Oil tops $90 as Middle East tensions jolt markets

How do escalating oil prices affect market stability?

Market Movements

Global Macro Market Observations

?? Israel on high alert after Iran’s missile retaliation threat

?? Powell sticks with Fed’s cautious rate-cut strategy

? US economy adds 303,000 jobs, unemployment falls to 3.8% in March

US data this week took a turn for the better, with strong showings from manufacturing and employment data. This has shifted the consensus view of the market from a soft landing to outright no landing, extending the likelihood of a higher for longer stance from the Fed. Fed fund futures now imply the 3rd cut for the year to happen in December instead of November, though the pace of rate cuts remains relatively steady otherwise.

The markets were also roiled late in the Thursday US session, as Iran issued warnings it would retaliate against Israel’s strike against its embassy in Syria. Risk assets took a large hit on the day, with the ES futures reversing course by some 2% to finish the day just above the 5,200 mark. Risk aversion dominated the Asian and London sessions on Friday, but the Non-farm Payroll (NFP) print was taken as a Goldilocks print (expanding labour market with YoY decelerating wage growth), and that helped buoy risk assets into the close.

Oil was also a key mover on the week, given the sensitivity of prices to tensions in the Middle East region. Brent Crude, already on a tear this week after the stronger US data, pushed some 1.75% higher to close above $91 per barrel over the Iran headline. Meanwhile Gold makes a new all time high with Friday’s close near 2,330.

Malaysia Market Observations

???? World Bank maintains M'sian GDP growth forecast at 4.3% for 2024

?? Deputy Finance Minister: Not the right time to impose capital gains tax

?? FBM KLCI extends gains, consumer stocks in focus

The World Bank maintained its forecast for Malaysia’s economy to grow 4.3% in 2024 as the risk of a global recession fades. They see the recovery in the tech cycle in particular, having spillover effects to Malaysia as a uniquely positioned friendly party amidst tension-ridden trade relationships between US and China.?

However, it was pointed out that Malaysia is still economically dependent on China and slowing growth in China could pose a risk.?

The World Bank pointed out another risk and the elephant in the room in our opinion, Malaysia’s fiscal standing. With targeted fuel subsidies a matter of months away, this could do some ways to address that. The results of the savings will inevitably have a bearing on ringgit.

The government also seems to prefer to let current revenue increasing measures take its course, with Deputy Finance Minister Lim Hui Ying taking to the press to reiterate that the government is not considering extending the capital gains tax to the disposal of shares in listed companies for the time being after the Dewan Negara passed the Income Tax Bill (Amendment) 2024, which clarifies that Capital Gains Tax will apply to the disposal of unlisted shares of companies incorporated in Malaysia owned by a company, LLP, trust body, or co-operative society.?

In markets, the surprisingly buoyant US ISM release with its economic implications spilling over to Malaysian markets, with stocks going yay and bonds going nay. The KLCI gained 1.25% for Week 14, while the general bond market was in the red:

The Halogen Shariah Ringgit Income Fund again underlined its credentials as an all weather income fund, notching another week of positive performance despite the wider bond markets suffering due to “higher rates for longer” worries creeping back in.

Crypto Market Observations

?? Bitcoin tumbles below $65,000, Liquidations Top $400M

?? BTC Faces Enhanced Volatility as US Govt Sells Silk Road-Related Bitcoin

??? U.S. SEC calls for comments on spot ETH ETFs

Crypto faced a tough week. On Tuesday, on-chain analysts detected the movement of about 30,000 Bitcoin from a US Government-owned wallet to Coinbase. These are part of the Bitcoin holdings seized from the now defunct Silk Road black market. We suspect at least a portion of those holdings were sold, as Bitcoin faced a 6% slide on the day from above 69,000 to a low of ~64,500. Other major altcoins sold off in tandem on the day (ETH down 6.4%, DOGE down 11%).

Bottom fishing continued in the market, which contributed to a rebound in prices from there. Bitcoin traded all the way back to above 68,000 over the following days. However, the Iran/Israel headline also had an impact on the market. The initial knee jerk reaction was fairly benign, and even somewhat positive (perhaps due to Bitcoin being viewed as digital gold or a safe haven from traditional finance).?

