By Deepta Bolaky
Geopolitical risks are brought back to the fore of the markets. We kick off the week with increased tensions in the Middle East following the drone attack on Saudi Arabia’s oil and gas facilities in Abqaiq over the weekend.
The drone attacks on the world’s largest oil processing facility at Abqaiq and the nearby Khurais oil field on Saturday fuelled the tensions in the Middle East. The strikes have disrupted about half of the kingdom’s oil capacity or around 5.7 million barrels of daily crude production and wiped out 5% of the world’s crude oil supplies.
Oil prices jumped by more than 10% on the news.
It is reported that Saudi Aramco, the national oil company will restore around 2 million barrels by Monday which will represent around one-third of the lost oil output. We also note that the US stays committed to ensuring that the global oil markets are stable and well-supplied.
The markets are gearing up to a busy start of the week focused on geopolitical tensions. After President Trump signalled the possibility of the easing sanctions on Iran last week, the drone attacks have escalated tensions between the two countries. The preliminary indications do not show that the strikes come from Yemen and despite Yemen’s Houthi rebels claimed responsibility for the attack, the US Secretary Pompeo unequivocally condemn Iran.
The President states that the US was “locked and loaded” and is waiting on Riyadh. We expect money to flow mostly in safe-haven on Monday until further developments on the investigation of the drone attacks.
Hong Kong protests enter 15th week as unrest continues. The extradition bill has been scrapped but pro-democracy demonstrators are now demanding full democracy and an investigation into police brutality seen during the months of protests.
After the recent calls to the US to “liberate” Hong Kong, the protesters manifest outside the British consulate requesting the UK government to protect the Hong Kong people and free their country. Protesters hurled petrol bombs at government buildings.
We expect the ongoing crisis in Hong Kong together with the existential geopolitical risks to weigh on risk appetite in the Asian markets.
Towards the end of last week, we saw some optimism on the trade talks which are set to resume early next month. There were some positive gestures from both sides on tariffs exemptions which renewed hopes of a trade agreement.
We expect investors to monitor closely the developments and interactions from both sides leading up to the meeting in October. At the moment, key officials are tamping down the markets’ expectations of a major trade deal, but the recent moves are providing some comfort and optimism that there is progress that may lead to a more concrete outcome.
On the economic front, the immediate attention will be on the central banks’ meetings:
Wednesday: FOMC Economic Projections, Fed’s Monetary Policy Statement & Interest Rate Decision and FOMC Press Conference.
Thursday: SNB Interest Rate Decision and Monetary Policy Assessment and BoE Interest Rate Decision and Minutes
The Federal Reserve meeting will be the most important event on the economic calendar this week. On Wednesday, markets participants are expecting another 25 bp rate cut. After the ECB rate cut and the revival of quantitative easing, it is almost certain that a rate cut is on the cards in the US as well.
However. we note that the Fed does not see a US recession, and even though the central bank acknowledged that the economic headwinds are intensifying, the path of the Fed Funds rate is uncertain.
The consumer-orientated parts of the economy are holding up. Consumers remain one of the bright spots – Personal Consumption grew at a healthy pace in July. The employment sector also remains strong. As inflation remains below the Fed’s target rate amid global trade risks, the markets will watch for signs that the FOMC members are fearing a downturn which could then provide some clarity for further rate cuts.
|Tuesday, 17 September 2019
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