Weekly Musings – Macro Quartet for the week ending December 08, 2023

11 Dec 2023 , 07:32 AM

OIL WEAKENS AS NON-OPEC SUPPLIES BUILD UP

This week, once again, saw oil prices weaken further to the $75/bbl mark. Now, oil is a full 23% down from the recent peak and this entire fall in oil price has been driven by non-OPEC supply. The story is about the rising importance of countries like Canada, China, Norway, Venezuela, and Brazil in the oil export market. Even as the OPEC and Russia continue to remain obsessed about cutting supplies, there is a third front that is building up. In the recent months, US has also become a major exporter of oil. 

Today, if you combine the exports of the US and Canada, it is more than the exports of Saudi Arabia. This is a clear shift in global oil pricing equations. In the past, only 3 things mattered to oil prices viz., OPEC+ supply, US inventories and Chinese demand. Now, non-OPEC oil supplies have emerged as the fourth element in the entire equation. In the absence of any affiliations, these countries are not bound by supply constraints. Seven countries, outside the OPEC and Big-3; now account for 22% of supplies and 25% of global crude oil exports.

GOLD RALLY LOSES STEAM DURING THE WEEK

Gold was the other asset class that displayed serious movement in the latest week. After rallying for last 3 weeks from $1936/oz to $2070/oz, the last week saw gold retreat towards $2004/oz. Gold still stays above the $2,000/oz mark, but only just. The sharp fall in gold prices was led by several factors. Firstly, there was concerted unwinding of gold longs in the market at higher levels. Secondly, the US GDP revived sharply to 5.2% in third quarter. India also reported GDP at 7.6% for the second quarter, 80 bps higher than the street estimates. 

Robust GDP growth is a sign for investors to gravitate towards risk assets like equity and not safe-haven assets like gold. The third factor was the pick in the dollar index (DXY) after 3 weeks of weakness. Typically, the dollar is inversely related to gold as the precious commodity is ultimately denominated in dollars. One can also add to this point the fact that bond yields have already fallen sharply and any yield related gains on gold are going to be limited from the current levels. That looks to cap gold rally from here on.

STORY OF US BOND YIELDS AND DOLLAR INDEX THIS WEEK?

Two macro variables that set the trend for the global macros are the US bond yields and the US dollar index (DXY). Let us first look at the US 10-year bond yields. 

Date	Price (%)	Open (%)	High (%)	Low (%)
Dec 04, 2023	4.259	4.220	4.299	4.220
Dec 05, 2023	4.167	4.255	4.265	4.163
Dec 06, 2023	4.114	4.173	4.205	4.104
Dec 07, 2023	4.148	4.110	4.186	4.104
Dec 08, 2023	4.229	4.153	4.278	4.147

Data Source: Bloomberg

US bond yields, are now a full 77 bps below the recent peak of 5%. This underlines the Fed stance that the spike in bond yields had little to do with Fed hawkishness and more to do with yield curve alignment. The Fed has maintained its hawkish tone, but the 10-year bond yields are now at 4.229% levels. Markets don’t expect any runaway inflation in global markets, as evident from PCE inflation at 3% in October. Let us turn to the DXY.

Date	Price (%)	Open (%)	High (%)	Low (%)
Dec 04, 2023	103.71	103.19	103.85	103.06
Dec 05, 2023	104.05	103.56	104.09	103.55
Dec 06, 2023	104.15	103.99	104.23	103.87
Dec 07, 2023	103.54	104.11	104.20	103.27
Dec 08, 2023	104.01	103.64	104.26	103.43

Data Source: Bloomberg

The dollar index (DXY) is an index of dollar strength against a basket of hard currencies like the Pound, Euro, Yen, Chinese Yuan etc. Despite Fed officials maintaining a hawkish tone, dollar index (DXY) remained flat to subdued. The level to watch is 107, which was scaled last month. This level has only been breached thrice in last 40 years and that could signify dollar strength. The dollar index was marginally higher this and closed above the 104 levels.

INDIA BOND YIELDS END MARGINALLY LOWER

Indian bond yields tapered marginally during the week from 7.271% levels to 7.266%. Despite strong India GDP data and fiscal deficit being in check, bond yields were not too impressed. Ironically, the bond yields rallied on the last day despite RBI monetary policy maintaining status quo on repo rates. The table captures bond yields over last 4 weeks.

