By Ulf Bergman
Macro/Geopolitics
The rising stakes in the war in Ukraine, following the Russian announcement of a partial mobilisation, and interest hikes by several central banks dominated last week’s headlines. The mounting risks of a global recession following another large move by the Federal Reserve and increasingly hawkish language from its Chairman sent the dollar sharply higher. In contrast to the greenback, most risky assets declined during the week as investors assessed their appetite for risk. The increasing likelihood that the US central bank will allow the US economy to dip into contractionary territory to fight inflation suggests that more outsized interest hikes can be expected. Hence, the dollar can be expected to strengthen further, with additional pressure on the commodities markets as a result.
In response to the weakening of the yuan versus the dollar, the Chinese central bank announced earlier today that it is increasing banks’ risk reserves on foreign-exchange forward sales to clients to twenty per cent. The move makes it more expensive to speculate against the Chinese currency in the derivatives market, and the authorities are hoping it will help the country’s currency to recover from near the weakest level since the financial crisis almost fifteen years ago.
Commodity Markets
Crude oil prices tumbled last week, with the Brent futures recording a weekly loss of nearly six per cent. However, for most parts of last week, the trading was relatively sedate with only limited daily moves. Still, Friday saw a sharp increase in investors’ risk aversion amid a rapidly deteriorating demand outlook. Hence, the last session of the week accounted for most of the weekly retreat following a decline of 4.8 per cent. The US crude oil prices fared even worse, with the WTI contracts dropping by nearly seven per cent.
Like crude oil, most of last week’s negative performance for the European natural gas futures stemmed from losses on the final day of the week. The front-month contracts ended the week 1.2 per cent lower at 185 euros per megawatt-hour, as a weaker demand outlook offset continued supply disruptions.
The rising prospects of a global recession also weighed on thermal coal prices last week. The Newcastle futures for delivery next month ended the week at 410 dollars per tonne, following a 4.2 per cent retreat. The contracts for delivery in North-West Europe fared somewhat better with a weekly decline of 2.4 per cent to end the week at 297 dollars per tonne.
Among the major commodities, iron ore had a better week than most. The October futures trading at the Singapore Exchange ended the week broadly unchanged. The steelmaking ingredient staged a recovery during the second half of the week following reports that Chinese construction activities were picking up.
The increasingly gloomy outlook for the global economy also put pressure on base metals, with weekly losses in the three to five per cent range. Supply concerns amid rising energy prices, especially in Europe, also offset some of the demand weakness. The copper futures trading at the London Metal Exchange fell by 4.2 per cent last week, while aluminium and zinc registered declines of nearly five per cent. The nickel contracts were the least bad performers, following a weekly loss of 3.5 per cent.
Among the agricultural commodities, only soybeans made any significant move, with the futures trading in Chicago ending the week 2.3 per cent lower. In contrast, the wheat and corn contracts ended the week broadly unchanged, as losses during Friday’s session offset earlier gains.
Freight Markets
Unlike the commodities markets, seaborne freight rates had another week of mostly solid gains. As has often been the case in recent weeks, the largest dry bulk vessels provided the standout performance. The Baltic Exchange’s sub-index for the Capesizes advanced by 45 per cent during the previous week amid a weakening tonnage supply. In contrast, the indicator for the Panamaxes only edged up by 0.3 per cent. Among the smaller vessel segments, the gauges for the Supramaxes and the Handysizes gained around 6.5 per cent. The solid weekly performance across most segments saw the headline Baltic Dry Index advancing by nearly seventeen per cent.
Among the Baltic’s wet indices, only the indicator for the clean tankers retreated last week. The index fell by one per cent, while their dirty siblings saw their rates edging up by 0.4 per cent, according to the Baltic Exchange. For the gas carriers, last week proved to be lucrative, with the indicator for the LNG freight rates advancing by 27.6 per cent and the LPG gauge gaining 16.1 per cent.
The View from the Shipfix Desk
The move by the Russian leadership to call for a partial mobilisation could further escalate the war in Ukraine. Hence, the deal that allowed Ukraine to resume its seaborne exports of agricultural commodities could come under threat, especially as the Russian leader has already expressed some grievances regarding it. While the deal initially helped bring down the wheat prices, renewed concerns over global supplies have seen the futures contracts trending higher since the middle of August.
Despite the rising tensions, cargo orders for agricultural commodities loading in Ukrainian ports rose sharply during the week before last. The weekly volumes reached the highest level since the middle of July last year. While last week may not quite live up to the recent high, volumes may increase somewhat as the remaining data for the week arrives. Still, the trade remains dominated by small vessels, with the average size below 20,000 tonnes.
Capesize freight rates have staged a remarkable recovery since the beginning of September, following an abysmal three months. Still, despite the rapid rebound, daily freight rates remain well below what has been observed during the same period in recent years. Hence, if history provides any guidance, there could be an additional upside, but rising economic and geopolitical headwinds could derail such assumptions.