile, data released on Monday showed The ISM index of the US service sector rose slightly to 56.5%. in November from 54.4% in October, which “Red flash signals raised that the Federal Reserve may keep interest rates higher for longer, increasing the odds of a US recession and lower energy use,Stephen Innes, managing partner at SPI Asset Management, told Morningstar. The ISM surveys purchasing and supply executives of non-manufacturing (or service) firms. The Services report measures business activity for the overall economy; Above 50 indicates growth, while below 50 indicates contraction.

Bearish oil price sentiment

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So, how bearish has sentiment become in the oil markets?

According to commodity analysts at Standard Chartered, the speculative situation in crude oil was not very noticeable during most of 2022, but it has changed in recent weeks. Analysts revealed that their Crude Money Manager Position Index which compares net long positions across four major New York and London crude contracts in terms of open interest and historical benchmarks is currently more negative than that of all the other commodities they track. StanChart says that in recent months, crude oil has remained near the bottom of the metals and energy rankings in terms of implied positive speculative preference, while gasoline has been near the top.

The Stanchart Crude Oil Index currently stands at -70.3, which is the lowest level since mid-April

2020 (about a week before WTI prices stabilized negatively). The index is now down

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by 57.4 over the past three weeks, marking the largest three-week drop since February

2020, before the temporary collapse of the OPEC+ agreement.

oil positioning

Source: Standard Chartered

However, Stanchart says the situation this time around is very different than it was during the historic oil price crash of 2020, which is likely to limit the downside in oil prices. For example, analysts note that oil market fundamentals are more supportive this time than they were in early 2020; Demand is not about to collapse due to the pandemic and there are no price wars by producers at the moment.

Experts say that oil prices are caught in the backlash from the top-down macro trades as both positive and negative news on the economic front triggered selling.

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According to StanChart, negative US economic data points are triggering a sell-off in oil prices due to recession fears. Ironically, however, the positive data points have a similar effect due to the strengthening of the US dollar.

Moreover, sentiment was boosted by hopes of a reopening of China, but with timetables drawing in, many traders preferred to bet more on the metals markets instead.

Fortunately for the oil bulls, commodity experts say that new shorts are relatively weak and will be covered soon, which helps support oil, although in the short term the market is likely to add to the negativity.

Regarding the Russian seaborne oil price cap, Stanchart predicted that it would have little effect on oil prices. Analysts point out that China, India and Turkey are the three main swing

Russian oil consumers and none of them have yet proposed to subscribe to the cap. Without the participation of these three countries, the amount of Russian oil likely to be subject to the cap would likely be small even if Russia agreed to sell oil under those terms (which it has repeatedly said it would not do).

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The big question here in terms of market influence, then, is whether Russia can transport oil to its main consumers (including providing adequate insurance) without using EU or other G7 services. Russia has acquired a large enough “shadow” tanker fleet since its invasion of Ukraine that it can use it to transport most of the displaced; However, analysts point out that the insurance side is likely to cause major problems. This has led analysts to predict that Russian crude production is likely to decline by 1.44 million barrels per day in 2023 thanks to a gradual shortage of quality equipment and the inability to access international service companies over time.

By Alex Kimani for Oilprice.com

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Stock, bond and cryptocurrency investors remain on edge after a rough year for the markets

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This version is for personal, non-commercial use only. Distribution and use of this material is subject to our Subscriber Agreement and copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.

https://www.wsj.com/articles/stock-bond-and-crypto-investors-remain-on-edge-after-brutal-year-for-markets-11672403124

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Dow Jones losses are heading towards the closing bell as US stocks approach their worst year since 2008

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US stocks were trimming losses heading towards the closing bell on Friday, but were still on track to post their worst annual loss since 2008, as the harvest of tax losses combined with concern over the outlook for US corporate and consumer earnings took its toll.

How are stock indices traded?
  • Dow Jones Industrial Average
    DJIA,
    -0.22%

    It fell about 182 points, or 0.6%, to 33,039 points.

  • S&P 500 index
    SPX,
    -0.25%

    It fell nearly 26 points, or 0.7%, to about 3,824.

  • The Nasdaq Composite Index fell 72 points, or 0.7%, to about 10,406 points.

Stocks posted their biggest gains of the month on Thursday, with the Dow Jones rising 345 points, or 1.05%, to 33,221 as major stock indexes rebounded after losses incurred earlier in the week that pushed the Nasdaq Composite to a new closing low for the year. . The S&P 500 was on track on Friday to wrap up its fourth consecutive losing week, the longest streak of weekly losses since May, according to FactSet data.

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What drives the markets

US stocks traded lower on Friday afternoon, on pace to close the last trading session of 2022 with weekly and monthly losses.

Stocks and bonds have been crushed this year as the Federal Reserve raised its benchmark interest rate more aggressively than many expected, as it sought to crush the worst inflation in four decades. The S&P 500 is on track to end the year with a loss of nearly 20%, its worst annual performance since 2008.

“Investors were on edge,” Mark Heppenstahl, chief investment officer at Penn Mutual Asset Management, said in a phone interview Friday. “It seems as if being able to bring prices down might be a little easier given how bad the year has been.”

Stock indices have fallen in recent weeks as the recent rally inspired by hopes in the Fed’s policy focus faded in December after the central bank indicated it would likely wait until 2024 to cut interest rates.

On the last day of the trading year, the markets were also hit by selling to capture losses that could be written off from tax bills, a practice known as tax harvesting, according to Kim Forrest, chief investment officer at Bouquet Capital Partners. .

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Forrest added that an uncertain outlook for 2023 has also weighed in, as investors worry about the strength of corporate earnings, the US economy and consumer as the fourth-quarter earnings season approaches early next year.

