Category: Market Analysis

WTI crude oil prices are under pressure, falling 0.7% on Monday and flirting with the critical $70 mark. Last week, OPEC+ actions helped stabilize prices above this level by postponing a “voluntary” production increase by key members for another quarter, as anticipated by market observers.

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Key Insights

1. OPEC+ Stabilization Strategy
   • OPEC+ appears focused on preventing a steep price decline, but any cracks in cartel unity could trigger a collapse.
   • Large producers tied to production commitments face a dilemma, losing market share—particularly to the US, where production is hitting record highs.
2. US Oil Production at Record Levels
   • US production surged to 13.63 million barrels per day (bpd) last week, the highest ever recorded.
   • Enhanced production efficiency allows the US to achieve higher output with just 482 active rigs, far below previous cycle peaks.
3. Market Share Challenges
   • Retaking market share from the US is politically and economically more complex than targeting other regions like Latin America or Southeast Asia.
   • This has led to speculation that OPEC+ may be pursuing a “managed decline” strategy for production.

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Technical Outlook

• Resistance: WTI has repeatedly failed to sustain gains above its 50-day moving average, hovering just above $70.
• Support: The $67 level has provided consistent support since mid-year, preventing steeper declines.
• Trend: WTI remains in a bearish pattern, trading below both the 50- and 200-week moving averages, indicating sustained downward momentum.

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Year-End Price Dynamics

The final trading weeks of the year could amplify bearish trends. Tax-loss harvesting by traders could drive prices lower in an environment of reduced liquidity. A breakdown below the $67 support level could lead to broader capitulation. However, such a decline might also attract value-driven buyers, potentially setting the stage for an uptrend in 2024.

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Conclusion

WTI crude faces a critical test as 2023 draws to a close. OPEC+ actions may provide temporary stability, but structural challenges, including US production dominance and bearish technical indicators, signal continued volatility. The coming weeks will be crucial in determining whether oil finds a new floor—or sets the stage for a rebound next year.

The last rate-setting meetings of the year will take place in Czechia and Hungary this week.

• Hungary: The central bank is expected to maintain its key policy rate at 6.5%, largely due to the persistent weakness of the Hungarian forint (HUF).
• Czechia: Stability is also anticipated, with rates remaining at 4.0%, although a rate cut cannot be entirely ruled out.

In Poland, economic data releases for November, including industrial output and retail sales growth, will provide insights into fourth-quarter economic performance. Additionally, several countries in the region will publish inflation figures and producer price data for November.

Labor Market Updates:

• Slovakia and Croatia: Unemployment rate figures are due.
• Poland and Croatia: Wage growth data will be released.

This is the final edition of CEE Market Insights for the year. We wish our readers a peaceful holiday season. The next issue will be available on Tuesday, January 7, 2025.

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FX Market Developments

Last week saw mixed performance among regional currencies:

• The Polish zloty (PLN) weakened against the euro.
• The Czech koruna (CZK) and the Hungarian forint (HUF) showed slight gains.

The EUR/HUF exchange rate fell below 410, but the Hungarian currency remains notably weak, influencing the central bank’s likely decision to keep rates unchanged at its upcoming meeting. Meanwhile, the Czech koruna is expected to see policy stability.

The Hungarian forint has been the region’s underperformer this year, lagging behind its peers. In contrast, the Romanian leu (RON) has remained stable due to central bank interventions. However, depreciation pressures may resurface after Romania’s presidential elections next year.

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Bond Market Developments

Last week’s ECB decision to cut interest rates by 25 basis points had a muted impact on bond markets.

Key movements:

• Hungarian Government Bonds (HGB) and Romanian Government Bonds (ROMGB) yield curves declined, with ROMGBs seeing significant movement.
• Romania’s progress in forming a new government and discussions on freezing some expenditure increases suggest awareness of the country’s fiscal challenges.

Upcoming Bond Auctions:

• Romania: Reopening of ROMGBs 2028 and 2030.
• Czechia: Sale of floating-rate bonds (floaters).
• Hungary and Poland: Regular bond auctions.
• T-bills: Scheduled in Croatia, Hungary, and Romania. Notably, the Czech T-bill auction has been canceled.

Market Recap
On Friday, German and European Monetary Union (EMU) bond yields showed modest initial gains but extended their upward trajectory by the session’s close. US Treasury yields rose as well, with the 2-year yield adding 5.4 basis points (bps) and the 10-year yield increasing by 6.9 bps. While no significant US economic data was released, markets speculated that the Federal Reserve (Fed) might adopt a more cautious stance on future rate cuts due to solid US activity data, higher-than-expected inflation, and uncertainties surrounding fiscal policy.

The Fed’s updated dot plot, due this week, is expected to provide clearer guidance on its monetary policy outlook. In Europe, German yields continued their post-ECB rebound, rising around 5 bps across the curve, with long-term yields (30-year) rising slightly less at 3.4 bps. Early ECB policymaker commentary reflected ongoing divisions between hawks and doves, though the consensus leaned toward a gradualist approach for now.

