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Iran's fallout has pushed the market view of the next Fed rate reduction further away
The expectation that the Federal Reserve will resume interest rate 'cuts' before September has eroded on Tuesday as rising oil prices due to the U.S. - Israel air war against Iran have heightened concerns?that inflation would keep the central bank in an hawkish position. After the air strike against Tehran that took out the country's "long-time" leader, interest rate futures and Treasury bonds saw a surge in sales for the second day running. The Strait of Hormuz is closed to all traffic, and the flow of 20 percent of the world's oil has been effectively stopped for an indefinite period of time. U.S. crude oil prices are up more than 13 percent since Friday. The?U.S. While the U.S. economy is less sensitive to oil than it was in the 1970s, higher energy prices can still lead to headline inflation. According to AAA, retail gasoline costs have risen by 10 cents per gallon over the past 24 hours. There is a high likelihood of further increases in the near future. The rate futures sale has reduced the chances of a Fed rate cut in June, when Kevin Warsh (President Donald Trump's nominee to succeed Jerome Powell as Fed Chair) would be leading a policy-setting session for the first. The traders now only see a 55% possibility of a rate?cut in July. This is down from 70% recently. Rate traders are also pricing in a lower chance of further easing after an initial rate cut, with only a 56% likelihood of a second reduction by December.
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Due to the strikes against Iran, Russia has halted construction at Bushehr Nuclear Plant.
Alexei Likhachev, the chief of Rosatom, said that the U.S. and Israeli air attack on Iran has halted the construction of new 'units' of Iran's nuclear 'power plant' in the 'port city' of Bushehr. Likhachev warned earlier of the danger posed by'strikes near Iranian nucleus facilities. He said that explosions were heard 'just a few kilometres from the facility, even though the facility was not being targeted. He told journalists that the work has stopped on the sites of the second &?third units. He said that it was difficult to predict what would happen next, due to the military operations being conducted against Iran. However, our people will stay there and this facility is one of our top priorities. Likhachev stated that there were no electronic or telephone communications with the leaders of 'the Iranian nuclear industry', but contact was maintained with colleagues on a?construction site. Likhachev stated that 639 Russians remain in Iran. Some who are already?in Tehran's capital city, Tehran, are leaving. Likhachev stated that nearly 100 workers, their families, and their homes were evacuated when the U.S., Israel, and other countries began attacking Iran on Saturday. (Reporting Anastasia Lyrchikova; Writing by Lucy Papachristou, Editing by Kevin liffey).
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Qatar curtailment exacerbates Iran war aluminium fears
QatarEnergy announced on Tuesday that it would halt production of aluminium due to the U.S. and Israeli attacks on Iran. Natural gas prices have soared since Monday, when the state-owned company halted production of liquefied gas following Iranian drone attacks against its Ras Laffan facility. QatarEnergy holds 51% of the shares in Qatar Aluminum Manufacturing Co, one of the shareholders in the 648,000-metric-ton per year Qatalum smelter alongside Norway's Norsk Hydro. QatarEnergy holds 51% in Qatar Aluminum ?Manufacturing Co, one of the shareholders in the 648,000-metric-ton-per-year Qatalum smelter alongside Norway's Norsk Hydro. IMPLICATIONS FOR ALUMINIUM PRODUCTION ?ARE UNCLEAR Hydro confirmed that QatarEnergy provided gas to Qatalum. However, the "specific implications" for Qatalum's aluminium production are currently unknown. Qatalum didn't immediately respond to our request for comment. After a 1.7% increase by Monday's close, the London Metal Exchange saw an increase of up to 3.8%, bringing prices to $3,315 per ton. The stoppage has prompted traders to express concern that other countries in the region will soon cease production of the metal, which is vital for construction and transport. The Gulf Cooperation Council countries supplied 8% of world aluminium last year. Morgan Stanley stated in a report that "the situation in the Middle East is fluid, but we do note that the region has a large production and export of aluminium via sea. It also relies on imports of both bauxite alumina and bauxite to keep its smelters operating." Ben Ayre, Kpler's metals analyst and lead for the GCC, estimated that GCC imports of alumina average 680,000 tons