Oil falls over 3% after data raises Fed interest rate worries

NEW YORK, Dec 5 (Reuters) – Oil prices fell over 3% on Monday, following US stock markets lower, after US service sector data raised worries that the Federal Reserve could continue its aggressive policy tightening path.

Brent crude futures settled down USD 2.89, or 3.4%%, at USD 82.68 a barrel. West Texas Intermediate crude (WTI) fell USD 3.05, or 3.8%, to USD 76.93 a barrel. Both benchmarks had earlier risen more than USD 2, before reversing direction.

During the session, WTI’s front-month contract began trading lower than prices in half a year, a market structure called contango, which implies oversupply.

US services industry activity unexpectedly picked up in November, with employment rebounding, offering more evidence of underlying momentum in the economy as it braces for an anticipated recession next year.

The news caused oil and stock markets to pare gains.

The data challenges hopes that the Fed might slow the pace and intensity of its rate hikes amid recent signs of ebbing inflation.

“Macro-economic jitters about the Fed and what they’re going to do on interest rates are taking over the market,” said Phil Flynn, an analyst at Price Futures group.

Supporting the market earlier, the Organization of the Petroleum Exporting Countries and allies including Russia, together called OPEC+, agreed on Sunday to stick to their October plan to cut output by 2 million barrels per day (bpd) from November through 2023.

“The decision … is not a surprise, given the uncertainty in the market over the impact of the Dec. 5 EU Russia crude oil import ban and the G7 price cap,” said Ann-Louise Hittle, vice president of consultancy Wood Mackenzie.

“In addition, the producers’ group faces downside risk from the potential for weakening global economic growth and China’s zero COVID policy.”

The Group of Seven (G7) countries and Australia last week agreed on a USD 60 a barrel price cap on seaborne Russian oil.

However, the price cap’s effect on the futures market during Monday’s session ran out of steam by the end of the day, said Andrew Lipow, president of Lipow Oil Associates in Houston.

“The market has realized that the EU is already banning the purchase of Russian oil with a few limited exemptions, and China and India are going to continue and purchase Russian crude oil, so the impact of the price cap will be mitigated,” Lipow said.

At the same time, in a positive sign for fuel demand in the world’s top oil importer, more Chinese cities eased COVID curbs over the weekend.

Business and manufacturing activity in China, the world’s second-largest economy, have been hit this year by strict measures to curb the spread of the coronavirus.

(Reporting by Stephanie Kelly in New York; Additional reporting by Noah Browning in London, Sonali Paul in Melbourne and Emily Chow in Singapore; Editing by Marguerita Choy and Matthew Lewis)

Gold retreats from near 4-month peak on positive US jobs data

Dec 2 (Reuters) – Gold prices slipped on Friday, retreating from a near-four month high, after robust US jobs data fanned concerns that the Federal Reserve might stick with its aggressive monetary policy tightening.

Spot gold fell 0.4% to USD 1,794.96 per ounce by 2:21 p.m. ET (1921 GMT), after earlier hitting its highest since Aug. 10 at USD 1,804.46. US gold futures GCv1 settled down 0.3% at USD 1,809.6.

Data showed US employers hired more workers than expected in November and raised wages despite mounting worries of a recession.

“With the US jobs number coming in much stronger than expected… what we’re seeing is the concern that the Fed may need to go further with their expected interest rate hikes,” said David Meger, director of metals trading at High Ridge Future.

“You’re going to see pressure on most asset classes today, not just the precious metals complex.”

The dollar edged 0.1% higher against its rivals, while benchmark US Treasury yield rose.

Additionally, Chicago Fed President Charles Evans stated at an event that there could be “a slightly higher peak rate of the funds rate, even as we likely will step down” the pace of rate hikes from 75 bps.

Fed funds futures prices still implied a 75% chance of the central bank raising its policy rate by 50 basis points to a 4.25%-4.5% range in mid-December.

Gold is highly sensitive to rising US interest rates, as these increase the opportunity cost of holding non-yielding bullion.

Gold prices were still set for their second straight weekly rise, up 2.2% so far this week, as the dollar dipped after Fed Chair Jerome Powell’s dovish speech this week.

Other precious metals were set for weekly gains as well. Spot silver XAG= rose 1.5% to USD 23.11 per ounce, having hit its highest since May 5. Platinum dropped 2.6% to USD 1,014.25 and palladium was down 2.1% to USD 1,901.25.

