Hungary Blocks Ukraine and Venezuela's Annexation Call Amid Bullish Markets

Hi all,

A bustling week for nations and market players, racing to get things done before Christmas. While countries and international agencies convene in Dubai for COP28 to discuss climate change targets, numerous exciting and, at times, daunting developments unfold simultaneously.

OPEC effrorts are proving to be vain, fixed-income markets gain confidence in early rate cuts with yields dropping lower, Moody’s issues a negative outlook on China shortly after giving one to the U.S., Venezuela moves to annex its neighbor, and Hungary blocks Ukraine.

Let’s dissect.

Markets Snapshot

Oil Prices

• Oil benchmarks registered their seventh consecutive weekly loss, primarily attributed to concerns about a global supply glut and diminished demand in China, leading to a 3% decline in Brent and a 4% decrease in WTI indices. All OPEC efforts and rescheduled meetings last week failed to keep oil prices afloat, as the market visibly lost confidence in OPEC’s ability to do so.

• Nonetheless, Algeria's Energy Minister Arkab suggested the OPEC+ alliance might extend oil production restrictions beyond Q1 2024, with Algeria planning a voluntary 51,000 bpd cut in addition to a previous 48,000 bpd reduction to stabilize the global oil market.

Federal Reserve

• Fed Chair Jerome Powell has pushed back against expectations of immediate interest rate cuts in the first half of 2024. Powell signaled that the Fed is inclined to keep current interest rates steady at the upcoming December meeting and is still open to potential further hikes.

• The yield on the US 10-year Treasury still dropped below 4.2%, marking a three-month low in response to the latest economic indicators. Job openings in the US have dwindled to their lowest point since March 2021, signaling a slowdown in the labor market.

• Observing recent equity growth and market traders' expectations of rate cuts as early as March next year, it's intriguing to note that market participants appear more dovish and forward-looking than cautious central banks worldwide.

ECB Bonds

• There is growing speculation in the market about potential monetary easing by the ECB in 2024, with expectations fully pricing in six quarter-point rate cuts to lower the key rate to 2.5%. Despite persistent inflation concerns, recent dovish comments from policymakers indicate that rate hikes beyond 4% may not be deemed necessary. This marks a stark contrast to the sentiment just three weeks ago.

Global Finance

China’s Credit Rating Outlook Has Been Cut to Negative

• Moody's has revised its outlook on Chinese sovereign bonds, downgrading it from stable to negative. Although the A1 rating is retained, the agency anticipates that Beijing's provision of support and potential bailouts for struggling local governments and state-owned enterprises could erode China's fiscal, economic, and institutional strength.

  

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• This change in outlook highlights rising concerns regarding China's mounting debt levels and the potential repercussions on overall growth in the world's second-largest economy. As we previously mentioned, Beijing recently announced a rare mid-year fiscal adjustment, issuing 1 trillion yuan ($137 billion) in government debt—one of the largest changes to the national budget in years.

• The credit rating agency anticipates China's economy to grow at a 4% annual pace in 2024 and 2025, significantly below the pre-pandemic 6% to 7% average over the preceding decade.

Geopolitics

Venezuela to Annex Essequibo?

• Venezuela's government claims an "overwhelming victory" in a ‘consultative’ referendum, with over 95% approval for asserting its claim over the Essequibo region, a resource-rich area administered by Guyana.

• Venezuela contends that the Essequibo territory, comprising two-thirds of Guyana, was unlawfully taken a century ago during the Spanish colonial period when Guyana was a British colony. Guyana sees the referendum as a pretext for annexation, causing anxiety among its residents.

  

  Source: X

• Venezuelan voters were asked to express their support for claiming sovereignty over Essequibo, granting citizenship to current and future residents, and rejecting the jurisdiction of the United Nations' top court in resolving the disagreement with Guyana. Despite a lack of real visible voters, the country reported over 10.5 million ballots cast.

• Venezuela's government heavily promoted the referendum, linking participation to patriotism and support for the president Nicolás Maduro. Essequibo-themed music, nationally televised history lessons, murals, rallies, and social media content were utilized to emphasize the significance of the referendum and the integration of Essequibo into Venezuela.

• A few days after referendum, Maduro has directed Venezuela's state-owned firms to issue licenses for the exploration and exploitation of oil deposits and mines in the Essequibo region. He announced the creation of a special military unit for the territory and ordered the release of new maps depicting Essequibo as integral to Venezuela's territory.

Our thoughts:

• With the presidential election scheduled next year, Maduro tries to divert attention from the pressing matters and gain support with the referendum that foster a sense of unity in the country.

• Another obvious objective is to acquire the Essequibo region itslef, spanning 160,000 sq km and surpassing Greece in size, renowned for its abundant mineral resources. It provides access to an Atlantic ocean, where energy giant ExxonMobil identified substantial oil reserves in 2015, making it highly attractive for Venezuela, a founding member of OPEC and one of the world's top oil producers.

• The ramifications of the referendum and Maduro's subsequent directives are currently uncertain, both in practical and legal terms. However, it seems that the government is adopting a clear annexation strategy, seeking to legitimize its territorial claim by showcasing the strong desire of its people to unite with the region.

• A potential conflict between two oil-rich nations could pose a fresh geopolitical challenge for the current US government. Joe Biden’s administration has sought to improve relations with Maduro, anticipating that lifting Trump-era sanctions would nudge him towards democratic reforms and positively impact global oil supplies.

Hungary Opposes Ukraine’s Entry into EU

• Hungary's ruling party has submitted a resolution to the parliament, urging the government not to support the initiation of talks on Ukraine's accession to the European Union.

• While the controversial Hungarian Prime Minister Viktor Orban has cautioned that EU leaders may struggle to reach a consensus on initiating membership talks with Ukraine, suggesting that the issue should not be included on the summit's agenda.

• Under the leadership of pro-russian Orban, Hungary has frequently complicated EU efforts to support Ukraine during Moscow's invasion.

  

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Our Thoughts

• Orban has adopted a highly visible strategy of instigating panic and inducing stress to ennhance his bargaining position before the EU Council Summit. Unanimity among all EU member states is necessary to admit a new country into the bloc, providing Hungary with a powerful veto.

• Currently, The European Commission is withholding approximately $24 billion from Hungary due to concerns related to corruption and a perceived decline in democratic norms under Orban rule. By confronting the rest of the EU, Orban is trying to blackmail Brussels to gain access to billions of euros in EU funding.

Peace Eludes Gaza Once Again, For Now

• Almost 100 hostages held by Hamas were released before the weeklong cease-fire between Israel and Hamas ended on December 1. It is estimated that approximately 140 hostages are still held by the militants. Currently, there are no ongoing negotiations for another cessation of hostilities.

• As a result, Israel expanded its military operations in southern Gaza, targeting about 200 Hamas locations. Concerns rise over Palestinian civilian safety, particularly as many had fled south from northern Gaza

• Meanhwhile, the United States vetoed a draft resolution at the U.N. Security Council on Friday, which called for an immediate humanitarian cease-fire in Gaza. Despite having the backing of the majority of the U.N. Security Council, the resolution was not passed. However, The U.S has warned that Israel must ‘put a premium on civilian protection’ while it battles Hamas.