Weekly Musings – Macro Quartet for week ending October 18, 2024

22 Oct 2024 , 10:49 AM

WHY OIL PRICES FELL SHARPLY IN THE WEEK?

During the week to October 18, 2024, the price of Brent crude fell sharply from $79/bbl to close at around $73/bbl. That is a fairly sharp fall in a single week. This fall in the oil prices is expected to have been triggered by the supply and demand side. Let us look at the supply side. The non-US, non-Russia, non-OPEC output has been building rapidly in the last few months. Counhtries like Canada, Brazil and China are aggressively expanding their oil output. Also, the Organization of Petroleum Exporting Countries (OPEC) is also now worried about sustaining the supply cuts for too long, as it leads to lost market opportunities. A surge in the supply of crude means; that oil market would remain oversupplied for now.

Countries like China are heavily investing in oil capacities so that they can reduce their dependence on oil imports and manage the demand largely from domestic supply. Apart from China, even Brazil, Canada, Mexico, and China have been boosting their oil capacity in a big way. This focus on domestic output is also being driven by the strife in the Red Sea route, which makes it impossible for tankers to pass through the crucial oil route connecting the Red Sea and the Mediterranean Sea. In addition, with the ongoing mini-war between Israel and Iran, there are also concerns over its impact on Hormuz Straits. A combination of surge in supply and expectation of weak demand from China led to a sharp fall in the price of oil from $79/bbl to $73/bbl. Then why did the rupee also weaken?

RUPEE WEAKNESS WAS MORE OF A MACRO RESPONSE

Normally, a fall in the oil prices should have resulted in the rupee strengthening. However, there were other factors that combined to weaken the rupee. Let us look at a few key factors here that led to rupee weakness.

• Firstly, the RBI has been relatively cautious about responding to the US rate cuts. Fed has already embarked on rate cuts with a 50 bps opening move in September 2024. In addition, it has promised another 50 bps of rate cut by end of 2024 and an additional 100 bps by end of 2025; taking total rate cuts to 200 bps from peak. However, even as RBI has been cautious and refused to tinker with rates in October, the markets are expecting the RBI to embark on rate cuts, as early as December 2024. That could put pressure on the rupee as the INR does not enjoy the exorbitant dollar privilege.
• The second reason for the rupee weakness is that the dollar index has been steadily hardening. This is linked to the previous point. Dollar is seen as a safe haven and when you have the kind of geopolitical risk as in West Asia, funds automatically gravitate towards dollar assets. That is also evident from the Dollar Index (DXY), which has bounced from 100 levels to above 103 levels.
• The third important reason for the weakness in the rupee is the FPI selling. It has been almost relentless in October with more than $9.25 Billion flowing out of Indian equities in just the last 13 trading sessions. That has also put pressure on the Indian rupee, leading to the weakness in the dollar.
• Last, but not the least, there is the widening trade deficit which sort of threatens to push the current account deficit (CAD) back to around 1.8% to 2.0% of GDP. That would be sharply higher than the previous year, when the CAD was just about 0.6% of GDP. A higher CAD has an intense impact on the rupee value.

In the last few weeks, the RBI has been aggressively defending the rupee by selling dollars at around the ₹84/$ levels. Markets are sceptical about how much longer this can sustain. All these factor kept the rupee under pressure, despite lower crude prices.

US BOND YIELDS FLAT; DOLLAR INDEX CLOSES HIGHER

Two macro variables set the tone for global markets; 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 (%)
Oct 14, 2024	4.073	4.069	4.118	4.059
Oct 15, 2024	4.038	4.100	4.104	4.026
Oct 16, 2024	4.016	4.037	4.043	3.995
Oct 17, 2024	4.096	4.022	4.100	4.018
Oct 18, 2024	4.075	4.093	4.118	4.065

Data Source: Bloomberg

In the last two weeks, it looks like the undertone of global bond yields has changed sharply. Last week, the US bond yields rallied after it became apparent from the jobs data that US Fed rate cuts would be more restrained going ahead. This week, the bond yields were flat to positive on hopes that the Fed may go slow on rate cuts, especially after the recent speeches by Neil Kashkari and Christopher Waller; who hinted that rate cuts may be more deliberated and calibrated in future. There has been sustained cashing-out bond selling in US bond markets as the savvy investors are trying to get out after the US hinted at more gradual rate cuts. The US bond yields had been trending lower since PCE inflation and the consumer inflation came in lower in recent months. However, even the Fed admits now that the growth concerns (hard landing) may have been overplayed a bit. That is evident if one looks at the US quarterly GDP date, the positive shift in unemployment numbers, and the signals emanating from the Atlanta Fed GDP forecasts.

The 10-year bond yields opened the week at 4.073% and closed the week flat to positive at 4.075%. Bond yields had spiked in the last two weeks on expectations of a slower than expected rate cut. Persistent selling of bonds by traders also pulled down bond prices and pushed up the yields. For instance, in a span of 2 weeks, the US bond yields had spiked from 3.743% to 4.073%. Let us now turn to the Dollar Index.