Date	Price (%)	Open (%)	High (%)	Low (%)
Nov 13, 2023	7.283	7.316	7.316	7.281
Nov 14, 2023	7.283	7.316	7.316	7.281
Nov 15, 2023	7.225	7.262	7.262	7.220
Nov 16, 2023	7.232	7.236	7.236	7.220
Nov 17, 2023	7.212	7.226	7.230	7.194
Nov 20, 2023	7.252	7.230	7.257	7.224
Nov 21, 2023	7.269	7.247	7.272	7.237
Nov 22, 2023	7.247	7.277	7.277	7.245
Nov 23, 2023	7.253	7.258	7.263	7.246
Nov 24, 2023	7.272	7.278	7.291	7.266
Nov 27, 2023	7.272	7.278	7.291	7.266
Nov 28, 2023	7.273	7.258	7.277	7.253
Nov 29, 2023	7.252	7.258	7.258	7.237
Nov 30, 2023	7.279	7.250	7.287	7.248
Dec 01, 2023	7.290	7.293	7.298	7.279
Dec 04, 2023	7.271	7.264	7.276	7.262
Dec 05, 2023	7.262	7.275	7.275	7.256
Dec 06, 2023	7.248	7.251	7.254	7.243
Dec 07, 2023	7.236	7.248	7.248	7.233
Dec 08, 2023	7.266	7.249	7.271	7.226

Data Source: RBI

During the week, the bond yield opened at 7.271% but later stayed in the range of 7.23% to 7.27% through the entire week before closing at 7.266%. the RBI maintained status quo on rates and also kept inflation estimates for FY24 at 5.4%, but hiked the GDP growth estimates for FY24 to 7.0% from 6.5%. RBI had already indicated it would not be too keen to hike rates aggressively from these levels since it also has a growth and solvency story to worry about in India. That is correct as India cannot afford to give up its mantle of being the fastest growing large economy in the world; something that only got reaffirmed during the week. With the US bond yields also stable, there was little incentive for India bond yields to really deviate.

RUPEE STAYS UNDER PRESSURE DESPITE FPI FLOWS

For the tenth week in a row, the Indian rupee stayed above the 83/$ mark. This week, the rupee opened at 83.426/$ and closed the week at 83.440/$ levels. On a week-on-week basis, the rupee weakened marginally by 1.68 basis points.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Nov 13, 2023	83.180	83.309	83.343	83.201
Nov 14, 2023	83.023	83.187	83.338	82.914
Nov 15, 2023	83.186	83.023	83.221	82.942
Nov 16, 2023	83.140	83.186	83.270	82.994
Nov 17, 2023	83.294	83.140	83.296	83.140
Nov 20, 2023	83.317	83.265	83.424	83.230
Nov 21, 2023	83.308	83.321	83.380	83.228
Nov 22, 2023	83.287	83.313	83.359	83.255
Nov 23, 2023	83.305	83.276	83.368	83.265
Nov 24, 2023	83.314	83.344	83.413	83.313
Nov 27, 2023	83.330	83.324	83.433	83.309
Nov 28, 2023	83.340	83.358	83.399	83.292
Nov 29, 2023	83.352	83.292	83.383	83.260
Nov 30, 2023	83.357	83.359	83.419	83.290
Dec 01, 2023	83.260	83.356	83.375	83.240
Dec 04, 2023	83.426	83.217	83.461	83.215
Dec 05, 2023	83.320	83.431	83.439	83.317
Dec 06, 2023	83.332	83.325	83.381	83.286
Dec 07, 2023	83.343	83.337	83.398	83.311
Dec 08, 2023	83.440	83.355	83.584	83.237

Data Source: RBI

Typically, the Indian rupee has been closely linked to the dollar index, which has been relatively stable in recent weeks. However, there are 3 more factors that impact rupee value. The first is crude oil prices. That has tapered in recent weeks to $75/bbl and that has been instrumental in the USDINR equation favouring the rupee. Secondly, FPI flows have been strong and in the last two weeks, FPIs infused nearly $4.21 billion into Indian equities. However, the one fundamental factor that has kept the Indian rupee tentative is the trade deficit, which peaked to a high last month. It still forms the basis of the current account deficit (CAD); which is the one factor still putting pressure on the Indian rupee.

BRENT CRUDE FALLS AS POWER SHIFTS TO NON-OPEC PLAYERS 

In the previous 3 weeks, the price of Brent crude had fallen from $90.15/bbl to $80.58/bbl. This week, oil fell further to as low as $74.05/bbl, before closing the week at $75.90/bbl after US crude oil inventories showed a substantial drawdown in the latest week. That boosted oil prices. Last week, the OPEC Plus had agreed to cut oil supplies by 1 million bpd. However, 96% of OPEC targets are never met and it is the non-OPEC nations that are now calling the shots. Outside the OPEC Plus and the US; the 7 key oil  producing countries account for 20% of global output and 25% of oil exports. They are now calling the shots. 

