Oil gains $5 on weaker dollar, tight supplies

July 18 (Reuters) – Oil prices rose more than USD 5 on Monday, boosted by dollar weakness and expectations that the US Federal Reserve won’t raise interest rates by a full percentage point at its next meeting to combat inflation.

Brent crude futures for September settlement gained USD 5.11, or 5.1%, to settle at USD 106.27 a barrel, after rising 2.1% on Friday.

US West Texas Intermediate (WTI) crude futures for August delivery settled up USD 5.01, or 5.1%, at USD 102.60 after rising by 1.9% in the previous session.

On Friday two US Federal Reserve officials indicated the central bank would likely only raise interest rates by 75 basis points at its July 26-27 meeting. Previous reports that the Fed was considering a 100 basis point decision sent markets lower late last week.

The US dollar retreated from multi-year highs on Monday, supporting commodities prices. A weaker dollar makes dollar-denominated commodities more affordable for holders of other currencies.

“Today’s strong advance resulted largely from a sizable and broad-based weakening in the US dollar that has been providing a key driver behind daily oil price swings during the past several weeks,” said Jim Ritterbusch, president of Ritterbusch and Associates LLC in Galena, Illinois.

Both Brent and WTI last week registered their biggest weekly declines in about a month.

Oil supplies remain tight. As expected, US President Joe Biden’s trip to Saudi Arabia did not yield any pledge from the top OPEC producer to boost oil supply.

Biden wants Gulf oil producers to step up output to help to lower oil prices.

Russian gas export monopoly Gazprom declared force majeure on gas supplies to Europe to at least one major customer, according to the letter seen by Reuters, potentially ratcheting up the conflict between Moscow and Europe.

That added support to oil prices, as traders saw it potentially as a precursor to actions by Russia to use energy as a weapon.

“The other clear risk …is that Russia will further slash energy supplies to Europe to try to raise the cost of supporting Ukraine and imposing sanctions,” said Helima Croft, head of global commodity strategy at RBC Capital Markets.

(Additional reporting by Noah Browning in London, Sonali Paul in Melbourne and Florence Tan in Singapore; Editing by David Goodman, Jonathan Oatis, Paul Simao and Cynthia Osterman)

Marcos wants to renegotiate loans on $4.9 billion China-backed rail projects

MANILA, July 16 (Reuters) – Philippine President Ferdinand Marcos Jr ordered the transport ministry to renegotiate loan agreements struck by his predecessor with China for railway projects worth USD 4.90 billion, an official said on Saturday.

Transportation Undersecretary Cesar Chavez said the official development assistance loan agreements for the three projects were considered “withdrawn” after the Chinese government “failed to act on the funding requests” made by the government of then-President Rodrigo Duterte.

Chavez said other funding options were also being considered for the projects worth 276 billion Philippine pesos: the Subic-Clark Railway Project, the Philippine National Railways South Long-Haul Project and the Davao-Digos segment of the Mindanao Railway Project.

Options include tapping private capital through a public private partnership, he said.

Asked for comment, a Chinese official said on condition of anonymity: “I can say China-Philippines cooperation over railways will continue. China is open for discussions with the Philippines.”

From more than 1,100 km (680 miles) before World War II, the Philippines had only 77 km of operational railway as of 2016, well behind other urban centers across Asia, government data shows.

Negotiations for the rail projects began in 2018, during the administration of Duterte, who pursued warmer ties with Beijing, setting aside a longstanding territorial spat over the South China Sea in exchange for billions of dollars of aid, loans and investment pledges, including for his infrastructure program.

Marcos has vowed to defend national sovereignty but has spoken strongly of the need to enhance ties with China in other areas.

(Reporting by Karen Lema; Editing by William Mallard)

US Navy conducts freedom of navigation operation in South China Sea

BEIJING, July 16 (Reuters) – The U.S. Navy on Saturday said in a statement the USS Benfold carried out what it calls a “freedom of navigation operation” in the South China Sea near the Spratly Islands.

“On July 16, USS Benfold (DDG 65) asserted navigational rights and freedoms in the South China Sea near the Spratly Islands, consistent with international law,” it said.

(Reporting by Albee Zhang and Tony Munroe; Editing by Tom Hogue)

Dollar still headed higher after correction in Fed betting

July 15 (Reuters) – The Fed doesn’t need to hike rates by 100 bps this month to prove it’s more committed to fighting inflation than the ECB or BOJ, so Treasury yield spreads over bund and JGB yields should remain attractive enough to turn dips into buying opportunities.

The question now, with the dollar index having rallied this week into a thicket of long-term resistance, is how big a correction might be.

