Financial markets entering the witching hours

Witching hour is the time of night, usually between 3 to 4 am, whereby supernaturals of witches, demons and ghosts roam and at their most powerful. 

In our days trading in the financial markets, the 3 to 4 am refers to the period around the third and fourth quarter of the year when market is most volatile and turmoil in the market usually happen before the period of low trading volume during Christmas to New Year. 

By the look of it, the global financial market is entering the witching period of the year. There was a sell-off on Wall Street last week arising from a poor job data which indicate recession is coming in.  

Extract from The Guardian last Friday, below:

The US labor market cooled significantly last month as unemployment unexpectedly rose, sparking fears of a slowdown across the world’s largest economy.

American employers added 114,000 jobs in July – short of the 180,000 additions expected by economists, and a marked decrease from the 179,000 added in June.

The headline unemployment increased to 4.3%, its highest level since October 2021, up from 4.1% the previous month.

Wall Street fell sharply following the official release. The S&P 500 declined 1.8% to a two-month low, as the technology-focused Nasdaq fell 2.4% and entered “correction” territory, having retreated 10% from the record high it scaled last month.

On the campaign trail, the strength of the US economy has become a key issue. With many still feeling the pinch from years of high inflation, a majority of Americans wrongly believe the US is in recession, according to a Harris poll for the Guardian earlier this year.

Federal Reserve

It looks to be a typical "too little, too much" or "too early, too late" of most Government policy intervention. Elon Musk lambasted Fed as foolish for not already cutting interest rate in his comment of Fed Chairman Jerome Powell for saying of plan to do so by September last Wednesday. 

That sent market into a tailspin and amplified by the poor job data on Friday. Forbes Sunday wrote:

The violent stock market selloff last week triggered by fears that the Federal Reserve missed its chance to help a faltering US economy ended one rotation trade and may have started another, leaving investors guessing where equities go from here.

After the Fed decided to hold rates steady at its two-day meeting that concluded Wednesday, equities collapsed, even though Chair Jerome Powell seemed to signal that rate cuts could be coming as soon as the next meeting in September. The technology-heavy Nasdaq 100 Index tumbled into a correction and the S&P 500 Index lost 3.2% in two days, its worst two-day stretch March 2023. 

The hesitance of Fed to maintain a steady interest rate amid recession fear raised questions. Is it to defend the US dollar in which China have brought down their holding in Treasuries and Japan dumping of their US holdings in equity, bond, commodity and crypto to defend the Yen? 

For a while, Jerome Powell been talking of targeting inflation of 2% in the US before pursuing an interest rate cut. It is not a realistic expectation with US debt level now at US$35 trillion and viewed by most observers as impossible for them to honour their debt commitment. 

It means Fed preference is not for interest rate to be lowered in order to keep the dollar attractive as safe haven currency and enable US to continue to "print money" i.e. issuance of Treasuries to refinance their debt.

And, it could have geo-global implications in view of the rising tension and conflicts in the Middle East, Europe and Asia. 

The imploded conflicts and trade wars that escalated into sanctions imposed by US and EU towards China is not economics but geo-political survival of the West to maintain the unipolar world order. 

Extract from Edge report on the carryover fear from Yen's 7 year rise against USD, below:

Meanwhile, markets are also dealing with the risk of military escalation in the Middle East after latest developments in the war between Israel and Hamas in Gaza, which has driven oil prices to January lows.

The US military is deploying more forces in the Middle East and Europe following threats from Iran and its allies Hamas and Hezbollah to respond to the killing of Hamas leader Ismail Haniyeh two days ago in Tehran.

Ringgit

There are commentaries attributing the Ringgit rise to Yen but its merely a spurious relation. As of this morning, Ringgit reached its 11 day high. Star Online reported below:

The ringgit continued to be well supported and sustained its upward momentum for 11 straight days against the US dollar as investors redirect their investments towards the Asia-Pacific region following weaker US jobs data last Friday, said an analyst.

At 8 am today, the ringgit appreciated to 4.4930/5010 versus the US dollar from last Friday's close of 4.4945/4995.

There has to be a major fund inflow to bring about such sharp rise. Edge could only hint of repatriation of fund and its probably the reason Anwar shared the credit to many parties. Extract below:

The ringgit jumped the most in nine years on bets foreign capital will flood in amid optimism surrounding Malaysia’s economy.

The currency surged as much as 2.3% on Monday, on course for its biggest gain since October 2015. It outperformed its Asian peers including the Japanese yen and the Chinese yuan.

After three years of losses, the ringgit is leading gains in emerging markets this quarter as the government sought to attract more foreign investments and began rolling back subsidies to narrow the budget deficit. Efforts by policymakers to encourage state-linked firms to repatriate and convert overseas income also helped stabilize the currency after it fell to a 26-year low in February.