“I think the Fed, and then earnings in mid-January — they’ll set the tone for the next six months. Until then, it’s anyone’s guess.”

The US central bank has raised its benchmark interest rate by more than four percentage points since the start of the year, pushing borrowing costs to their highest levels since 2007.

The timing of the first Fed rate cut will likely have a significant impact on markets, according to Forrest, but the outlook remains uncertain, even as the Fed tries to signal that it plans to keep interest rates higher for longer.

On the economic data front, the Chicago PMI for December, the latest major data release for the year, Came stronger than expected. Climbing to 44.9 from 37.2 in the previous month. Readings below 50 indicate contraction.

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In the coming year, Heppenstahl said, “we are likely to shift toward concerns about economic growth rather than inflation.” “I think the decline in growth will eventually lead to an even greater drop in inflation.”

Read: Stock market investors face 3 recession scenarios in 2023

Eric Sterner, chief information officer at Apollon Wealth Management, said in a phone interview on Friday that he expects the US to fall into a recession next year and that the stock market could see a new bottom as companies likely review their earnings. “I think the earnings outlook for 2023 is still very high,” he said.

The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite were all on pace Friday afternoon posting weekly losses of around 1%, according to FactSet data, at last check. For the month, the Dow was down about 5%, the S&P 500 was down about 7% and the Nasdaq was about to crash down about 10%.

Read: Value stocks are outperforming growth stocks in 2022 by a large margin historically

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As for bonds, Treasury yields rose on Friday as the US sovereign debt market was set to post its worst year since at least the 1970s.

The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.879%

It rose about four basis points on Friday at 3.88%, according to FactSet data, in the latest check. Ten-year yields jumped about 2.34 percentage points this year through Thursday, on track for the biggest annual gain ever based on data going back to 1977, according to market data from Dow Jones.

Meanwhile, the yield on the two-year note
TMUBMUSD02Y,
4.423%

Up about 3.64 percentage points in 2022 through Thursday to 4.368%, 30-year return
TMUBMUSD30Y,
3.971%

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It jumped 2.03 percentage points over the same period to 3.922%. That marks the largest increase in a calendar year for each based on data going back to 1973, according to market data from Dow Jones.

Outside the US, European stocks capped their biggest percentage drop in a calendar year since 2018, with the Stoxx Europe 600
xxxp,
-1.27%
And the
It is an index of euro-denominated stocks, down 12.9%, according to market data from Dow Jones.

Read: A downturn in the US stock market is trailing these international ETFs as 2022 draws to a close

Companies in focus

Steve Goldstein contributed to this article.

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Fed’s reverse repo facility reaches $2.554 trillion by Reuters

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© Reuters. FILE PHOTO: The Federal Reserve Building in Washington, US, January 26, 2022. (Reuters)/Joshua Roberts/File Photo

Written by Michael S Derby

NEW YORK (Reuters) – A key facility used by the Federal Reserve to help control short-term interest rates saw record inflows on Friday, the last trading day of the year.

The New York Fed said its reverse repo facility took in $2.554 trillion in cash from money market funds and other eligible financial firms, beating the previous high seen on Sept. 30, when inflows totaled $2.426 trillion.

The cash rally was almost certainly tipping into record territory in the usual end-of-quarter pattern that could worsen further towards the end of the year. On those dates, for a variety of reasons, many financial firms prefer to deposit money in the central bank rather than in the private markets.

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The Fed’s reverse repo facility has been very active for some time. After seeing almost no absorption for a long time, money began to gravitate toward the central bank in the spring of 2021 and then grew steadily. Daily reverse repo usage has been steadily above the $2 trillion mark since June.

The reverse repo facility takes cash from qualified financial firms in what is an actual loan from the Federal Reserve. The current rate is 4.3%, a yield that is often better than rates for short-term private sector lending.

The reverse repo facility is designed to provide a soft floor for short-term rates and the federal funds target rate, and is the Fed’s primary tool for achieving its function and inflationary mandates. To mark the higher end of the range, the Fed is also pushing deposit-taking banks to deposit cash at the central bank, where the interest rate on reserve balances is now 4.4%.

The federal funds rate is currently set between 4.25% and 4.5% and is trading at 4.33% as of Friday, sandwiched between the reverse repo rate and interest on reserve balances.

There are no signs of shrinkage

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Even with the heavy use of reverse repo, Fed officials have always remained unconcerned about large outflows, even as some in financial markets worried about the potential for the Fed to drain the borrowing and lending lives of private money markets.

Fed officials also expected that as the central bank continues to raise interest rates with the goal of bringing down very high levels of inflation, the use of the reverse repo facility should decrease. But that hasn’t happened yet, and some in the markets now believe that the consistently high utilization of the Fed facility will be around for some time to come.

Research by the Federal Reserve Bank of New York indicated that banking regulation issues make demand for the Fed’s reverse repo instrument high. Meanwhile, the Kansas City Fed added its view that large inflows are related to limited private market investment opportunities and policy uncertainty.

Strong cash flows to the central bank may not have alarmed central banks, but they have driven their operations to an actual loss. The Federal Reserve finances itself through interest on the bonds it owns as well as the services it provides to the financial community. It usually makes a noticeable profit and by law returns it to the treasury.

Currently, the cost of paying interest on reverse repo agreements and reserve balances outweighs income. The Fed reported Thursday that as of Dec. 28, the accounting metric it uses to track losses was $18 billion. Many observers expect that the Fed’s plans to raise interest rates further and keep them at high levels will mean fairly large losses for the central bank over time, even if these losses will not affect the action of the Fed’s monetary policy.

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