Macro commentary by eToro analyst for Romania, Bogdan Maioreanu
If you are scared of the prices you see at the fuel pump now, the future might bring new increases. The market is capable of withstanding a near doubling in oil prices to $130 per barrel, along with a rise in the 10-year US treasury yield to 2.50%, according to JP Morgan. The bank pointed to the fact that stocks, the economy, and consumers did just fine from 2010 to 2015, when oil prices averaged about $100 per barrel. The scenario in which the markets will start a broader selloff is linked to an increase in 10 Years US Treasury bond yields above 2.5 – 3% but the bank does not see a threat right now.
The oil prices continue to reach new peaks fueling the fears concerning inflation in Europe. In Romania, already the gasoline exceeded 6 lei per litre with some expensive aditivated brands exceeding 7 RON per litre. An increase in fuel prices is likely to spread to other goods increasing an already unusually high inflation.
Despite the rising oil prices, the OPEC Meeting last week decided to add next month only 400.000 barrels per day to production, insufficient to keep oil inventories at the current levels already under great demand pressure. Insufficient supply cannot ease the prices.
In Asia, the energy crisis brings fears of economic slowdown with China posting a weaker September Manufacturing PMI of 49.6 entering into concern territory. Real Estate giant Evergrande’s situation is still under development with 23 October as the date in which the 30 day grace period of the outstanding bond coupon will pass stating the actual default. But the crisis is slowly gaining another dimension with Fantasia Holdings outright defaulting in repaying the principal of an outstanding 206 Million USD bonds, raising deeper concerns about the possible burst of a real estate bubble.
Crossing the Atlantic, the US is showing a worrisome trend of not being able to attract people to return to work. Despite the lift of any Covid related aids at the beginning of September, the Nonfarm Payrolls report showed that the US economy created only 194,000 new jobs last month. This is a nine-month low and less than half of consensus expectations. It was below even August’s shock report of only 235,000 jobs. The unemployment rate eased from 5.2% to 4.8%, whilst average wage growth rose to 4.6%. The leisure and hospitality sector led jobs gains as the economy continues to re-open, but these weak numbers leave employment 5.1 million jobs lower than pre-pandemic and spark growth questions. While bond yields are on the rise, the tapering perspective in November begins to fade again.
Returning to Europe, a glimmer of hope was given by Russia’s president Vladimir Putin who said that Russian gas sales to Europe may hit a new record this year and transit via Ukraine is set to exceed volumes agreed under Gazprom’s contract with Kyiv. As a result, the gas futures price decreased. Though unclear how much the gas supply will increase, Gazprom already exceeded its contractual obligations with 8%, the markets reacted to these declarations stopping the gas price rally for now. The situation is not solved yet. Supply is only one side of the issue, increased demand and fierce competition on energy resources are the other side. A side that is to be addressed at the end of this month when the European Council, will discuss how to deal with storage, to create a strategic reserve and will look at the overall price composition of the electricity market trying to decouple it from gas.
This weekend gave us a glimpse into a possible future with scarce electricity, when Lebanon, plagued by a fierce economic crisis, had a 24 hour black-out due to lack of fuel for the electric centrals.
All of this mix of good and bad news is happening in October, a month that is statistically volatile and showed a 50 year median negative performance of the S&P 500.
Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.
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