In the currency market, the euro attempted to recover against the US dollar, with EUR/USD closing at 1.0501, up from 1.0468. Sterling underperformed against both the euro and the dollar following weak UK data, including disappointing October industrial production and a second consecutive monthly GDP contraction (-0.1%). EUR/GBP rose above 0.83, easing concerns of a potential test of the 2022 low at 0.8203.

Equity markets in Europe and the US closed relatively flat. In Asia, markets traded mostly lower following weaker-than-expected November retail sales in China, which rose by 3% year-on-year (vs. 5% expected), reflecting ongoing weak demand despite recent stimulus measures.

Focus for Today

• EMU Preliminary PMIs: Consensus expects the composite PMI to remain unchanged at 49.5, with little optimism for a near-term rebound amid ongoing political and economic uncertainties in France and Germany. Weak data could cap further increases in short-term EMU yields, with 2.20%-2.25% offering potential resistance for 2-year swaps.
• US Services PMI: Investors will watch to see if the services PMI confirms the decline seen in the ISM services index, as the two often diverge.
• Sterling Sensitivity: Following Friday’s disappointing UK data, sterling may face further pressure if the UK composite PMI (expected at 50.6) disappoints.

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Moody’s Downgrade of France and Slovakia

Rating agency Moody’s downgraded both France (from Aa2 to Aa3, stable outlook) and Slovakia (from A2 to A3, stable outlook) after Friday’s market close.

France:
The downgrade reflects Moody’s concerns over France’s deteriorating public finances. Political fragmentation is likely to hinder significant fiscal consolidation, increasing the risk of a negative feedback loop involving higher deficits, rising debt levels, and elevated financing costs. Moody’s projects the following:

• Deficit: Expected at 6.3% of GDP in 2025, gradually declining to 5.2% by 2027.
• Debt-to-GDP: Projected to rise from 113.3% in 2024 to approximately 120% in 2027.

Slovakia:
The downgrade for Slovakia stems from broad institutional challenges and escalating political tensions. Key concerns include:

• A deteriorating trend in governance indicators due to judicial and media reforms that weaken checks and balances.
• Increased political fragmentation, complicating fiscal policymaking and further straining the country’s institutional stability.

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Political Developments in Germany

Germany’s Christian Democratic Union (CDU) is set to unveil its election manifesto, which includes proposals aimed at bolstering support for hard-working citizens and addressing immigration concerns. According to a Financial Times report on a draft of the manifesto, key policies include:

• Immigration Control: “We must decide ourselves once again who comes to us and who can stay.”
• Tax Reforms:
  • Cuts to income tax for low- and middle-income earners.
  • Reductions in social security contributions.
  • A phased reduction in corporate tax from the current 30% to 25%.
  • Abolition of the “Soli” surcharge on income tax, initially introduced to fund German reunification.

Despite these ambitious pledges, the CDU remains committed to Germany’s debt brake, leaving questions about how the proposed tax cuts and rebates will be funded. The manifesto reflects the party’s focus on fiscal discipline, summed up in its statement: “The debts of today are the taxes of tomorrow.”

The AUD/USD pair traded with a subdued tone during Friday’s European session, edging down to 0.6370. The Australian Dollar remains under pressure as the US Dollar gains strength on expectations of a hawkish Federal Reserve (Fed) decision next week. Friday’s session lacked significant market-moving events, keeping the focus on broader fundamentals.

Fundamental Overview

US Developments:
The US Initial Jobless Claims rose to a two-month high of 242K, fueling speculation about possible policy easing by the Fed. However, stronger-than-expected inflation data from the Producer Price Index (PPI) countered these expectations.

• Headline PPI: Increased 3% year-over-year (YoY), up from 2.4%.
• Core PPI: Climbed to 3.4% YoY.

This combination of mixed data kept the US Dollar firm, adding to the pressure on AUD/USD.

Australian Developments:
Australian employment data for November surpassed expectations, with 35.6K jobs added (forecast: 25K) and the unemployment rate falling to 3.9% (forecast: 4.2%). Despite this robust data, the Reserve Bank of Australia (RBA) maintained a dovish stance, expressing confidence in inflation gradually reaching target levels. Market expectations for a February rate cut eased, dropping from 70% to 50%.

Technical Overview

On the technical front, AUD/USD slipped to 0.6370, reflecting persistent bearish sentiment amid US Dollar strength.

• RSI: Near oversold territory at 34, showing mild downward momentum.
• MACD Histogram: Decreasing green bars indicate waning bullish momentum.

Key Levels to Watch:

• Support: Immediate support is seen at 0.6350. A decisive break below this level could pave the way for further losses.
• Resistance: Strong resistance lies at 0.6400, coinciding with a key psychological barrier. A sustained break above 0.6400 could shift the short-term bias to neutral and open the door for a retest of 0.6430.

While AUD/USD remains vulnerable, oversold conditions could trigger a corrective bounce if selling pressure eases. Traders should monitor upcoming US and Australian data, as well as the Fed’s rate decision, for further directional cues.