Is The Market Pivoting?

<WikiFX Malaysia Original – Editor: Fion>

Russia announced the commencement of its next special military operation in Ukraine, focusing on playing the offense in the Donbas region. Although concerns about the rising prices of commodities and energy supply shortages are still present, the market seems to have taken a pivot quietly. WTI dropped over 5% to an intraday low of approximately USD 102, recording the greatest drop since the 14th of March. Spot gold plunged from its high of $1998 at the start of the week to $1943 whilst the U.S. Dollar skyrocketed to 100.91 hitting a yearly high.

The possible reason to explain such changes in the markets could be deduced from the latest World Economic Outlook report released by the International Monetary Fund (IMF). In this issue, the World Economic Outlook report downgrades the global economic growth expectations and raises inflation expectations. The global economy is expecting a drop of 0.8% from January's forecast of 4.4% to 3.6%. Among the major financial markets, America's economy is expected to grow by 3.7% in 2022 and 2.3% in 2023. On the other hand, the Eurozone economy is expected to grow by 2.8% in 2022 and 2.3% in 2023 while China's economy is projected to grow by 4.4% and 5.1% in 2022 and 2023.

In addition, the IMF believes that the conflict between Russia and Ukraine is the root cause behind the accelerated rise in commodity prices. With the pressure of higher prices on both businesses and consumers, the IMF warns that inflation could approach a higher level for a longer than expected time. Simultaneously, the IMF also warns that any further imbalance between supply and demand could further deteriorate the inflation issue. The IMF forecasts the inflation in 2022 to reach 5.7% in developed countries and 8.7% in emerging and developing markets – recording an increase of 1.8% and 2.8% respectively from January's report.

It is worth noting that the rising risk of inflation expectations may push major central banks to adopt a more aggressive policy tightening approach, which could consequently put emerging market economies under greater pressure. On Tuesday (April 19 UTC +8), Chicago's Federal Reserve Bank President Charles Evans announced that there could be a chance for the Fed to raise its policy target range to 2.25-2.5% by the end of 2022.

There is no doubt that the slowdown in global economic growth has directly impacted the demand for global oil, which has somewhat eased the current supply shortage concerns in the oil market. The United States and other IEA members previously announced a total of 240 million barrels of oil stocks in response to the Russia-Ukraine war, and with the European Union not imposing its sixth round of sanctions against Russia (typically on oil supply), the market may still have a supply gap of 1 million barrels of oil daily.

<WikiFX Malaysia Original – Editor: Fion>