5% Interest Rates, $100 Oil: Market Frustration

Postponing the interest rate decision could prolong uncertainty until December, increasing market fatigue.

During the last Federal Open Market Committee (FOMC) meeting, only 3 out of 12 committee members expressed opposition to freezing interest rates.

During this time, the market tends to move sideways, neither up nor down.

The formation of a market consensus on the pace of rate hikes and the terminal rate level played a more crucial role than the rate hike itself.

This pattern is generally interpreted as a natural phenomenon that occurs as the market adjusts to a new interest rate environment.

Without forward guidance, market uncertainty persists. Regardless of the FOMC's decision, the market is likely to react somewhat sluggishly rather than with an immediate rebound.

When a new economic environment emerges, a period of market adjustment typically follows, during which investors take time to resolve uncertainties.

Nvidia's operating profit margin and memory prices remain at high levels.

However, the pace of China's technological catch-up and whether big tech companies maintain AI investment remain key variables. Despite some market concerns, uncertainties are expected to be resolved only when AI-related companies' earnings actually provide support.

Big tech companies released their earnings at the end of July, and the next announcements are scheduled for the end of October. With midterm elections on November 3 and two interest rate hikes also planned, the market is unlikely to find a clear direction until all these events have passed.

It is expected to be difficult for the market to clearly decide on an upward or downward direction until interest rates have been raised once or twice.

Once earnings announcements are completed and things settle down somewhat, interest in macro risks tends to rise again in a recurring pattern.

Unlike last year, the importance of the overall macro environment has significantly increased this year.

This is why Wall Street is talking about 5% interest rates, and it is analyzed that it would not be strange for interest rates to rise to 5.1%.

However, if interest rates significantly exceed 5.1%, it becomes an attractive price for those investing in US Treasury bonds, potentially leading to buying. Indeed, when interest rates surpassed 5%, Treasury buying entered the market, causing rates to fall back to the 4.9% range. Therefore, the possibility of a sharp surge in interest rates is low, and a market digestion process is needed.

Oil prices are considered one of the most unpredictable indicators, with a very wide margin of error in forecasts.

In fact, many investment banks' oil price forecasts frequently turn out to be inaccurate.

Although there was some hope at one point due to former President Donald Trump's remarks about ending the war after the midterm elections, the war appears to be prolonged. In this situation, analysis suggests that oil prices are increasingly likely to remain in triple digits, i.e., above $100.

Expectations for the US-China summit are not high, with some believing it could be a 'big party with nothing to eat,' similar to previous meetings. There's a view that important agreements may not be disclosed or the situation may not significantly improve.

However, in terms of oil prices, China is analyzed to hold significant influence.

This was due to immediate supply responses from major oil-producing countries like Saudi Arabia.

However, recent geopolitical risks are characterized by oil prices not declining but rather rising or maintaining high levels.

Beginning with the North Sea oil fields, new oil fields were successively discovered in Alaska, Mexico, Russia, and elsewhere, leading to a jackpot of massive supply flooding the crude oil market.

This significantly increased crude oil supply, and oil prices fell sharply, almost collapsing, bringing an end to the era of high oil prices.

Russia mitigated the impact of sanctions by indirectly exporting to countries like China and India.

In particular, the US led the charge in releasing large quantities of strategic petroleum reserves (SPR), which reduced US crude oil inventories to levels seen in the early 1980s. It is emphasized that while building up SPR takes a long time, using it happens in an instant.

China's crude oil imports, which make it the world's largest importer, plummeted to mid-2010s levels after the Russia-Ukraine war. This was a result of China releasing strategic petroleum reserves and significantly reducing imports.

This decrease in China's crude oil demand was a major factor in keeping oil prices below $100. China has a history of responding to falling oil prices by releasing strategic petroleum reserves.

After declining since the Russia-Ukraine war, China's crude oil imports saw a slight increase for the first time in July and August. With China's crude oil inventories being depleted, the resumption of imports could act as an upward factor for oil prices.

This, coupled with the recent Saudi attack issue, could amplify oil price volatility.

While China does not disclose precise reserve information, various agencies, including the U.S. Energy Information Administration (EIA), estimate the reserve gap between the two countries to be approximately 20%.

This suggests that China's influence in the global crude oil market could grow even larger in the future.

The proportion of renewable energy has significantly increased, and diverse crude oil supply sources, including US shale oil, exist, diversifying crude oil supply.

These structural changes act as factors that can limit oil prices from continuously rising as they did in the past.

A comparison of past oil prices converted to current inflation showed that oil prices reached their peak at the start of the Russia-Ukraine war.

However, if China begins to adjust its crude oil imports, oil prices could remain at a neutral level. This suggests that while oil prices will influence interest rate hikes, they may not be a decisive variable.