Date	Price (%)	Open (%)	High (%)	Low (%)
Oct 14, 2024	103.30	102.92	103.36	102.93
Oct 15, 2024	103.26	103.21	103.34	103.03
Oct 16, 2024	103.59	103.26	103.61	103.17
Oct 17, 2024	103.83	103.56	103.87	103.44
Oct 18, 2024	103.49	103.81	103.81	103.46

Data Source: Bloomberg

Structurally, the dollar index had fallen from a high of 106 to the range of 100-101. In previous weeks, the dollar index displayed a sharp bounce. In the previous week, the dollar index had rallied from 100.78 102.52 levels. IN the current week, the dollar index opened sharply higher at 103.30 and closed at 103.49 levels. This week, the rally in the dollar index continued as it built upon a strong gap-up opening. The dollar index is a measure of dollar strength, and with the rising geopolitical risk, there are is the typical safe-haven shift to dollars that is likely to happen, and it is already visible. We are seeing a lot of risk-off funds gravitating towards dollar assets . Dollar index scaled a weekly high of 103.87 and low of 102.93 levels for the week.

INDIA BOND YIELDS EDGE HIGHER AS RBI PUTS OFF RATE CUTS

After the sharp spike in bond yields in the previous week, the general expectation was that bond yields would spike above the 7% mark in the current week. However, that was not to be. Unlike the US Fed, the RBI did not cut rates, so expectations are still there that the RBI would cut rates, sooner rather than later. Bond yields in India moved up from 6.782% to 6.809% in the latest week. The borrowing calendar for H2-FY25 at ₹6.61 Trillion favours lower bond yields, and could be a key factor. The general view in the market is that despite the Fed action, the RBI may continue to be cautious about rate cuts. That was also explained by bond yields inching up slightly. For now, it looks like the RBI may consider rate cuts in December 2024 or in February 2025; although the RBI is unwilling to stick its neck out.

Date	Price (%)	Open (%)	High (%)	Low (%)
Sep 23, 2024	6.767	6.775	6.775	6.759
Sep 24, 2024	6.761	6.768	6.770	6.754
Sep 25, 2024	6.738	6.753	6.753	6.735
Sep 26, 2024	6.718	6.740	6.740	6.706
Sep 27, 2024	6.759	6.747	6.767	6.723
Sep 30, 2024	6.750	6.760	6.760	6.744
Oct 01, 2024	6.732	6.759	6.759	6.730
Oct 02, 2024	6.732	6.759	6.759	6.730
Oct 03, 2024	6.777	6.751	6.779	6.744
Oct 04, 2024	6.829	6.793	6.838	6.792
Oct 07, 2024	6.846	6.846	6.853	6.813
Oct 08, 2024	6.806	6.845	6.845	6.802
Oct 09, 2024	6.766	6.818	6.818	6.741
Oct 10, 2024	6.776	6.805	6.805	6.750
Oct 11, 2024	6.788	6.770	6.798	6.767
Oct 14, 2024	6.782	6.788	6.788	6.767
Oct 15, 2024	6.769	6.794	6.794	6.765
Oct 16, 2024	6.773	6.762	6.775	6.758
Oct 17, 2024	6.784	6.775	6.787	6.770
Oct 18, 2024	6.809	6.794	6.821	6.789

Data Source: RBI

During the week, the bond yield opened at 6.782% and closed higher at 6.809%. Yields were trading around 30-month lows, so a dead cat bounce happened last week; but that is done and dusted. An important data point in the coming week will be the minutes of the RBI MPC, which will offer a much clearer and unambiguous outlook for rates. For the week, the India bond yields touched a high of 6.821% and a low of 6.765%.

RUPEE WEAKNESS HOLDS IT BEYOND ₹84/$

In the last few weeks, the RBI had been consistently intervening to defend the rupee from weakening beyond ₹84/$. It remains to be seen; how much longer the RBI can sustain its defence of the rupee; at least it may move the limit higher.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Sep 23, 2024	83.530	83.481	83.577	83.440
Sep 24, 2024	83.600	83.572	83.688	83.518
Sep 25, 2024	83.600	83.605	83.652	83.506
Sep 26, 2024	83.601	83.640	83.729	83.593
Sep 27, 2024	83.710	83.622	83.725	83.598
Sep 30, 2024	83.755	83.696	83.836	83.670
Oct 01, 2024	83.900	83.851	83.951	83.786
Oct 02, 2024	83.920	83.908	84.012	83.849
Oct 03, 2024	83.990	83.927	84.036	83.895
Oct 04, 2024	84.030	84.010	84.052	83.948
Oct 07, 2024	83.980	84.007	84.018	83.945
Oct 08, 2024	83.945	83.969	83.996	83.915
Oct 09, 2024	83.950	83.938	83.980	83.893
Oct 10, 2024	83.940	83.939	83.992	83.930
Oct 11, 2024	84.101	83.965	84.121	83.942
Oct 14, 2024	84.045	84.065	84.099	84.004
Oct 15, 2024	84.040	84.048	84.075	83.995
Oct 16, 2024	84.030	84.047	84.074	83.958
Oct 17, 2024	84.035	84.038	84.067	83.990
Oct 18, 2024	84.065	84.015	84.077	84.015