per month. He said that only 61,000 tons of the alumina already on the water, bound for the smelters in the Gulf region are already there. The 'Strait of Hormuz is effectively closed to shipping, so another 57,000 tons of alumina destined for Oman will not have to go through it. Ayre stated that "there is an additional?377,000 tonnes en route, and we have 160,000 tones lined up for departure from Australia later this month." In the meantime, a little over 10% of aluminum inventories are stored in the LME warehouse network Exchange data on Tuesday showed that 45,325 tonnes were ordered to be removed from Port Klang in Malaysia. This suggests traders are trying to take advantage of supply shortages. Reporting by Terje Solsvik, Tom Daly, and Pratima Deai, with editing by Stine Jacquejsen, Louise Heavens, and Barbara Lewis
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Shell's Brazil oil 'enormous opportunities' amid Middle East conflict
Shell's CEO for Brazil told reporters that the conflict between Israel and the United States with Iran presents "enormous opportunities" to attract investment to develop Brazil's oil assets. Cristiano Pinto Da Costa, who is a Brazilian politician, said that Brazil's geopolitical stabilty and its track record as a reliable oil-producer give it a definite 'advantage' over other countries, even though he acknowledged the country had limited capacity to increase production in the short term. Brazil will likely benefit "over the medium to long term", he said, touting the record investments made by the London listed oil major of $12.5 billion ($2.4 billion) in the country. We went from?10-15 blocks in 2021, to 50 exploration blocks today. Costa said that this was a consciously strategic decision. Shell's investment in Brazil should continue to grow in the upcoming years, he said. The company is developing assets in the country, such as the Orca oil field. He said that on February 24, Shell 'produced a record 496,00 barrels of oil equivalent per day in Brazil. $1 = $5.2515 reais (Reporting and editing by Gabriel Araujo; Fabio Teixeira, Marta Nogueira)
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The 'Made-in-EU' auto regulations may cause backlash among friends and rivals
The European Union treads a thin line when it comes to plans to introduce "Made in EU" rules for the bloc's automotive industry. It wants to revitalize local manufacturing without damaging relationships with major trading partners. Plans, which are due on Wednesday, as part of an 'effort to boost EU Industry more broadly,' are complicated by a division between the member states. France takes a more protective line, while Germany is more concerned about possible retaliation. Automakers who rely on non EU supplies, or have large operations in non EU countries, such as Ford and Jaguar Land Rover that lobby Brussels, are also opposed. Britain, Turkey and Morocco would like to be included in the 'Made in Europe" rules. But only if their interests are not ignored. The stakes are high. Christophe Perillat said, "If we don’t do this there will be massive relocations," the CEO of French auto manufacturer Valeo, Christophe Perillat on Friday. "I've not seen an industry come back." RETALIATION FEARS According to the latest version of the proposed Industrial Accelerator Act that has been leaked, 70% of an?electric car's cost, excluding its battery, would have to be made in the EU to qualify for EU subsides. The draft also stipulates a minimum EU content for the battery pack, but excludes the cells to acknowledge China's dominance in the global supply chain of battery cells. The European auto industry has been under pressure for a long time. This pressure is intensified with the arrival of Chinese competitors who are rolling out cheaper and more technologically advanced EVs. The French association of small suppliers Fiev claims that its members have lost half their workforce from 2007 to 2024. Its president Jean-Louis Pech warns, however, that employment could again be cut in half by the end if no action is taken. Antoine Doutriaux is the CEO of Plastivaloire. The company makes plastic interior parts, and?closed a French factory last year. He says that not mandating local contents "would be dangerous for European Industry". He claims that Chinese competitors pay 30% less than the US for raw materials, and "do not play by the same rules". Germany's automakers, however, sell more than one-quarter of their vehicles to China, the largest auto market in the world, and are concerned that strict local content rules could spark a trade conflict. Karoline Kampermann is the head of economics, foreign trade and taxation for VDA, a German automobile lobby group. She said: "Further protectionist measures, such as local