With monthly RSIs at record highs some caution is advised, but to look for more than a short-lived dip, prices would have to close below the 38.2% Fibo of the post-June Fed meeting 103.41-109.29 rise at 107.04.

Even if the Fed hikes by 75 bps on July 27, rather than the extreme 100 bps briefly priced in after Wednesday’s hot CPI readings, the fed funds rate will still rise to 3.5% by year-end, versus maybe 1% for the ECB and nil from the BOJ, so a dollar index rise closer to 2001’s 121.02 peak remains possible.

(Randolph Donney is a Reuters market analyst. The views expressed are his own.)

Stronger dollar pushes gold to fifth weekly loss

July 15 (Reuters) – Gold slipped on Friday and was headed for a fifth consecutive weekly loss, knocked down by the dollar’s overall strength amid prospects of steep rate hikes by the US Federal Reserve.

Spot gold fell 0.3% to USD 1,704.30 per ounce by 1750 GMT, and has lost around 2.2% so far this week. US gold futures settled down 0.1% at USD 1,703.6.

“Prices have been pressured by a very strong dollar. The market, from being worried about inflation, has turned to being worried about recession, resulting in lower demand across metals, including gold,” said Jim Wyckoff, senior analyst at Kitco Metals.

The dollar eased, but held near a two-decade high, denting gold’s appeal among overseas investors and also gobbling up safe-haven flows amid slowdown fears.

“With gold bugs falling like dominoes, prices are now challenging pre-pandemic levels, raising risks that the largest speculative cohort in gold will start to feel the pain under a hawkish Fed regime,” TD Securities said in a note.

Gold is considered an inflation hedge, but rate hikes raise the opportunity cost of holding non-yielding bullion.

Meanwhile, US retail sales rebounded strongly in June as Americans spent more amid soaring inflation, which could allay fears of an imminent recession but not change the view that growth in the second quarter was tepid.

Investors also took stock of the EU’s potential plan to adopt its seventh package of sanctions against Russia that would add a ban on Russian gold imports.

“The EU sanctions will not have a big impact on supply and demand as Russia can just sell their gold to other countries, gold is pretty fungible,” Wycoff added.

In the physical gold market, recent price decline drew some buyers in Asian hubs.

Silver was up 1.5% at USD 18.65 per ounce, but was headed for a weekly decline.

Platinum was steady at USD 843.90, while palladium fell 2.8% to USD 1,843.69, seeing its first weekly decline in four weeks.

(Reporting by Ashitha Shivaprasad and Arundhati Sarkar in Bengaluru; Editing by Anil D’Silva and Shailesh Kuber)

Weak China data, steady dollar put EM FX on pace for weekly losses

July 15 (Reuters) – Emerging market currencies were on pace for their sixth consecutive week of losses on Friday as worries over a potential global economic downturn as well as faster US interest rate hikes dented the appeal for riskier assets.

China brought the gloom on Friday, with the yuan marking its biggest weekly decline since mid-May as a much weaker-than-expected economic growth data raised doubts about this year’s growth target.

“China is one of Asia’s key growth powerhouses,” said Danni Hewson financial analyst at AJ Bell. “This doesn’t bode well as recession fears grow in many parts of the world, and it could fuel speculation that China’s commodities appetite may wane if economic activity is stalling.”

The offshore yuan was down a touch, while stock markets were also hit by property developers and financial stocks following homebuyers’ threats to stop mortgage payments on unfinished apartments.

Among other currencies, the Indian rupee hit a fresh record low at 79.95 per dollar before easing a bit.

The South African rand, the Turkish lira slipped as the dollar held at a two-week high with traders flirting with the prospect of a 100-basis-point rate hike by the Federal Reserve later this month.

The MSCI’s EM currencies index slipped 0.2%, with analysts forecasting more weakness despite aggressive rate hikes across EM economies to quell soaring inflation.

“The bottom in EM can only occur when the Fed needs to shift the focus to avoiding a deeper recession. Only then EM central banks will have room to move to a more accommodative stance,” Bofa strategists David Hauner and David Beker wrote in a note.

The Polish zloty firmed 0.2% versus the euro, moving further away from four-month lows, as a central bank member said Poland’s main rate would be raised at its next rate-setting meeting in September. nL8N2YW0W1

Russia’s rouble, firmed towards 58 against the dollar and the euro, supported by the beginning of a favorable tax period. Export-focused companies usually step up conversion of their forex revenues to meet local liabilities.

Sri Lankan dollar bonds, were still at record lows as the speaker of Sri Lanka’s parliament formally accepted President Gotabaya Rajapaksa’s resignation after he fled to Singapore amid an uprising brought about by his country’s worst economic crisis in seven decades.

