Blue Wave Oil Price Soaring → Weakening of the Dollar Kim Hyun-seok’s Wall Street Now

On the 5th (US local time), the New York stock market rebounded as if nothing had happened the day before. The Dow rose by 0.55%, the S&P 500 up by 0.71% and the Nasdaq by 0.95%. With the chances of winning the Democratic Party continuing to rise that day, Georgia’s federal senator runoff began, but the market did not shake. We also ignored news of the coronavirus strain and the expansion of European blockades.

The previous day, 10 of the 11 sectors in the S&P 500 were down, and that day, all sectors saw an uptrend. Thanks to soaring international oil prices, the energy sector surged 4.53% to lead the market. Bitcoin price, which had been stagnant, rose to the $34,000 level again.

The easiest way to explain this marketplace is the’power of money’. Net inflows of US$15 billion last week to equity-type funds in the U.S. have continued for eight consecutive weeks.

Cleveland Federal Bank Governor Loretta Mester reassured the market by saying that even if the economy improves in the second half of this year, the Fed could continue to buy assets worth $120 billion per month throughout the year. The previous day, Atlanta Federal Bank Governor Rafael Bostik said in an interview with Reuters, “I believe that in the near future, the $120 billion monthly asset purchase could be rescheduled quickly.” Governor Mester is a hawker.

In the mood for risky assets, the ICE dollar index fell to 89.4 on that day, falling to the lowest level since April 2018, as Mr. A Wall Street official said, “The factors that cause the dollar to weaken are continuing to strengthen.”

① Possibility of sweeping the Democratic Party (more dollars)

The Georgia state runoff ballot is being held. The situation is becoming increasingly favorable to the Democrats. Democratic Party candidates John Osoff and Rafael Warnock are campaigning, saying, “If you shoot us, you will get $2,000 per capita for stimulus checks.” Analysis is the trend that the US stock market will be adjusted if the Democratic Party sweeps the Senate into the blue wave. Jeffrey Segal’s Wharton School’s professor fell 5-10%, while Oppenheimer’s John Stoltzpus, senior strategist, fell 6-10%.

But on this day, investors can’t find much impatience. A Wall Street official said, “There are many who believe that the larger stimulus that the Democratic Party will pour out will offset the negative effects of strengthening regulations,” he said. “The atmosphere that positively evaluated’Blue Wave’ last October is reviving.” This means that even if Blue Wave becomes a reality, the adjustment may not be deeper than expected.

This is based on the analysis that the scale of stimulus measures will increase and investments in infrastructure deals and green energy will be strengthened when it becomes’Blue Wave’, but tax increases such as corporate taxes will not be easy. This is because the Democratic Party also has three or four mid-centres, including Joe Manchin (West Virginia). If even one of them opposes the symptoms, it is not easy to pass.

But if the Georgia elections result in a’blue wave’, what is certain is that the dollar’s weakness could deepen. Because more spending means more dollars.

In addition, the market’s expected breakeven rate (BER) over the next 10 years the day before was 2.01%, exceeding 2%. This is the first time in 2 years since November 2018. Amid expectations of inflation, the benchmark 10-year Treasury bond yield rose slightly, while the 10-year price-linked Treasury Bond (TIPS) had a strong buying trend, which means that the interest rate fell further. As a result, the real interest rate fell further, lowering it compared to Japan, which is the’aid for negative interest rates’. When the real interest rate is lowered, funds are forced to go abroad in search of higher interest rates. A weak dollar is inevitable.

② Raw material price increase

The startling news that day came from the Organization of Petroleum Exporting Countries (OPEC) and’OPEC+’, a meeting of major oil producing countries. Saudi Arabia suddenly announced a reduction of 1 million barrels per day in February and March, and oil prices soared. Initially, OPEC+ had decided to reduce production cuts by 500,000 barrels per month from January this year, but it was decided through monthly meetings.

At a meeting held from the previous day, Russia and Kazakhstan insisted that production cuts should be reduced by 500,000 barrels a day (increased production) in February, and OPEC members such as Saudi Arabia should maintain the current production cuts (7.2 million barrels a day) as there is no demand yet. I couldn’t agree. However, Saudi Arabia voluntarily reduced production and decided to allow more production in Russia and Kazashtan. Accordingly, OPEC+’s total production cut will only be reduced by 75,000 barrels each from 7.2 million barrels per day to 7125,000 barrels in February and 7.75 million barrels in March.

Saudi Arabia’s decision is analyzed as an incentive to protect OPEC+. In the case of Russia, rather than keeping the oil price, it is a position that it should secure market share when American shale companies twist. President Trump, my friend (?), disappeared anyway.

In addition, even inside OPEC, the UAE and other countries have insisted that oil-producing countries such as Nigeria, which have not kept the promise of production cuts, should cut compensation. Saudi Arabia announced a voluntary reduction in production on the same day, explaining that it was intended to help Nigeria and others reduce compensation.

As a result, Western Texas Crude Oil (WTI) in the United States rose more than 5% on the same day, soaring to $50.2 during the day, breaking the first $50 per barrel since February. Rising oil prices have the effect of encouraging a weak dollar. Because resource exports are driving strong emerging market currencies. Moreover, on that day, copper also rose by more than 2% due to the expectation of an economic recovery. Corn has soared 5 dollars per bushel to the highest level in 6 years due to fears of declining crop yields due to climate change, and palm oil prices also hit a 10-year high.

This commodity surge is again a factor in inflation in the United States. Not only has the absolute price of raw materials increased, but the US importers have to pay higher import prices due to the weak dollar. The notorious inflation in America in the 1970s was triggered by an oil shock.

This atmosphere was also revealed in the December ISM manufacturing index released today. Among the detailed indices, the price index recorded 77.6, an increase of 12.2 points from the previous month. This is the highest since May 2018. “There was an additional fear of inflation,” ISM said. “Steel, aluminum, copper, petroleum-based products and transportation costs were the biggest drivers, and no commodities declined.”

When concerns over inflation increase, the Fed will initially tighten the base rate, such as a hike. Meanwhile, it is common for the dollar to become stronger again.

However, the Fed currently does not even dream of tightening. Wall Street’s basic assumption is that the rate hike will only take effect in the second half of 2023, three years later. If the current situation continues, the weakening dollar is likely to continue.

③ Strong yuan from China

Moreover, the US-China conflict is also fueling a weak dollar. On the 5th, the People’s Bank of China announced the median exchange rate of the yuan against the dollar at 6.4760 yuan, down 1% from the previous trading day. This is the largest daily adjustment since the abolition of the dollar peg system in July 2005. Wall Street’s judgment is that China started to attract foreign funds through a strong renminbi, as the US tried to block China’s exports with tariffs and block the financing for Chinese companies. In addition, China is the first country to achieve economic normalization among major economies by successfully controlling the coronavirus.

This strong yuan also fuels inflation expectations in the United States. Because the price of Chinese-made goods will increase.

CNBC reported that Treasury Secretary Stephen Manusin opposes the delisting of the three major Chinese telecommunications companies (China Mobile, China Unicom, and China Telecom) by the New York Stock Exchange (NYSE). The day before, he said he did not agree with the NYSE’s announcement of the withdrawal.

When investing this year, it’s a good idea to keep in mind the plethora of liquidity the Fed is pouring out, as well as the weak dollar and rising inflation expectations.

Reporter Kim Hyun-seok [email protected]