content requirements, could lead to retaliation from other countries." China has denied that its automakers receive unfair subsidies. It also retaliated to other EU measures, which it considers as protectionists, like EU import tariffs for Chinese-made EVs. "WALKING ON EGGSHELLS" The global auto supply chain is so complex and integrated that it's difficult to determine the local content levels of individual models. A2MAC1, a French company that dismantles cars for automakers in order to evaluate their products, has reviewed two European EVs - the Volkswagen ID.3 and Renault 5 - based upon cost of parts per country. The ID.3 was found to have a value of 86% from the EU, and only 7% from China. This does not include raw materials. It is easily a?made in EU' product. Renault claims that up to 80% suppliers of the Renault 5 assembly site in northern France are located within 300 km. A2MAC1 discovered that EU-based components accounted for only 51% of a car's total cost. China supplied 41%. By excluding the battery, the component that is most dependent on China, the EU content increases to 76%. The Renault 5 would then meet the threshold. The Commission's proposal would only count parts from EU member states plus Iceland, Liechtenstein, and Norway (the European Economic Area) as local content. However, it would also consider parts from "trusted partner" and World Trade Organization agreements. Ford's European Supply Chain, for Example, is heavily dependent on Britain and Turkey. European President Jim Baumbick claims that "excluding these countries would weaken the production within the EU". The?low cost manufacturing hub of Toyota, Stellantis and Hyundai is Turkey. Cengiz Eroldu is the president of Turkish automaker's association OSD. He says that exclusion "poses great risks to our country's investment climate" and inclusion "is a necessity". Chris Heron of the lobby group E-Mobility said that including Turkey would allow Chinese automakers to save on energy and labor while still being eligible for EU subsidies. He said, "It's like walking on eggs,"
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ROI-Iran war exposes 60-40 portfolio frailty: McGeever
Investors are left with an uncomfortable question: How can they hedge their risks when the traditional equity and bond portfolio is no longer working? Investors are under increasing pressure to find a solution, and the answer may not be obvious. However, the volatility of the world markets following the U.S./Israeli attack on Iran last weekend indicates that this will only intensify. As bonds fell across the curve, the implied volatility of U.S. Treasuries rose the most on Monday since April. Implied - U.S. Equity market volatility on Tuesday was the highest since October as stocks all over the world fell. Investors have historically used Treasuries to protect themselves against economic, geopolitical and financial risks. They also use gold, which is considered the safest, most liquid asset. Bonds have historically been expected to increase in value during periods of low risk, which would reduce the volatility of equities. This led to the adoption of the traditional allocation to portfolios: 60% stocks and 40% bonds. Since the COVID-19 outbreak, the US's rising fiscal deficit, public debt and inflation have slowly but steadily undermined the status of Treasuries as the "natural hedge" against equity risks. The safety mechanisms built into the 60/40 Portfolio have been eroded as a result. The authors of an International Monetary Fund (IMF) blog published a report last month that noted how bonds and stocks often move together, particularly during market declines. Investors from all backgrounds, including conservative institutions such as pension funds and insurance companies, are exposed to higher volatility and greater losses. This, of course increases the financial stability risk for policymakers. If diversification fails, it can lead to a cascade of financial instability. "Investors and policymakers need to rethink their risk management in a new world where traditional hedges are no longer effective," they stated. DIFFERENTIATION IN CORRELATION What are the alternative strategies for hedging or diversification that IMF suggests? Blog post highlighted the use of private assets to protect portfolios from market panic, as they are often less volatile than publicly traded assets. Recent events in the?private credit market show that opaque private markets come with their own risks. Post also suggested commodities be taken into consideration. Gold and precious metals have disappointed those who believe that hard assets are the best way to hedge political risk. Bullion, a traditional "safe-haven asset" and hedge against inflation that has been around for