(Reporting by Sruthi Shankar and Susan Mathew in Bengaluru; Editing by Vinay Dwivedi)

Gold hurtles toward fifth weekly dip on dollar strength

July 15 (Reuters) – Gold prices fell on Friday and were poised for a fifth straight weekly loss, as expectations of a sizeable rate hike by the US Federal Reserve powered the dollar and eroded bullion’s appeal.

Spot gold was down 0.3% at USD 1,704.99 per ounce, as of 0916 GMT, and lost 2.2% so far this week. US gold futures eased 0.2% to USD 1,701.90.

The dollar held at a two-decade high, making greenback-priced bullion expensive among overseas investors.

Gold looks to be in a free-fall, and typically buyers will restrain themselves until the price finds some decent support, said independent analyst Ross Norman.

With the US dollar undergoing an epic rally, it’s apparent that investors see it as the ‘go-to’ safe-haven asset, Norman said, adding, there’s “some significant redemptions in the gold ETF on a daily basis as stale institutional longs liquidate.”

Two of the Fed’s most hawkish policymakers said on Thursday they favoured another 75-basis-point interest rate increase this month.

Investors now await US monthly retail sales due at 1230 GMT.

Market have more or less priced in a 100-point rate hike, and “as for retail sales, the trend is more important than a one-off number,” StoneX analyst Rhona O’Connell said.

Higher interest rates raise the opportunity cost of holding non-yielding bullion.

The market also took stock of the EU’s plans to adopt its seventh package of sanctions against Russia, which will add a ban on import of Russian gold.

“The EU sanctions against Russian gold will have rather limited impact. I think this move as more of a gesture. Likely the Russians will be able to find buyers outside the EU quite satisfactorily,” Norman said.

Spot silver fell 0.2% to USD 18.35 per ounce, and lost about 5% this week, in what could be its seventh straight weekly loss.

Platinum was down 0.3% at USD 841.36 per ounce, while palladium dropped 0.8% to USD 1,882.56.

(Reporting by Arundhati Sarkar in Bengaluru; Editing by Sherry Jacob-Phillips)

Dollar consolidates at 2-decade high; euro at parity

LONDON, July 15 (Reuters) – The U.S. dollar held at a two-decade high on Friday as a broad wave of risk aversion swept through global markets, with traders flirting with the prospect of a 100 basis point rate hike by the Federal Reserve later this month.

Currencies perceived as riskier, including the Aussie and the pound, were under pressure as a barrage of negative news over the last 24 hours weighed on sentiment.

Against a basket of its rivals, the dollar rose to its highest levels since September 2002 above 109, as the U.S. banking earnings season kicked off on a weak note, China’s growth in the second quarter tanked more than expected and Italy faced a new political crisis.

“A stabilization in the dollar around current levels is possible today, but we continue to highlight: a) limited scope for a correction; b) a balance of risks still tilted to the upside in the near term,” ING analysts said in a note.

The greenback was on track for its third consecutive week of gains as traders ramped up bets the Fed would go for a super-sized tightening at their July 26-27 meeting after data on Wednesday showed U.S. consumer price inflation racing at the fastest pace in four decades.

Those bets were pared after Fed Governor Christopher Waller and St. Louis Fed President James Bullard both said they favored another 75 bps hike for this month, in spite of the inflation figures.

The euro was flat at $1.0026, after bouncing back from below parity on Thursday for a second day.

The single currency dipped as low as $0.9952 after Italian Prime Minister Mario Draghi offered to resign, but that was rejected by the country’s president.

China’s yuan held at a two-month low against the dollar and looked set for its biggest weekly drop since May as the weak data raised doubts about this year’s economic growth target.

(Reporting by Saikat Chatterjee Editing by Mark Potter)

Credit investors see more risk ahead as recession fears rise

NEW YORK, July 15 (Reuters) – Rising recessionary concerns are seeing some investors reduce risk in their credit exposure as they brace for an economic slowdown whose magnitude remains highly uncertain.

US bonds have been hurt by rising interest rates and unrelentingly high inflation, but over the past few weeks the market focus has shifted more heavily towards fears that the US Federal Reserve will bring on a recession as it tries to tame inflation.

As pressure in credit piles up, some investors are looking to trim exposure to lower-rated credits and buy bonds of companies likely to be more resilient in an economic downturn.

“We will always own high yield, we’ll always own some emerging markets, but I think we probably just want to own less going forward in the next three months, six months,” said Nick Hayes, head of global strategic bonds strategy at AXA Investment Managers. “We want to improve the quality of the overall portfolio because maybe we are heading into a really uncertain time,” he said.

This may not be easy, bond traders said, partly because rising borrowing costs are likely to curb supply, which may limit investors’ ability to distribute their exposure between secondary and primary markets.