Stock market          

Indeed, there was a short scare on Bursa Malaysia last week a fine and suspension on a market-maker for alleged stock manipulation. It brought volume down temporarily before foreign fund came buying. They were the net buyer by RM242 million last week. 

However, when Wall Street sneeze, Malaysia catch a cold. Last Friday, 1,300 counters decline on a sea of red despite the 10 days winning streak on Ringgit. The Edge reported on this morning opening as follows:

Malaysian stocks extended their sharp decline on Monday with the country’s benchmark index on course for its worst day in more than one year, as Asian stocks continued to tumble on fears over health of the US economy.

The FBM KLCI was down 33.38 points, or 2.1%, to 1577.67 as at 9.15am. YTL Corporation Bhd (KL:YTL) fell 8.9% to RM3.25, leading losses among all 30 component stocks. In the broader market, more than 1,000 stocks were in the red in active trade.

It is early August but looks like the "annual" witching quarter came earlier than expected. This time, it could be beyond the normal economic cycle, market adjustment to negative economic data and shifting of fund.    

Energy

Not just because Ringgit strengthened when stock market is temporarily bleeding. Even oil price is behaving strangely. Star Online reported from Reuters, below:

Oil hovers at 8-month lows as U.S. recession fears offset Mideast tensions

COMMODITIES

Monday, 05 Aug 2024 9:50 AM MYT

Brent crude futures settled down US$2.71, or 3.41%, to US$76.81 a barrel. US West Texas Intermediate crude futures settled down US$2.79, or 3.66%, at US$73.52.

 

SINGAPORE: Oil prices hovered at eight-month lows on Monday as fears of a recession in the United States, the world's top oil consumer, offset concerns that escalating tensions in the Middle East may affect supplies from the largest producing region.

Brent crude futures inched down 4 cents, or 0.1%, to $76.77 a barrel by 0035 GMT, while U.S. West Texas Intermediate crude futures were at $73.39 a barrel, down 13 cents, or 0.2%.

Prices were supported by persistent fighting in Gaza with an Israeli airstrike hitting two schools and killing at least 30 people on Sunday, Palestinian officials said, the day after a round of talks in Cairo ended without result.

Israel and the United States are bracing for a serious escalation in the region after Iran and its allies Hamas and Hezbollah pledged to retaliate against Israel for the killings of Hamas' leader Ismail Haniyeh and Fuad Shukr, a top military commander from Lebanese armed group Hezbollah last week.

"If this conflict intensifies, crude exports could be impacted," ANZ analysts said in a note.

Despite worries about escalating tensions in the Middle East, Brent and WTI tumbled more than 3% to settle at their lowest since January on Friday in a volatile week. Last week, both contracts marked their fourth straight week of losses, their biggest losing streaks since November.

Oil prices were dragged down by U.S. recession fears and after OPEC+, an alliance between the Organization of the Petroleum Exporting Countries and other producers such as Russia, stuck to its plan to phase out voluntary production cuts from October.

The market had been expecting OPEC+ to delay the phase out of voluntary production cuts beyond the third quarter, ANZ analysts said.

A Reuters survey showed on Friday that OPEC oil output rose in July despite production cuts by the group.

In the U.S., the number of operating oil rigs were steady at 482 last week, Baker Hughes said in a weekly report.

Weak economic data across the globe weighed on oil prices, on concerns that a sluggish global economic recovery would dampen fuel consumption.

Data released last week showed that the U.S. economy added fewer jobs than expected last month while factories across the U.S., China and Europe grappled with tepid demand.

Slumping diesel consumption in China, the world's biggest contributor to oil demand growth, is weighing on global oil prices. - Reuters

WWIII? 

The prospect of war between Israel and Hezbollah in Lebanon have been anticipated. 

Following the assassination of Hamas's Ismail Haniyeh in Teheran, the US have deployed warships to defend Israel from possible Iran attack. And there have been millitary build-up in Iran. 

There is also conflicts brewing in Europe with EU and NATO are on a war mode. Ukraine with the consent of Brussels (EU) cut energy supply to Hungary and Slovakia for calling on a diplomatic solution to the Ukraine conflicts and refusing to participate in arming Ukraine.   

Philipines is the US's latest proxy for war like Ukraine for encounter against China. 

Is a World War III being invoked by the West to resist the change in the global order from unipolarity to multipolarity and de-dollarisation that comes with BRICS?

The view of school of political realism, Dr John Mearsheimer of pre-WWIII tension two years ago:

His updated view involving EU, Nato, Russia, China, Palestine and Israel here and here. With so many factors aligned, its the witching quarter of the year.