Weekly Musings – Macro Quartet for the week ending July 26, 2024

29 Jul 2024 , 11:06 AM

WHAT THE RED SEA CRISIS MEANS FOR GLOBAL INVESTORS?

In the last few months, the crisis in the Middle East began with the Hamas attacks on Israel. It soon involved other nations like Syria, Iran, and Lebanon and threatens to become a much larger geopolitical crisis. Israel counter attacks have resulted in mass civilian casualties, which is why the UN is also looking at an early ceasefire. For now, Egypt and Qatar are trying to broker a peace deal in the Middle East and West Asia and a lot depends on how they can navigate through this mess. After all, the risks of a potential escalation are huge.

Let us look at how the worsening of the crisis in the Middle East will impact various asset classes.

• In the last one week, the price of Brent Crude has eased from $85/bbl to under $81/bbl. This is largely on the back of ceasefire hopes. While the movement of oil would still continue, the price of oil is being impacted by delayed deliveries, idle refinery times and higher freight and insurance charges payable for oil tankers. Of course, the real crisis may set in only if oil crosses $90/bbl, and that looks some time away.
• Let us assess how the Middle East conflict will impact the price of gold. Gold may not be directly impacted by the tensions in the region, but there would be other implications. For instance, a longer war in which the US continues to support Israel, will mean greater incentive for countries in the region to move out of the US dollar as a reserve currency.
• Let us now turn to what this crisis in the Middle East means for currencies globally, including for EMs like India. The expectation is that if the tensions in the Middle East continue and if the US-backed Israel continues to target civilians, then it could result in extended short term demand for the dollar. That will result in dollar strength. Escalation of tensions could also mean greater risk aversion among investors and that will encourage the safe-haven demand for the US dollar.
• What does a prolonged crisis in the Middle East mean for global equities in general and EM equities in particular. Past experience has been that equity markets tend to recover swiftly from geopolitical events unless they lead to persistently higher commodity prices. More than gold, oil & gas may be a good way to diversify your portfolio amidst rising geopolitical risk.

To sum up, what does this Middle East crisis mean for investors in general? In reality, the playbook may actually be fairly straightforward. If the crisis prolongs, the overall equity valuations may not be impacted since bond rates are still not remunerative compared to inflation. However, it could mean that the higher for longer approach of the US Fed may actually continue well  into 2025. Investors need to be mentally prepared for that eventuality in the global markets.

US BOND YIELDS  LOWER; DOLLAR INDEX ENDS FLAT

Two macro variables that set the tone 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 (%)
Jul 22, 2024	4.254	4.218	4.278	4.204
Jul 23, 2024	4.254	4.253	4.256	4.221
Jul 24, 2024	4.286	4.254	4.292	4.210
Jul 25, 2024	4.245	4.278	4.278	4.196
Jul 26, 2024	4.194	4.243	4.264	4.190

Data Source: Bloomberg

US bond yields started the week at slightly subdued levels of 4.254%, but gradually edged lower in the last couple of days to close the week at 4.194% levels. Bond yields had jumped up about 3 weeks back on expectations of Trump 2.0 in November, when the US goes to the hustings. However, this week, there are concerns over Biden nominating Kamala Harris to take on Trump; with the likes of Obama underlining that Kamala Harris may not have it in her to take on the personality of Trump. However, with a 30 bps fall in consumer inflation and a 10 bps fall in the PCE inflation, lower bond yields may be indicative of the Fed going ahead with its first rate cut in September. Of course, further rate cuts are not too clear at this point of time. During the week, the US bond yields touched a weekly high of 4.292% and a low of 4.190%. For now, the action shifts to what the Fed does with rates in September. Let us now turn to the US dollar index (DXY), a barometer of dollar strength.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jul 22, 2024	104.31	104.36	104.42	104.18
Jul 23, 2024	104.45	104.31	104.54	104.20
Jul 24, 2024	104.39	104.48	104.56	104.12
Jul 25, 2024	104.36	104.38	104.46	104.08
Jul 26, 2024	104.32	104.36	104.45	104.21

Data Source: Bloomberg

In a week when the bond yields edged lower on prospects of imminent rate cuts, the dollar index (DXY) was largely static for the week. In June, we had seen dollar strength amidst weakness in the Euro and the Yen. That is over for now. For the week, the dollar index started on a steady note, opening at the 104.31 levels, and steadily inched higher but tapered on the last day to close almost flat at 104.32 levels. During the week, the dollar index (DXY) scaled a high of 104.56 and a low of 104.08.

