Stalemate in the Persian Gulf raises oil and gas prices
The price of Brent crude oil rose 6.63% over the week to $94.39 per barrel, while the TTF gas price index, considered the main benchmark for natural gas prices in Europe, increased 7.23% to €65.86 per megawatt-hour. The price increase was driven by the increasingly entrenched diplomatic stalemate in the Persian Gulf.
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“Since the Strait of Hormuz remains closed and Washington is preparing what it calls the toughest sanctions on Iran to date, market participants increasingly expect long-term disruptions rather than a quick resolution to the conflict. Moreover, for Europe, the rise in gas prices is even more important than oil. Due to the maritime blockade, Qatar’s liquefied natural gas (LNG) supply has stopped, European energy companies are actively competing for the remaining cargoes, and warmer-than-usual weather is slowing gas storage replenishment ahead of winter,” notes Citadele Bank economist A. Izgorodinas.
Gold, silver, and euro rise due to weakening dollar
The price of gold rose 5.56% over the week to $4,624.10 per ounce, while silver increased 6.89% to $69.47.
“Two factors influenced this. First, rising energy prices increase inflation risk, so precious metals remain an attractive hedge against price increases. Second, the US dollar weakened after the US Treasury announced it would at least double the volume of long-term government bond purchases. This aims to stabilize the bond market, where long-term yields remain near their highest levels in recent years,” comments A. Izgorodinas.
As the dollar weakened, the euro strengthened. Over the week, it rose 1.14% to $1.1699 and for the first time since May surpassed the $1.17 mark.
Stock markets weighed down by high borrowing costs
Stock markets moved in the opposite direction. The Nasdaq Composite index fell 2.05%, the Russell 2000 lost 1.65%, and the S&P 500 decreased 1.43%. In Europe, the CAC 40 index dropped 1.76%, the Euro Stoxx 50 fell 1.18%, Germany’s DAX 40 declined 1.15%, and Spain’s IBEX 35 decreased 0.97%.
The main source of pressure was not a deteriorating economy but high money costs. US Treasury actions stabilized bond yields only briefly. As yields began to rise again, the most affected were the most highly valued market segments, especially large US technology companies.
Additional pressure on corporate profitability comes from higher energy costs. Meanwhile, weaker-than-expected Walmart results have increased doubts about US consumer resilience. Although there was some partial recovery in stock markets on Friday, it did not change the overall weekly picture.
Growth takes center stage
“Last week’s economic indicators were better than might appear judging solely by market reactions. Preliminary eurozone business activity data show that the economy maintained its growth pace in August. The composite Purchasing Managers’ Index (PMI), considered one of the earliest indicators of economic health, rose to 52.1 points, reaching its highest level since last November. The manufacturing sector index rose to 52.8 points, the best result in the past four years. The growth was mainly driven by strengthening export demand,” said A. Izgorodinas.
The biggest improvement was recorded in Germany. The country’s manufacturing PMI rose to 54.1 points, the highest since May 2022. German factories increased production at the fastest pace since early 2022, and companies began hiring more actively for the first time this year.
The situation in the eurozone services sector remained essentially unchanged. Its index stayed at 51.7 points in August. Although sentiment in the services sector weakened further in Germany and France, better results in other eurozone countries offset this impact.
“Despite high oil and gas prices in financial markets, eurozone companies reported decreasing production cost pressures, and prices in the services sector rose only slightly faster. Considering all indicators together, it is expected that the eurozone economy will grow by about 0.3-0.4% in the third quarter. Consumer sentiment has also been gradually improving since the lows in April as inflation stabilizes,” said the Citadele Bank economist.
Therefore, last week the main problem was not the lack of economic growth. The biggest concerns for markets were rising energy prices and high borrowing costs.
US manufacturing continues to grow, oil production remains stable
US manufacturing output increased 0.2% in July compared to June, although the annual growth rate slowed to 1.2% from 1.4-1.5% in the previous three months. Computer and electronics manufacturing became one of the main growth drivers in the sector – annual growth in this segment has remained near 10% for the third consecutive month, and rising producer optimism suggests growth will likely continue in the coming months.
Mining industry output also rose 0.2% month-on-month in July and was 1% higher than a year ago. US oil production has stabilized in recent weeks at about 13.8 million barrels per day, and the number of active drilling rigs continues to gradually increase. Given the tight situation in the global oil market, this is an indicator worth watching closely.
China’s economic recovery remains uneven
China’s retail sales growth slowed to 0.6% year-on-year in July. This is the fourth consecutive month with growth near zero.
Meanwhile, export-oriented sectors showed better results. Industrial production increased 4.5% year-on-year, although growth was 5.3% in June. Exports rose nearly 24%, so the average export growth since the beginning of the year remains near 20%.
Investment decline deepened further in July – it was 12.8% lower than a year ago. The biggest drop was in real estate investment – down 28.7%. Transaction volumes in China’s housing market continued to decrease, and housing prices remained on a downward trajectory.
This week’s market focus
In Europe, the most important will be business and consumer expectation indicators and inflation data.
The greatest attention will be on Germany’s Ifo business climate index, which reflects the economic expectations of the country’s companies. The index is forecast to rise from 86.6 to 87.3 points. Improvement is expected in both the current situation and expectations components. After strong PMI figures last week, markets will seek to confirm that Germany’s industrial recovery is indeed gaining momentum.
Second-quarter German GDP data will also be confirmed. The economy is expected to have grown 0.2% quarter-on-quarter and 0.9% year-on-year. In August, the number of unemployed is expected to increase by about 4,000 compared to a 6,000 increase the previous month, with the unemployment rate expected to remain at 6.4%.
Consumer sentiment in Germany remains weak. The September GfK consumer climate index is expected to be -29.5 points, essentially unchanged from the previous -29.6 points.
Italy will release consumer and business confidence indicators, and the European Commission will present the economic sentiment index. In July, it was 96.9 points – indicating recovery, but still below the long-term average of 100 points.
Another important focus will be inflation. It is forecast that annual inflation in Spain will accelerate from 3.6% to 4.2% in August, mainly due to energy prices. In France, consumer prices are expected to rise 0.7% month-on-month compared to 0.6% previously. Energy prices remain the main factor here. French consumer spending is unlikely to grow, and second-quarter GDP growth is expected to be confirmed at 0.2% quarter-on-quarter and 0.7% year-on-year.
These national data will be important for assessing eurozone inflation to be released next week. The ECB raised the deposit rate to 2.25% in June, left it unchanged in July, and markets have almost fully priced in another rate hike in September. The minutes of the July meeting will be published on Thursday and will show how divided the Governing Council is.
The US July core PCE price index – the Federal Reserve’s preferred inflation measure – is expected to remain at 3.3% year-on-year, with the monthly rate rising to 0.2% from 0.1%. The final estimate of second-quarter GDP is also awaited, expected to confirm a 1.5% annual economic growth rate.
Two consumer confidence indicators will be released – the Conference Board survey, expected to show 90.3 points after 90.8 previously, and the University of Michigan index, expected to remain at 51 points. The latter remains one of the lowest in history.
The University of Michigan survey also includes inflation expectations. Consumers are forecast to expect 4.3% inflation over the next year and 3.3% over five years. This still significantly exceeds the FED target and remains a relevant issue amid rising oil prices.
From Thursday to Saturday, the traditional Jackson Hole central bank symposium will take place. Given the unstable bond market and uncertainty about further FED decisions, speeches by participants at this event may become the most important market catalyst of the week.
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