However, risk aversion mounted in the Friday Asian session, with Bitcoin trading from an opening of near $68,500 down to a low near $65,900. Subsequently, crypto assets rebounded in the US session following the NFP release, with Bitcoin closing Friday near $67,800.

What We Are Monitoring For The Week Ahead

Looking Ahead: Our Insights

The backdrop macro backdrop looks to be shifting from one where the base case was deflationary, to one where inflation might be making an inflection point. However, the US economic expansion still looks to be on point for now, given turning points in labour and manufacturing data. ISM services PMI this week did fall below expectations, but on balance the US economic outperformance continues.?

We’ll be watching the evolution of the Iran/Israel geopolitical tensions closely, especially with regards to the impact it’ll have on oil prices. Brent crude has already been gaining steam in the past 30 days, and with the latest catalyst pushing it above 90, we doubt that the markets can stay sanguine on inflation so long as energy prices reaccelerate higher.

While Fed speakers remain mixed in their messaging, the balance does seem to be tilted more in favour of hawkish rhetoric vs. data dependency allowing for rate cuts. The latest comments from the hawks came from Neel Kashkari, who laid a case for no rate cuts at all should progress on the inflation front be stymied. The market has done little in the way of adjusting its implied pricing via Fed Fund Futures though, with only a shift in the November cut into December being seen.?

In domestic markets, we expect more of the “growth positive” dynamic to play through in the limited trading days i.e. good for stocks, bad for bonds. This could be exacerbated by the poor liquidity as market participants are away from their desks in Week 15 due to the Hari Raya Aidilfitri public holiday. Investors in the Halogen Shariah Ringgit Income Fund need not fear, as the defensive positioning of the Fund mitigates most of the bond market risk by virtue of having a low modified duration (a measure of market risk exposure) of less than 10 months.

In a backdrop of US outperformance and geopolitical tensions, we could get a scenario where US risky assets continue to chug along in an election year, but the Dollar will stay dominant on the back of investment flows and flight to safety concerns. In which case, hopes for a turnaround in regional currencies may have to be delayed once again. While the Ringgit might be able to stay afloat should BNM’s measures to encourage repatriations take hold, we’ve yet to see any major signs on that front.

The knee-jerk reaction higher in crypto somewhat resembles what happened at the start of the Russia/Ukraine conflict, where crypto was seen as a ‘safe haven’ as a way for both Russians and Ukranians to move money around. Subsequently though, even crypto was not able to escape the effects of tighter monetary conditions, resulting in a more rapid decline in what was in hindsight the early innings of crypto winter. We’d caution that a shift back to a more inflationary backdrop may have a similar effect here, especially with regard to oil prices reigniting that spark.

Otherwise, dip buyers have been seen aplenty in this week’s move lower. It took multiple attempts to flush out leveraged longs and reset funding rates lower. At one point, an OI flush lower was rapidly built back within the span of an hour. By the end of the week though, Bitcoin had managed to rebound back near where we started, amidst an environment of lower leveraged metrics. Even outstanding OI on CME has now reportedly dipped back below the 10 billion mark (though as we noted, a large amount of reported positions were shorts built by fast money, likely for arbitrage reasons).

Compared to Bitcoin, alts did take a massive beating and have not recovered nearly as much. The ETH/BTC cross broke and closed below the 0.05 support mark. The last time it breached that level was back in January, where the fake news of an ETF approval saw traders reverse the decline and start the ETH/BTC rotation meta. That impetus is no longer there for now, as the prospects of a spot Ether ETF remain murky as of now. The SEC opening the comments period for 3 of the applicants is rather interesting, as Blackrock is not included amongst them. We think that this might be regarding attempts to include staking as a feature in those funds (which the Halogen Shariah Ethereum Fund already has), though Bitwise’s application does not seem to have included it. We’ll be watching how this development plays out.

Thank you for reading and we’ll see you next week!

Team Halogen

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