(Reporting by Seher Dareen and Brijesh Patel in Bengaluru; Editing by Sriraj Kalluvila and Shailesh Kuber)

US equity funds register biggest weekly outflow in over five weeks

Dec 2 (Reuters) – US equity funds logged big outflows in the week to November 30 as investors booked profit after concerns over economic growth resurfaced due to protests in major Chinese cities against strict COVID-19 policies.

Investors were also cautious about the tech sector amid a hit to iPhone production in China.

According to data from Refinitiv Lipper, US equity funds saw outflows of USD 17.37 billion, the biggest amount for a week since June 15.

Data showed the S&P 500, Nasdaq Composite and Dow Jones Industrial Average .DJI all recorded two straight months of gains through November.

US equity growth and value funds both witnessed outflows for a second straight week, with disposals amounting to USD 6.8 billion and USD 1.76 billion, respectively.

By sector, investors exited tech, financials, and real estate funds worth USD 647 million, USD 231 million and USD 219 million, respectively.

Data for US bond funds showed investors withdrew USD 10.41 billion in a fourth straight week of net selling.

US investors sold taxable bond funds of USD 8.91 billion, marking a third straight week of outflow, while exiting USD 288 million out of municipal bond funds.

US general domestic taxable fixed income funds recorded outflows of USD 6.38 billion, the biggest for a week since at least Jan. 2021, while short/intermediate investment-grade, and high yield funds had net selling of USD 1.23 billion and USD 1.11 billion respectively.

Meanwhile, safer US money market funds received USD 26.95 billion, the biggest amount in four weeks, and government bond fund attracted USD 738 million.

(Reporting by Gaurav Dogra and Patturaja Murugaboopathy in Bengaluru)

ECB to start offloading debt to fight inflation

FRANKFURT, Dec 2 (Reuters) – The European Central Bank is all but certain to start offloading some of its 5 trillion euro (USD 5.3 trillion) bond stash next year as it ramps up efforts to bring down record-high inflation in the euro zone.

Along with a continuing streak of interest rate increases, it hopes so-called quantitative tightening, or QT, will raise borrowing costs and thereby slow demand for goods and services across the 19 countries that use the euro.

The policy shift will be historic, after the ECB spent nearly a decade doing the exact opposite via multiple stimulus programmes that kept the euro zone economy afloat through sequential crises.

It also poses a challenge to governments that have relied on the ECB as a major lender for years, particularly in the bloc’s indebted south.

The ECB will lay out the “key principles” of the QT program on Dec 15, with kick-off expected in the first few months of 2023.

Here are the main questions investors are asking about the ECB’s plans.

WHAT IS QT AND HOW IS IT SUPPOSED TO WORK?

At a general level, quantitative tightening is supposed to be a mirror image of the quantitative easing (QE) policies that have dominated the past decade.

Under QE, the ECB drove down borrowing costs by buying government bonds, hoping this would spur banks and other investors to put their money to more fruitful use, such as financing companies.

Through quantitative tightening, the ECB will mop up the liquidity created by QE by shedding its bond holdings.

This should raise the cost of money and cool credit and investment.

WHAT WOULD IT LOOK LIKE IN PRACTICE?

The ECB has hinted that it doesn’t plan to sell its bonds but will instead simply stop replacing some of those that mature, as the US Federal Reserve did when it started its own QT programme earlier this year.

The Fed said it would only reinvest proceeds from maturing bonds exceeding a certain monthly threshold.

WILL THE ECB SIMPLY COPY THE FED?

Probably not, as monthly redemptions from the ECB’s Asset Purchase Program range from 17.8 billion euros next August to 52.7 billion euros in October.

That means it might need to use a percentage of redemptions as its yardstick or smooth reinvestments across several months, as it has done in the past.

But ECB policymakers have been adamant that they want QT to be predictable and gradual, so don’t expect too much variation.

The idea is to put it on autopilot so that policymakers will not have to make regular decisions on the pace of redemptions, ensuring interest rates will remain their key tool.

HOW MUCH MONEY ARE WE TALKING ABOUT HERE?

The ECB bought 3.3 trillion euros worth of assets under APP, most of which are government bonds.

These have an average maturity of just over seven years and analysts expect the ECB to reduce its portfolio by only 15-20 billion euros per month on average. That means it will take the ECB a long time to run down its balance sheet if it doesn’t sell assets.

The ECB also has a separate Pandemic Emergency Purchase Programme, worth 1.7 trillion euros. It has said it will keep reinvesting proceeds from that scheme until the end of 2024.

