A crude awakening? Oil shocks are one thing, but an oil shock into a global downturn is quite another.
After the initial gasps that took Brent crude briefly above $70 for the first time since May, oil prices have settled about 10% higher following the weekend attacks on Saudi production facilities that could hit some 5% of world output.
Brent was trading about $66.50 first thing as investors weighed up the likely length of the outage after drone attacks claimed by Yemen's Houthi rebels set facilities ablaze and sparked another war of words between Washington and Tehran over regional tensions.
The impact of an energy price spike can cut both ways for markets – possibly inflationary on one level, but often depressing growth if weak demand means companies can’t pass on the higher input prices to consumers.
With the predominant fear in world markets now one of a possible downturn or even recession next year and inflation still largely missing in action anyway, higher oil prices are being read mainly as an economic hit.
Stock markets fell, although not dramatically. Tokyo markets were closed for a holiday, but U.S. and European stock futures were down about 0.6% each, Shanghai stocks fell about 0.2% and Hong Kong – weighed down by another weekend of violent street protests – fell about 1%.
Seoul’s Kospi bucked the trend and gained 0.6%. MSCI’s all-country equity index was down just 0.05% first thing, with the emerging-markets component down about 0.3%.
The Saudi attack came as China reported annual industrial production output grew just 4.4% in August, its slowest growth in more than 17 years. Retail sales grew 7.5%, below forecasts. The offshore yuan weakened to 7.0625 per dollar.
On the growth/inflation trade-off, bond markets were clear on their direction. U.S. 10-year Treasury yields dipped about 4 basis points to 1.86% after the attacks, with Wednesday’s expected quarter-point interest rate cut from the Federal Reserve also playing a role.
Bund futures ticked higher early Monday. Beyond the direct economic impact of rising energy prices, the wider geopolitical implications of the attacks also caused a drift to perceived safe havens. The yen gained a bit; dollar/yen recoiled to about 107.50 before bouncing.
Gold prices nudged up. So, overall the financial fallout has been contained. Oil prices are not yet threatening new highs for year in a market reasonably well supplied with U.S. shale output, amid a lengthy conflict that could worsen but is hardly an unknown risk. Coming in a week of Fed easing and stimulus from other central banks also takes the edge off the reaction.
In European news, airlines from Lufthansa to British Airways owner IAG are expected to fall as much as 5% after the surge in prices. Airbus is expected to fall 2% after a report in Politico cited European Union officials as saying that the United States has won a dispute over subsidies to Airbus and gained the right to hit the EU with billions of euros in punitive tariffs.
H&M, the world's second-biggest fashion retailer, delivered a bigger-than-expected rise in fiscal net third-quarter sales and said summer collections had been well-received. The outlook for shares is mixed - one dealer said shares, which hit their highest since December 2017, may fall as investors book profits; another saw the stock getting a lift, although he noted that the beat was driven by favourable foreign exchange.
German lighting group Osram has advised its shareholders to accept a takeover bid from AMS and sell their shares to the Austrian sensor specialist, saying the offer was economically attractive.
— A look at the day ahead from EMEA markets editor Mike Dolan. The views expressed are his own —