Profit taking morphs into a selloff amid macro headwinds

Profit-taking morphed into full-scale selling, as weak economic data and the prospect of further rate hikes weighed on sentiment across markets.

Crude oil fell sharply on Friday last week as a risk-off tone was sparked by a strong jobs report. Prospects of less aggressive rate hikes were dashed by the record low unemployment numbers. This was exacerbated by concerns of rising inventories and weaker than expected demand in China. Despite strong mobility data during the Lunar New Year holiday, Chinese traders have been relatively absent from markets. The market is also grappling with weak demand in the US. Inventories climbed for the fourth consecutive week, with gasoline stockpiles up particularly sharply. This comes amid ongoing supply side issues. European sanctions on Russian fuel products kicked in on 5?February. This is as the G7 implements a USD100/bbl price cap on Russian diesel sales. For the moment, the market expects non-EU countries will increase imports of refined Russian crude, thus creating little disruption to overall supplies. Nevertheless, OPEC’s continued constraint on supply should keep the market tight.

European gas fell last week as weak demand and ample stockpiles weighed on sentiment. However, officials remain concerned that the energy crisis is not over. Germany’s energy regulator, BNetzA, warned that the public isn’t saving as much gas as it could be. Consumers only curbed their gas use by 8.6% below the 2018-21 average in January, well below the government’s target of 20%. North Asian LNG also fell amid lacklustre demand from China. Ample stockpiles could subdue China’s purchases from the spot LNG market in the short term.

European carbon prices gained last week amid technical buying and short covering. Sentiment has been buoyed by expectations of better economic growth, which would ultimately drive carbon emissions higher. The prospect of market reforms boosted sentiment. Australian carbon credit units eased back from recent highs, amid lacklustre trading. ACCU ended the week at AUD36.50/t.

Copper led the base metals sector lower last week amid doubts over China’s pace of recovery from recent COVID-19 restrictions. China’s economy showed muted improvement in January, according to high-frequency data from Bloomberg. Home sales during the Lunar New Year fell 14% y/y. The market also shrugged-off risks of further supply disruptions. MMG was forced to close its Las Bambas copper mine in Peru due to a shortage of critical supplies amid political unrest. Nickel edged lower as tightness in the battery nickel market is being offset by weakness elsewhere. High prices have finally induced a supply response, with the market now facing a surge in new projects, so it is likely to push into a surplus this year.

Gold broke back below USD1,900/oz as the prospect of monetary loosening shrank following the strong jobs data.