INDIA BOND YIELDS END THE WEEK ABOVE 7% MARK

The India 10-year bond yields were below the 7% mark for nearly 3 weeks in a row. In the latest week to July 26, 2024, the 10-year benchmark yields bounced above the 7% mark on the last trading day. This was more after the budget was announced. While the fiscal deficit is being contained at 4.9% for FY25, the real concern is the higher allocations to Andhra Pradesh and Bihar, as well as sharply higher allocations for food subsidies. These had the impact of hardening the bond yields. The 7% ceiling was breached on the last day with considerable trading volumes.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jul 01, 2024	7.013	7.023	7.024	7.010
Jul 02, 2024	7.009	7.009	7.009	7.009
Jul 03, 2024	7.001	7.009	7.009	6.999
Jul 04, 2024	6.998	6.992	7.001	6.989
Jul 05, 2024	6.993	7.016	7.016	6.987
Jul 08, 2024	6.989	6.989	6.991	6.983
Jul 09, 2024	6.989	7.006	7.006	6.983
Jul 10, 2024	6.976	6.995	6.995	6.975
Jul 11, 2024	6.982	6.982	6.982	6.982
Jul 12, 2024	6.986	6.975	6.988	6.972
Jul 15, 2024	6.981	7.005	7.005	6.977
Jul 16, 2024	6.966	6.977	6.977	6.963
Jul 17, 2024	6.966	6.977	6.977	6.963
Jul 18, 2024	6.966	6.970	6.970	6.959
Jul 19, 2024	6.965	6.976	6.976	6.962
Jul 22, 2024	6.967	6.982	6.982	6.966
Jul 23, 2024	6.970	6.972	6.987	6.952
Jul 24, 2024	6.964	6.977	6.977	6.960
Jul 25, 2024	6.952	6.974	6.974	6.952
Jul 26, 2024	7.055	7.063	7.065	7.047

Data Source: RBI

During the week, the bond yield opened at 6.967% and closed at 7.055%. The trigger for higher bond yields came from higher expected borrowings to meet food subsidies and for allocations to Bihar and Andhra Pradesh. During the week, India 10-year bond yields touched a high of 7.065% and a low of 6.952%. The immediate trigger will be the monsoons and its impact on food inflation.

RUPEE CLOSES MARGINALLY STRONGER THIS WEEK

With the dollar index almost flat at 104.36 levels; the rupee was expected to strengthen, but it weakened to close around the 83.724/$ mark.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Jul 01, 2024	83.438	83.380	83.479	83.349
Jul 02, 2024	83.500	83.440	83.567	83.422
Jul 03, 2024	83.520	83.497	83.564	83.435
Jul 04, 2024	83.475	83.495	83.561	83.463
Jul 05, 2024	83.500	83.503	83.532	83.458
Jul 08, 2024	83.500	83.495	83.522	83.434
Jul 09, 2024	83.465	83.479	83.522	83.452
Jul 10, 2024	83.510	83.492	83.545	83.465
Jul 11, 2024	83.507	83.518	83.607	83.472
Jul 12, 2024	83.513	83.507	83.564	83.476
Jul 15, 2024	83.551	83.507	83.628	83.493
Jul 16, 2024	83.524	83.590	83.626	83.530
Jul 17, 2024	83.580	83.532	83.592	83.494
Jul 18, 2024	83.580	83.576	83.682	83.555
Jul 19, 2024	83.724	83.668	83.741	83.596
Jul 22, 2024	83.651	83.741	83.741	83.637
Jul 23, 2024	83.676	83.664	83.731	83.606
Jul 24, 2024	83.710	83.690	83.739	83.675
Jul 25, 2024	83.720	83.769	83.810	83.648
Jul 26, 2024	83.703	83.760	83.770	83.701

Data Source: RBI

Just about 4 weeks back, we had seen the rupee weaken to 83.684/$. That remained a closing low for the rupee; till that level was officially breached last week. In the recent week, the rupee made several attempts to cross above 83.8/$, but despite briefly going about that level, it could not sustain that level. With controlled current account deficit (CAD) in FY24 and FPIs infusing $9.04 Billion in last 7 weeks, the expectation would have been for the rupee to stabilize. Unless the Fed demonstrates its intent to cut rates, the dollar will continue to strengthen. Also, oil prices have been volatile and that is also having an impact. For the week, the USDINR touched a high of 83.606/$ and a low of 83.810/$.