WHAT DOES IT MEAN FOR BORROWERS?

The ECB has been a major buyer of government bonds since 2015. For some months at the height of the pandemic, it was buying more sovereign debt than countries were issuing.

This is set to change under QT, forcing euro zone governments – most of which are still running deficits – to raise money from private investors.

UniCredit estimates the market will need to absorb an additional 500 billion euros’ worth of euro zone government bonds next year, the biggest increase since 2010.

SHOULD WE EXPECT MARKET TURMOIL?

Markets seem to have already priced in some QT, with yields on government bonds across the euro zone climbing to multi-year highs in September before a pullback in recent weeks.

Germany’s 10-year bonds are currently yielding 1.8% compared to minus 0.4% a year ago while similar bonds for highly indebted Italy are at 3.7%.

But the ECB has already provided a safety net for these countries, in the form of a scheme that would let it buy unlimited amounts of their bonds if the market seized up.

(USD 1 = 0.9497 euros)

(Reporting by Francesco Canepa; Editing by Catherine Evans)

Nikkei ends at 3-week low on yen strength

TOKYO, Dec 2 (Reuters) – Japan’s Nikkei index closed at its lowest in three weeks on Friday, led by declines in technology stocks, while the yen’s sharp gains hurt automakers.

Investors were also cautious ahead of key US monthly jobs data, which could offer cues on the Federal Reserve’s stance on interest rate hikes.

The Nikkei fell 1.59% to 27,777.90, its lowest close since Nov. 10, and posted a 1.59% weekly fall.

The Topix lost 1.64% to 1,953.98, after losing as much as 2.06%, a level that could trigger the Bank of Japan to step in the market. The index fell 1.64% for the week.

Japan’s shock win over Spain in the soccer World Cup overnight lifted shares of online broadcaster CyberAgent and British-style pub chain Hub.

CyberAgent — the social media and online ad company that is broadcasting all of the Qatar World Cup matches on its Ameba app — rose 3.95%, while Hub 3030.T jumped 7.03%.

“Many Japanese companies have their assumed dollar-yen rate set around 135, so additional yen strength has a very high probability of a becoming a drag on earnings,” Kazuo Kamitani, a strategist at Nomura, said in a conference call with journalists.

Investors globally will be closely watching Friday’s US non-farm payrolls for any further evidence of a peak in inflationary pressures to support Fed Chair Jerome Powell’s comments this week that it is time to slow rate hikes.

On the Nikkei, Mitsubishi Motors was the worst performer, sliding 5.91%. Nissan fell 2.98% and Toyota lost 1.38%.

The biggest drag was Uniqlo store operator Fast Retailing <9983.T), which shaved 48 points off the Nikkei with its 1.72% decline.

Mobile phone company KDDI lost 1.91%.

(Reporting by Kevin Buckland and Junko Fujita; Editing by William Mallard and Uttaresh.V)

Oil prices mixed on easing COVID curbs in China, firm dollar

Dec 2 (Reuters) – Oil futures were mixed on Friday, as hopes for further relaxation of COVID curbs in China, which could help demand recover in the world’s second biggest economy, boosted market sentiment, but a firmer US dollar capped gains.

Brent crude futures were down 1 cent, or 0.01%, at USD 86.87 per barrel by 0731 GMT, after earlier rising to $87.40.

US West Texas Intermediate (WTI) crude futures slipped 21 cents, or 0.3%, to USD 81.01 per barrel, after climbing to USD 81.63 earlier in the session.

Both benchmarks were on track for their first weekly gains after three consecutive weeks of decline.

China is set to announce an easing of its COVID-19 quarantine protocols in coming days and a reduction in mass testing, sources told Reuters, which would be a major shift in policy following the widespread protests and public anger over the world’s toughest curbs.

IMF managing director Kristalina Georgieva said on Friday a further calibration of China’s COVID strategy would be critical to sustaining and balancing the economy’s recovery.

“Oil demand has suffered under the strict measures to contain the virus, with implied oil demand currently at 13 million barrels per day (bpd), 1 million barrels bpd lower than average,” analysts at ANZ Research said in a note.

The oil market was subdued, however, by the US dollar, which typically trades inversely with oil, as the greenback edged off 16-week lows against a basket of major currencies after data showed US consumer spending increased solidly in October.

Meanwhile, European Union governments tentatively agreed on a USD 60 a barrel price cap on Russian seaborne oilwith an adjustment mechanism to keep the cap at 5% below the market price, according to diplomats and a document seen by Reuters.