centuries, only rose 1% on Sunday and fell 2% on Tuesday. Platinum and silver prices have fallen by 10% since Monday's opening of trading. The precious metals market is driven by short-term flows as well as economic fundamentals. Other commodities, with the notable exceptions of oil and natural gas, are also being sold, such as corn, wheat, and copper. These are certainly short-term moves, but if these don't reverse one wonders what the options are for diversification and hedging. Not Dead Yet Before the Iran strike, Treasuries seemed to be regaining a sense of diversification. Truist Advisory Services reports that the daily correlation between stocks, bonds and the stock market turned negative in the first two month of this year. It was also approaching the average levels seen during the pre-pandemic decade. Was it a temporary anomaly? Keith Lerner is the chief investment officer of?Truist. Lerner says that while the current rise in oil prices may make Treasuries look less attractive due to the possibility of inflation and tighter monetary policies, a prolonged period of high energy costs will become a recession threat. In this case, bonds become attractive once again. Lerner stated that "our view of high-quality bonds as a good portfolio diversifier in general has not changed." Risk-management strategies and diversification methods are often thrown out the window when political factors drive market sentiment and prices rather than economic fundamentals. Investors who are experts in understanding the economy and markets, do not always have the best ability to predict how long a war will last. Bob Elliott, CIO and CEO of Unlimited, said: "It doesn't matter if this conflict lasts a long time or not. It is a lesson to diversify your portfolio to achieve a wider range outcomes." Investors face a difficult challenge. You like this column? Open Interest (ROI) is your new essential source of global financial commentary. Follow ROI on LinkedIn and X. Listen to the Morning Bid podcast daily on Apple, Spotify or the app. Subscribe to the Morning Bid podcast and hear journalists discussing the latest news in finance and markets seven days a weeks.
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Aluminum prices rise as Middle East conflict fuels concerns about supply
Aluminum prices rose Tuesday, as traders were 'alert' to the supply risks in the Middle East due to the U.S.-Israeli air war on Iran that spilled over into neighboring countries. Benchmark Aluminium on the London Metal Exchange rose 2.1% to $3,260 per metric tonne in open-outcry official trading, after reaching a month-high of $3,315. Middle East exports aluminium via the Strait of Hormuz, which accounts for 8 percent of global capacity. Iran threatened to attack any ship that tried to cross the Strait on Monday. Aluminium producers have halted premium offers for Japanese buyers in the second quarter. Norsk Hydro wanted more information when QatarEnergy announced that it was stopping the production of certain downstream products, including aluminum in Qatar. QatarEnergy provides gas to Qatalum - a joint venture between Norsk Hydro and a local company. Spread between the LME cash aluminum contract and the benchmark indicates concern about the availability of metal in the near future. In Tuesday's volatile session, the price was?zero compared with?the last week's $12 discount per ton. Daily LME data revealed that the available aluminium stocks at LME registered warehouses dropped to 375.525 tonnes, their lowest level since September. This was after new cancellations of 45.325 tons in Malaysia's Port Klang. Official activity saw copper drop 1.9% to $12.864 after it hit $12.722, its lowest level since February 19. The U.S. Dollar extended gains with the spike in oil prices and the lack of an end to hostilities. Stocks and government bonds were further eroded, while precious metals fell sharply. Ben Davis, RBC Capital Markets' head of European metals research and mining, said: "It is a whole new world." It was surprising to see the lack of reaction yesterday. But markets are catching up now. Other LME metals fell 7.7%, to $48,550, with signs that?Myanmar’s Wa region is taking steps toward a gradual restart of mining activities. Nickel fell 0.2% to $17,120. Indonesia Nickel Miners Association?said that the government has allocated a quota for nickel ore production of 260 millions?tons by 2026. It added that there will be an option to suggest revisions on the quota. Zinc dropped 0.5% to $3300, after reaching a one-month low at $3248, while lead fell by 0.8% to $1945.5. (Reporting and editing by Louise Heavens; Polina Devtt)
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Analysts say that oil shock could affect emerging markets in ways beyond inflation.