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Nov 13, 2023	82.52	81.43	82.84	80.41
Nov 14, 2023	82.47	82.71	83.97	82.06
Nov 15, 2023	81.18	82.39	83.04	80.79
Nov 16, 2023	77.42	80.98	81.17	76.60
Nov 17, 2023	80.60	77.60	80.81	77.28
Nov 20, 2023	82.32	80.30	82.94	79.58
Nov 21, 2023	82.45	82.13	82.54	81.43
Nov 22, 2023	81.96	82.47	82.65	78.41
Nov 23, 2023	81.42	81.60	81.63	80.19
Nov 24, 2023	80.58	81.40	82.20	80.13
Nov 27, 2023	79.87	80.16	81.14	79.07
Nov 28, 2023	81.47	80.17	81.97	79.70
Nov 29, 2023	82.88	81.64	82.99	80.72
Nov 30, 2023	80.86	82.62	84.61	80.01
Dec 01, 2023	78.88	80.67	81.54	78.75
Dec 04, 2023	78.03	79.50	79.72	77.52
Dec 05, 2023	77.20	78.10	79.09	77.00
Dec 06, 2023	74.30	77.12	77.65	74.11
Dec 07, 2023	74.05	74.50	75.48	73.60
Dec 08, 2023	75.90	74.63	76.36	74.21

Data Source: Bloomberg

There is a quiet paradigm shift happening. For a long time, strength in oil came from reserves. With fossil fuels likely to be phased out in 50-60 years, oil reserves have substantially lost their importance. That is where the Middle East and OPEC are losing their importance in oil pricing equations. Despite supply cuts, oil is under pressure as the swing producers today are neither Russia nor the OPEC countries. 

GOLD PRICES FALL AFTER A 3-WEEK RALLY

The table below captures the international spot prices of gold in dollars per troy ounce (oz). A troy ounce is approximately 31.1035 grams. Here is a gist of gold prices in the week.

Date	Price ($/oz)	Open ($/oz)	High ($/oz)	Low ($/oz)
Nov 13, 2023	1,945.89	1,937.05	1,949.27	1,931.73
Nov 14, 2023	1,962.54	1,946.61	1,970.91	1,943.83
Nov 15, 2023	1,960.46	1,962.59	1,975.24	1,955.47
Nov 16, 2023	1,982.70	1,960.40	1,988.04	1,956.51
Nov 17, 2023	1,980.87	1,982.62	1,993.49	1,978.65
Nov 20, 2023	1,977.19	1,980.39	1,985.26	1,965.20
Nov 21, 2023	1,998.37	1,977.49	2,007.52	1,977.34
Nov 22, 2023	1,989.72	1,998.69	2,006.90	1,986.89
Nov 23, 2023	1,991.79	1,990.15	1,999.19	1,989.01
Nov 24, 2023	2,002.85	1,994.20	2,003.68	1,991.51
Nov 27, 2023	2,013.64	2,002.78	2,018.14	2,000.67
Nov 28, 2023	2,040.89	2,013.94	2,043.00	2,011.60
Nov 29, 2023	2,044.59	2,041.24	2,052.09	2,035.05
Nov 30, 2023	2,035.75	2,044.80	2,047.59	2,031.84
Dec 01, 2023	2,070.90	2,034.49	2,075.34	2,033.75
Dec 04, 2023	2,029.74	2,071.25	2,135.90	2,020.34
Dec 05, 2023	2,019.42	2,030.15	2,041.33	2,010.02
Dec 06, 2023	2,024.90	2,019.74	2,036.30	2,017.27
Dec 07, 2023	2,028.34	2,025.30	2,039.93	2,020.26
Dec 08, 2023	2,004.49	2,028.24	2,034.07	1,994.81

Data Source: Bloomberg

Gold prices fell after the 3 week rally. Effectively, gold had rallied from $1,936/oz to $2,071/oz till last week; a gain of 6.97% in just 3 weeks. The latest week saw gold prices tapering from $2,071/oz to $2,004/oz. After the frenetic rally, some unwinding is par for the course. Just when we thought that the glitter was back in gold, the correction appears to have started. That is because, gold rallies are ultimately a function of low interest rates as it reduces the opportunity cost of holding gold. That was the one factor that drove gold rallies in the past. For now, nobody is talking about rate cuts; least of the US Federal Reserve.