All EU governments must approve the agreement in a written procedure by Friday. Poland, which had pushed for the cap to be as low as possible, had not confirmed that it would support the deal, an EU diplomat said.

BofA Global Research said in a note that capping prices for Russian crude would lead to buyers paying more for oil on the global market, and represented “a major upside risk to prices in 2023.”

If Russia ended up producing significantly less oil it could “turbocharge oil prices higher,” BoFa said. BofA assumed Russian oil output would total 10 million bpd for 2023, while the International Energy Agency has pencilled in output of 9.59 million bpd.

(Reporting by Mohi Narayan in New Delhi; Additional reporting by Laila Kearney in New York; Editing by Cynthia Osterman & Simon Cameron-Moore)

Oil dips 1.5% ahead of OPEC+ meeting, EU Russian oil ban

HOUSTON, Dec 2 (Reuters) – Oil futures slipped 1.5% in choppy trading on Friday ahead of a meeting of the Organization of the Petroleum Exporting Countries and its allies (OPEC+) on Sunday and an EU ban on Russian crude on Monday.

Brent crude futures settled down USD 1.31, a 1.5% drop, at USD 85.57 per barrel. US West Texas Intermediate (WTI) crude futures fell USD 1.24, or 1.5%, to USD 79.98 per barrel.

Both contracts dipped in and out of negative territory, but notched their first weekly gains at around 2.5% and 5%, respectively, after three consecutive weeks of drops.

“Traders will be hesitant to be short over the weekend if there are growing rumblings that OPEC might try to shock and awe the market at their weekend meeting,” said Phil Flynn, an analyst at Price Futures group.

OPEC+ is widely expected to stick to its latest target of reducing oil production by 2 million barrels per day (bpd) when it meets on Sunday, but some analysts believe that crude prices could fall if the group does not make further cuts.

“Crude carries significantly more weekend risk and could be extremely volatile on the open next week,” said Oanda analyst Craig Erlam, a view echoed by other analysts.

Russian oil output could fall by 500,000 to 1 million bpd early in 2023 due to the European Union ban on seaborne imports from Monday, two sources at major Russian producers said.

Poland agreed to the EU’s deal for a USD 60 per barrel price cap on Russian seaborne oil, allowing the bloc to move forward with formally approving the deal over the weekend, Poland’s Ambassador to the EU, Andrzej Sados, said.

European Commission President Ursula von der Leyen said the Russian oil price cap will be adjustable over time so that the union can react to market developments.

Russian Urals crude URL-E traded at around USD 70 a barrel on Thursday afternoon. The cap was designed to limit revenues to Russia while not resulting in an oil price spike.

Sending bullish signals, China is set to announce an easing of its COVID-19 quarantine protocols within days, sources told Reuters, which would be a major shift in policy in the world’s second-biggest oil consumer, although analysts warn a significant economic reopening is likely months away.

The US oil rig count, an indicator of future production, remained unchanged this week, according to data from Baker Hughes. Worries also accelerated that US shale can no longer boost production at a short notice.

Government data also showed that US employers added more jobs than expected in November while average hourly earnings also increased, potentially giving the Federal Reserve more incentive to raise interest rates.

Money managers cut their net long US crude futures and options positions in the week to Nov. 29, the US Commodity Futures Trading Commission (CFTC) said.

(Reporting by Arathy Somasekhar in Houston; Additional reporting by Mohi Narayan in New Delhi; Editing by Marguerita Choy and Matthew Lewis)

Gold slips, set for best week in three on smaller Fed rate-hike bets

Dec 2 (Reuters) – Gold prices eased on Friday ahead of a key US jobs report, but were set for their best week in three as the dollar weakened on prospects of slower US interest rate hikes.

Spot gold fell 0.2% to USD 1,799.80 per ounce, as of 0729 GMT, after hitting its highest since Aug. 10 at USD 1,804.46 earlier in the session. US gold futures were down 0.1% at USD 1,813.30.

Gold prices have risen about 2.5% this week in what would be their second straight weekly gain.

The dollar index held steady but was headed for a weekly loss of about 1%, weighed down by expectation that the peak in US interest rates was on the horizon.

A weaker greenback makes dollar-priced gold less expensive for overseas buyers.

After Fed Chair Jerome Powell’s comment on Wednesday, the dollar corrected heavily and this supported gold’s appeal, said Hareesh V, head of commodity research at Geojit Financial Services in Kochi, India.