Data Source: RBI

Over the last few weeks, RBI had been steadily selling dollars around the ₹84/$ mark, which helped support the rupee. In the last two weeks, the rupee closed the weak above ₹84/$, a clear indication that the RBI would now look at higher defence points. RBI had already slowed dollar selling amidst rising geopolitical risk, but it spiked last week, as was shown in the forex reserves depletion last week. With the US dollar attracting safe haven flows from investors, dollar strength is inevitable. While Brent Prices were rather supportive, what spooked the rupee was the persistent FPI selling and the concerns over CAD. For the week, the USDINR touched a high of 83.958/$ and a low of 84.065/$.

BRENT CRUDE CLOSES SHARPLY LOWER FOR THE WEEK

The discussion on the crude prices has now shifted from the support levels to the resistance level. Experts are now pegging Brent to break above $80/bbl and move to $90/bbl mark.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Sep 23, 2024	73.21	73.94	74.44	72.41
Sep 24, 2024	74.47	73.43	75.12	73.26
Sep 25, 2024	72.90	74.44	74.67	72.50
Sep 26, 2024	71.09	72.89	73.28	70.25
Sep 27, 2024	71.54	70.71	72.00	70.44
Sep 30, 2024	71.70	71.88	72.79	71.03
Oct 01, 2024	74.46	71.86	75.45	69.92
Oct 02, 2024	74.67	74.45	76.14	73.60
Oct 03, 2024	77.90	74.58	77.99	74.33
Oct 04, 2024	78.08	77.80	79.29	77.39
Oct 07, 2024	81.13	77.49	81.17	77.39
Oct 08, 2024	77.47	81.01	81.16	76.39
Oct 09, 2024	76.78	77.52	78.00	75.19
Oct 10, 2024	79.27	76.73	79.72	76.73
Oct 11, 2024	78.88	79.13	79.50	78.04
Oct 14, 2024	77.46	78.55	78.55	74.86
Oct 15, 2024	74.25	75.22	75.57	73.34
Oct 16, 2024	74.22	74.71	74.93	73.42
Oct 17, 2024	74.45	74.47	74.92	73.26
Oct 18, 2024	73.06	74.59	74.95	72.50

Data Source: Bloomberg

In the last few weeks, there was persistent accretion to the US oil reserves, which had prevented Brent Crude prices from going above $80/bbl. What would be interesting for the oil markets is whether the recent supply glut will sustain. That is likely to protect losses for the US. For the week, Brent crude touched a high of $78.55/bbl and a low of $73.06/bbl.

SPOT GOLD RALLIES, BREAKS ABOVE $2,700/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)
Sep 23, 2024	2,628.40	2,621.81	2,635.54	2,613.60
Sep 24, 2024	2,656.70	2,628.92	2,664.47	2,622.58
Sep 25, 2024	2,656.82	2,655.90	2,670.60	2,649.84
Sep 26, 2024	2,670.20	2,657.32	2,685.96	2,654.56
Sep 27, 2024	2,657.97	2,669.50	2,674.40	2,643.15
Sep 30, 2024	2,634.49	2,658.30	2,666.11	2,624.78
Oct 01, 2024	2,662.82	2,635.41	2,673.20	2,631.98
Oct 02, 2024	2,657.75	2,661.15	2,663.85	2,641.18
Oct 03, 2024	2,655.90	2,658.66	2,663.40	2,639.73
Oct 04, 2024	2,653.52	2,655.90	2,670.20	2,632.10
Oct 07, 2024	2,643.58	2,651.20	2,659.91	2,637.70
Oct 08, 2024	2,621.94	2,643.50	2,653.09	2,604.79
Oct 09, 2024	2,607.77	2,620.19	2,624.65	2,605.18
Oct 10, 2024	2,629.48	2,608.14	2,631.63	2,604.15
Oct 11, 2024	2,656.00	2,630.80	2,661.55	2,627.65
Oct 14, 2024	2,651.05	2,657.21	2,666.94	2,643.16
Oct 15, 2024	2,660.99	2,651.75	2,669.07	2,638.31
Oct 16, 2024	2,673.24	2,663.00	2,685.73	2,658.71
Oct 17, 2024	2,692.55	2,674.05	2,696.80	2,673.00
Oct 18, 2024	2,720.25	2,692.41	2,722.87	2,691.48

Data Source: Bloomberg

Spot Gold opened the week at $2,651.05/oz but spent the remaining days steadily moving up, before closing the week at $2,720.25/oz. This is the first close for gold above $2,700/oz. The 50 bps rate cut by the Fed came as a boon for gold prices as it reduces the opportunity cost of holding gold. However, the glide path is not too clear now; although gold bulls are expecting $3,000/oz to be eventually taken out by next year. During the week, gold touched a high of $2,722.87/oz and a low of $2,638.31/oz. Spot Gold has now given a close above $2,700/oz for the first time ever!