Analysts warn that the war in Iran, and the surge?in energy costs it will cause, will have a significant impact on emerging markets. This includes pressures on currency, capital flows and external balances. Brokerages such as J.P.Morgan, and?Bernstein expect Brent prices will rise 'above a $100 mark if conflict continues. Tehran has vowed that it would close the Strait of Hormuz, and warned any ship attempting to pass through the vital shipping route for gas and oil. Brent crude futures rose $5.63 or 7.2% to $83.36 per barrel at 1254 GMT, after reaching their highest level since July 2024, $85.12. A mere 10% increase in oil prices could erode?current accounts (for emerging markets), by 40-60 basis point. "Prolonged increases will only increase these deficits," analysts from ING?said. They added that Thailand, South Korea, Vietnam, Taiwan, and the Philippines are most vulnerable. The U.S.-Israeli airwar against Iran has widened. Israel attacked Lebanon, and Iran responded?with attacks against energy infrastructure and tankers in the Strait of Hormuz and Gulf countries. The conflict has shaken the global financial markets. Both the emerging market equity and currency indexes have fallen to their lowest levels in three weeks as investors seek the safety of the U.S. Dollar. Analysts said that higher crude oil prices are only a small risk for China, unless they escalate or last a long time. India's thin oil reserves would make it one of the most vulnerable to a disruption in supply. Goldman Sachs estimates that an increase in Brent crude prices from $70 up to $85 will 'add about 0.7 percentage points to inflation in emerging Asia, and slash the economic growth by around 0.5 points, and widen current account deficits in almost every economy in the area, especially Thailand, Singapore, and South Korea. Citigroup warned that a prolonged shock to oil prices could "aggressively" de-anchor inflation expectations in emerging markets. Countries with low reserves, such as Argentina and?Sri Lanka face a heightened risk of capital outflows, and their currencies may fall. Separately, J.P. Morgan analysts added the Polish zloty currency to their list as "underweight". (Reporting from Rashika and Kanchana in Bengalur; additional reporting by Akriti; editing by Devika Syamnath).
Asia Gold-Price dip stops working to stimulate India retail demand; China premiums dip
Gold demand in India somewhat improved this week after costs fixed from a record high but retail purchases stayed lower than normal prompting dealerships to expand discounts, while need in China likewise suffered with premiums edging lower.
In India, the world's second-largest gold customer and a. major importer, domestic rates < were trading around. 71,500 rupees per 10 grams on Friday, after striking a record. high of 74,442 rupees earlier this week.
Gold prices have boiled down, but retail customers are still. waiting on the sidelines, anticipating an even bigger fall, said. Ashish Pethe, partner at Waman Hari Pethe Jewellers.
Indian dealerships offered a discount rate << XAU-IN-PREM > of approximately $13. an ounce over main domestic rates - inclusive of 15% import. and 3% sales levies, versus last week's discount of $10.
In the 2nd half of the week, a few jewellers made small. purchases to renew stocks, said a Mumbai-based bullion. dealer with a private bank.
Meanwhile, India's gold imports in 2024 could fall by almost. a fifth from the previous year, the head of an industry body. told .
In top customer China, premiums << XAU-CN-PREM > were seen. in between $15-$ 20 per ounce over benchmark spot costs,. versus $16-$ 30 last week.
Besides higher costs previously in the week, the current. correction in area gold might have startled some investors, leading. them to await a better entry point, possibly moistening. demand for physical gold, stated Bernard Sin, local director,. Greater China, at MKS PAMP.
Spot gold costs were set for their greatest weekly drop in. over 5 months.
If gold touches the $2,300 level, we can see some physical. buying interest returning into the marketplace, stated Peter Fung,. head of dealing at Wing Fung Rare-earth Elements in Hong Kong.
Bullion is being offered in between at par to $2.50 premiums. << XAU-SG-PREM > in Singapore, and at par to $2.00 premiums. << XAU-HK-PREM > in Hong Kong.
In Japan, dealerships offered gold << XAU-TK-PREM > at a $0.25-$ 0.50. premium, a little lower than last week's variety.
(source: Reuters)