Benchmark 10-year Treasury yields – a barometer for mortgage rates and other financial instruments – have gone down to 2.99% from around 3.5% on June 14. But the yield spread on the ICE BofA US High Yield Index, a commonly used benchmark for the junk bond market, has gone up by over 50 basis points over the same period and its investment grade equivalent has also increased. Credit spreads typically widen when risk of default rises.

High-yield spreads hit a two-year peak of about 600 basis points earlier this month. The Fed has never hiked rates with such tight credit conditions, BofA strategists said, noting that during both the 2001-2 dot-com collapse and the 2008 financial crisis, the Fed was cutting rates.

Still, high-yield spreads are not showing the level of stress in some prior crises. Spreads widened to more than 2,000 basis points during the financial crisis and to over 1,000 basis points in early 2020 during the start of the coronavirus outbreak.

For Jonathan Duensing, head of fixed income, US portfolio manager at Amundi US asset management, credit spreads point to an economic slowdown, although not a severe one, but they could widen further.

“We’re still a little bit more cautious on overall exposure … selecting the companies that we feel are going to be best positioned to maybe withstand the upcoming environment,” he said.

RECESSION SIGNALS

Meanwhile recession signals are becoming more worrying.

Some Wall Street banks in recent weeks raised their expectations of an economic downturn, and the inversion of the US two-year/10-year Treasury yield curve – widely seen as a precursor to recession – has grown to its widest since 2000.

“What’s unusual about this slowdown … is that there are shock absorbers suggesting that it might not be a very deep slowdown if it happens,” said Viktor Hjort, global head of credit strategy & desk analysts at BNP Paribas, referring to factors such as companies being in good financial health as they come out of the COVID-19 pandemic.

Still, it could be prolonged by the Fed’s lack of ability to help as the central bank is constrained by inflation, he said.

A combination of higher interest rates and economic contraction could lead to more defaults among US companies, and an adjustment of investor positions which would, in its turn, hamper companies’ access to the debt markets.

“There’s no question that default rates will increase. It’s just a question of by how much and how quickly,” said James Gellert, CEO of analytics company RapidRatings.

Debt bankers say markets are still open for borrowers willing to pay premia but that issuers have been considering replacing bonds with short-term instruments or reducing the size of their fundraising exercises. For companies that cannot afford to postpone their funding plans, the path has become uncertain.

“If the new issue side of it isn’t there, then trying to find secondary bonds can be problematic,” said Dom Holland, head of US business development at LedgerEdge, a distributed ledger technology corporate bond trading platform.

(Reporting by Davide Barbuscia; Editing by Megan Davies and Daniel Wallis)

Oil rises on Saudi oil production expectations

LONDON, July 15 (Reuters) – Oil prices rose on Friday after a US official told Reuters an immediate Saudi oil output boost is not expected, with further support from indications that the US central bank could raise interest rates less aggressively than anticipated.

Brent crude futures for September delivery rose 76 cents, or 0.77%, to USD 99.86 a barrel by 0929 GMT while WTI crude rose 28 cents, or 0.29%, to USD 96.06.

The US Federal Reserve’s most hawkish policymakers on Thursday said they favored a rate increase of 75 basis points at its policy meeting this month, not the bigger increase traders had priced in after a report on Wednesday showed inflation was accelerating.

The interest rate uncertainty and weak economic data led to Brent and WTI shedding more than USD 5 on Thursday to less than the closing price on Feb. 23, the day before Russia invaded Ukraine, though both contracts clawed back nearly all the losses by the end of the session.

The US official’s comment on Saudi oil production comes at a time when capacity at members of the Organization of the Petroleum Exporting Countries (OPEC) is running low, with most producers pumping at maximum capacity.

US President Joe Biden, meanwhile, is visiting Saudi Arabia to attend a summit of Gulf allies and is expected to call for the region to pump more oil.

“[Biden’s] case will have been weakened significantly by the latest price rout,” said Stephen Brennock of oil broker PVM.

Analysts, meanwhile, expect to continued pressure on oil from concerns over the global economy.

“Brent has dipped noticeably below USD 100 per barrel this week. It is likely to continue sliding given that the recession fears will presumably not abate for the time being,” Commerzbank said in a note.

Bearish market sentiment has also followed renewed COVID-19 outbreaks in China, which have hampered a demand recovery.

China’s refinery throughput in June shrank nearly 10% from a year earlier, with output for the first half of the year down 6% in the first annual decline for the period since at least 2011, data showed on Friday.

(Additional reporting by Jeslyn Lerh in Singapore and Laura Sanicola in New York; Editing by David Goodman)

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