“The USD 1,805 level may act as an immediate resistance for gold, a break above which may trigger fresh rallies.”

Earlier this week, Powell had said it was time to slow rate hikes. Rising rates have kept a hold on gold’s traditional status as an inflation hedge this year, as they translate into higher opportunity cost of holding the non-yielding metal.

Investors now await the US Labor Department’s non-farm payrolls data due at 1330 GMT.

“A softer print on wage growth and NFP would be a case of all stars aligned for further dollar weakness and that should further benefit gold. However, an upside surprise in the report may halt gold’s ascend, especially with prices trading near key resistance level,” OCBC FX strategist Christopher Wong said.

Spot silver was flat at USD 22.77, platinum fell 0.1% to USD 1,040.13 and palladium lost 0.5% to USD 1,932.45.

(Reporting by Ashitha Shivaprasad in Bengaluru; Editing by Rashmi Aich and Subhranshu Sahu)

Philippines cbank chief: Likely 25 or 50 bps rate hike in Dec

MANILA, Dec 2 (Reuters) – The Philippine central bank will hike interest rates this month, though the monetary board is likely to be split over whether to raise the policy rate by 25 or 50 basis points, its governor said on Friday in an interview with Bloomberg TV.

Felipe Medalla expressed relief that the USFederal Reserve was likely to scale back its interest rate hikes. On Tuesday, he said the BSP could pause policy tightening by the first quarter next year barring “no major shocks”.

“Certainly we will not do zero and I cannot speak for the rest of the board. But I think the board members will probably be split between whether doing 25 or 50,” he said.

Medalla heads the seven-member monetary board, which will review the BSP’s interest rate settings on Dec. 15 in its last policy meeting of the year.

The BSP has increased its benchmark interest rates by a cumulative 300 basis points since May to battle inflation.

When asked if he thinks the BSP’s key rates will peak in the first half of 2023, Medalla replied: “Yes”.

Fed Chair Jerome Powell on Wednesday said it was time to slow the pace of coming rate hikes, ahead of the US central bank’s Dec. 13-14 meeting, at which a half-point increase is widely expected.

(Reporting by Neil Jerome Morales and Karen Lema; Writing by Enrico Dela Cruz; Editing by Tom Hogue & Simon Cameron-Moore)

Waiting on Beijing

The surprisingly dovish tone of Fed Chair Jerome Powell’s speech on Wednesday is likely to drive world markets until the Fed’s December policy meeting, but for Asia, China’s economic data and government response to the ongoing domestic protests will be no less important.

The IMF, the US Treasury Secretary and the world’s biggest bond fund all chipped in with their views on China on Wednesday, although what investors really want to hear is word from Beijing.

The economic outlook is deteriorating. Chinese business activity is contracting at its fastest pace in six months, official PMI data showed on Wednesday, raising fears about next year. The final reading of the Caixin manufacturing PMI on Thursday is expected to be revised down too.

This is likely to prompt further fiscal and monetary policy easing from the authorities. But will it be enough to relax the COVID-19 restrictions and accelerate the broader reopening of the economy?

As analysts at CrossBorder Capital note, economic momentum in China is slowing again, while investors’ risk appetite remains near 2020 pandemic lows.

The IMF suggests there is scope for a further “gradual, safe recalibration” of Beijing’s zero-COVID policy. This comes a day after IMF Managing Director Kristalina Georgieva said the 4.4% forecast for Chinese growth next year could be cut.

US Treasury Secretary Janet Yellen said China’s zero-COVID policy was a threat to healing global supply chain difficulties, but said she would not give Beijing advice on managing the pandemic.

On the FX front, at least, Beijing may have got an inadvertent and indirect helping hand from the Fed on Wednesday, after Powell’s eagerly-awaited remarks on the economic outlook were deemed to be far more dovish than investors had expected.

The dollar fell almost 1%, and if that weakness is replicated and maintained in the weeks ahead, a renewed slide in the yuan’s exchange rate is one less thing Beijing has to worry about.

Another whoosh in global markets – Wall Street’s three main indices soared 2%-4% on Powell’s comments on Wednesday – won’t do any harm either.

Three key developments that could provide more direction to markets on Thursday:

– China Caixin manufacturing PMI (November, final)

– US PCE inflation (November)

– Fed’s Logan, Bowman, Kashkari, Barr all speak

(Reporting by Jamie McGeever in Orlando, Fla.; Editing by Deepa Babington)

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