Risk sentiment boosted by lower than expected inflation

A risk-on rally across markets saw commodities surge higher. A lower-than-expected inflation print sparked the rally, while a weaker USD added support. Ongoing easing of virus controls in China boosted sentiment.

Gold?rallied after slower-than-expected rise in inflation sparked hopes that the Fed will start reducing the pace of interest rate hikes. The data suggest it will slow at this week’s FOMC meeting. The inflation data say Treasuries surged, with the 10-year yield falling 10bp. A weaker USD also boosted investor appetite for the precious metal.

The risk-on tone saw the rest of the commodity complex rise sharply.?Crude oil?gained amid a flurry of bullish headlines, least of all the ongoing reopening of the Chinese economy. China’s ambassador to the US said the country will continue relaxing its pandemic-curbs and will welcome more international travellers soon. However, there are also signs that domestic travel is rebounding. Domestic flight activity jumped to around 65% of pre-pandemic levels Monday, from just 22% on 29 November, according to Chinese aviation data company VariFlight. Ticket sales for the crucial Lunar New Year period in late January have also surged, China Aviation Daily reported. Supply side issues were also supportive. TC Energy Corp has yet to submit a restart plan for the Keystone pipeline following a leak last week. Russia’s President Putin is planning to sign a decree banning the sale of Russian oil through any contract that specifies the recipient as a nation that joined the G7 price cap. However, that won’t affect any contracts signed before 5 December and will be in force until 1 July. OPEC urged caution as its members implement the recent 2mb/d production cut. It now expects to see a finely balanced market in Q1 2023, instead of the deficit implied by its forecasts a month ago. It sees demand increasing by 2.2mb/d next year to average 101.77mb/d.

European gas?edged higher as cold weather tests the resilience of its energy market. The deep freeze has seen heating demand surge. In the UK, gas demand has jumped more than 50% since November. This comes amid ongoing supply outages in Norway. This has seen European gas storage fall to 88%, down from 91% last week. Until now, LNG imports have helped meeting shortages from Russia. However, China’s reopening is creating some unease in the market. China’s return to the spot LNG market will be a challenge for Europe to refill storage in 2023. The European Union failed to reach an agreement on a cap on natural gas. Countries led by Germany are calling for a cautious approach, while a group containing Belgium and Italy suggest they should be more aggressive in containing prices.?North Asian LNG?spot prices gained as Chinese buyers sought supplies for next year. China’s CNOOC is seeking to buy LNG for Feb-Dec delivery, as the country abruptly ends its stringent zero-COVD strategy.

Copper?led the?base metals?sector higher as risk sentiment improved. A weaker USD also added support. However, the gains were muted amid concerns that the surge of COVID-19 cases would weaken demand in the short term. The virus is rapidly spreading through households and offices and starting to put pressure on the hospital system. This could further weigh on consumer and industrial activity in the short term.

European carbon prices?drifted lower as the market continued to focus on negotiations on EU ETS reform and potential additional auctions from next year. EU policy makers reached a landmark deal to introduce emissions levies on certain imports. The ETS overhaul will spell out how and when emissions allowances are phased out under the Carbon Border Adjustment Mechanism.