US retail sales beat expectations, fueled Federal Reserve (Fed) hawks and bets of another rate hike in December – or January – yesterday. The US 2-year yield spiked to a fresh high since 2007, and the 10-year yield spiked above the 4.80% mark regardless of mounting tensions in Gaza – reminding those who seek protection against geopolitical tensions that the US sovereigns’ safety is limited by the potentially sharp reaction to economic data, a crowded issuance calendar, the possibility of a further belt-tightening from the Fed and concerns about US deficit in an environment where the US is not only expected to help Ukrainians but finance the Israeli war in Gaza, as well.
Gold spiked above its 200-DMA defying mountains, and the rising US yields. The yellow metal is a solid hedge against risky assets that get smashed by a severe fall in appetite.
Higher yields are also bad news for stock valuations, but what triggered yesterday’s stock selloff was not only a rebound in yields but also – and mostly - a major slump in US chip stocks. The AI investors’ darling Nvidia (NASDAQ:NVDA) took an almost 5% hit yesterday after the US announced that they will bring more sanctions to advanced chip exports to China, to prevent the Chinese from using it to improve their military equipment. Intel (NASDAQ:INTC) fell 1.37%, and AMD shed 1.24%.
US President Joe Biden went to Israel to show his support to Israel, which in the meantime bombed a hospital in Gaza and killed at least 500 people. The rising tensions pushed oil to a fresh high since tensions in Gaza started, and the barrel of American crude flirted with the $89pb level. I am afraid we will see tensions further escalate in Gaza, and that could send oil prices higher by a big chunk, especially if Iran gets involved in the carnage of the Middle East. The fact that the US oil inventories fell by 4.4mio barrels last week, and the agreement between US and Venezuela to relieve a part of sanctions against the Venezuelan oil are rapidly swept under the rug when things get ugly in the Middle East.
- Last week’s draw in US oil inventories is just a correction of the huge 12-million barrel fall of the week before.
- Venezuela has the potential to replace the Iranian oil, as it has the world’s largest proven oil reserves and it used to pump around 3-4-mio barrels a day. But, production fell by 75% since the 1990s peak, as the Venezuelan state oil giant has been severely debilitated due to years of defaults, mismanagement, insufficient investment, sanctions, corruption, and a massive outflow of skilled workers from the nation. As such, Venezuelan oil won’t submerge global market overnight.
And that’s ‘tant mieux’ for oil companies which see their stock prices surge on all this brilliant set of news. Shell hit a record high yesterday in Amsterdam, even though its CEO had to give his speech via a video link, instead of in person at London’s Park Lane Energy Intelligence Forum because a young lady called Greta Thunberg and her followers came to protest climate damages in front of the venue. Charming Greta got arrested, as big boys of oil cheered the juicy profits. The climate will pay the bill.
Oh, I Almost Forgot
Bank earnings released yesterday were mixed. Goldman’s profit fell for the 8th straight quarter, by a decent 33%. The stock price fell near the $300 mark. BoFA, on the other hand, topped profit estimates on trading and net interest income. Its shares rebounded 2% from an almost 2-year low. Morgan Stanley will report today, along with Tesla (NASDAQ:TSLA) and Netflix (NASDAQ:NFLX).
Some Good News
On the economic data front, Chinese growth beat expectations as it came this close to the 5% mark in Q3, and retail sales rose more than expected as unemployment fell. On the flip side of the world, inflation in Canada eased, wages in the UK grew slower than expected, and inflation didn’t fall as much as expected. Now, note that the deviation from expectations is minor and the latest update won’t matter for the Bank of England (BoE) expectations, which will certainly keep the interest rates steady at its next meeting. But that will hardly prevent Cable from falling toward 1.20 if Fed doves give in to strong economic data.