BRENT CRUDE FALLS to $81/BBL ON CHINA WORRIES

After hovering around $85/bbl in the previous week, oil witnessed a sharp fall on the last day of trading on Friday, July 26, 2024 to close near the 81/$ level. What worked against oil was the sharper than expected slowdown in Chinese demand, and a general view that the Middle East ceasefire hopes will keep oil prices in check.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Jul 01, 2024	86.60	84.90	86.88	84.85
Jul 02, 2024	86.24	86.71	87.46	86.16
Jul 03, 2024	87.34	86.44	87.39	85.89
Jul 04, 2024	87.43	87.09	87.59	86.51
Jul 05, 2024	86.54	87.45	87.95	86.49
Jul 08, 2024	85.75	86.74	86.92	85.56
Jul 09, 2024	84.66	85.67	85.85	84.53
Jul 10, 2024	85.08	84.92	85.66	84.00
Jul 11, 2024	85.40	85.45	85.89	84.64
Jul 12, 2024	85.03	85.69	86.35	84.95
Jul 15, 2024	84.85	85.10	85.37	84.42
Jul 16, 2024	83.73	84.78	84.86	83.30
Jul 17, 2024	85.08	83.66	85.20	83.43
Jul 18, 2024	85.11	85.23	85.81	84.22
Jul 19, 2024	82.63	84.72	85.35	82.56
Jul 22, 2024	82.40	82.80	83.22	81.60
Jul 23, 2024	81.01	82.25	82.79	80.51
Jul 24, 2024	81.71	81.46	82.23	80.93
Jul 25, 2024	82.37	81.58	82.53	80.09
Jul 26, 2024	81.13	82.40	82.71	80.33

Data Source: Bloomberg

Oil prices held above the $82/bbl mark in the week before falling below $81/bbl on Friday. The concerns are centred around a strong dollar and weakness in Chinese demand for oil on the back of lower than expected growth rate. The China factor subdued the robust oil demand argument as China appeared to be struggling to grow. For now, the demand supply gap is likely to continue, although Chinese demand could be the joker in the pack. For the week, Brent crude touched a high of $83.22/bbl and a low of $80.09/bbl.

SPOT GOLD TAPERS TO WEEKLY CLOSE OF $2,386/OZ

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

Date	Price ($/oz)	Open ($/oz)	High ($/oz)	Low ($/oz)
Jul 01, 2024	2,331.70	2,326.46	2,338.72	2,318.55
Jul 02, 2024	2,329.28	2,332.05	2,336.90	2,319.24
Jul 03, 2024	2,356.06	2,328.00	2,365.06	2,326.93
Jul 04, 2024	2,356.12	2,353.70	2,362.64	2,350.76
Jul 05, 2024	2,391.46	2,358.01	2,393.04	2,354.03
Jul 08, 2024	2,358.80	2,391.77	2,391.85	2,351.16
Jul 09, 2024	2,363.58	2,358.60	2,371.52	2,349.59
Jul 10, 2024	2,371.07	2,363.80	2,386.75	2,362.73
Jul 11, 2024	2,414.78	2,371.58	2,424.62	2,370.83
Jul 12, 2024	2,411.27	2,416.47	2,418.37	2,391.52
Jul 15, 2024	2,422.07	2,409.50	2,439.74	2,401.35
Jul 16, 2024	2,468.57	2,424.80	2,469.91	2,423.54
Jul 17, 2024	2,458.38	2,476.22	2,483.78	2,451.60
Jul 18, 2024	2,444.97	2,460.13	2,475.02	2,440.41
Jul 19, 2024	2,400.79	2,445.34	2,446.29	2,393.92
Jul 22, 2024	2,397.65	2,400.41	2,412.32	2,384.00
Jul 23, 2024	2,409.21	2,396.80	2,412.15	2,388.26
Jul 24, 2024	2,397.59	2,408.94	2,432.05	2,396.50
Jul 25, 2024	2,364.50	2,398.49	2,401.32	2,353.19
Jul 26, 2024	2,385.57	2,364.30	2,390.82	2,355.89

Data Source: Bloomberg

Gold closed the week lower at $2,385.27/oz in the spot gold market. In the last few days, price of gold had spiked decisively above $2,400/oz The rally in gold prices in the last couple of weeks came on the back of dollar weakness and central bank buying. The ongoing crisis in the middle East is likely to keep the safe haven demand for gold robust. Gold traders are betting on 2 Fed rates cuts in 2024, and probably few more in 2025.This has the potential to reduce the opportunity cost of holding gold. During the week, gold touched a high of $2,432/oz and a low of $2,353/oz.