Business Maverick

Business Maverick

Oil stokes inflation risks, weighing on US futures: markets wrap

Oil stokes inflation risks, weighing on US futures: markets wrap
An interior view of Frankfurt Stock Exchange in Frankfurt am Main, Germany, 14 March 2023. (Photo: EPA-EFE / Ronald Wittek)

US equity futures were on the back foot and the dollar rose with Treasury yields as the surprise production cut from OPEC+ drove oil prices about 6% higher.

The jolt from the group’s decision to reduce output by more than 1 million barrels a day came as a jolt to global markets on Monday. It reverberated across asset classes as investors rushed to adjust for the risk that inflationary pressure may be more persistent than previously thought.

The dollar extended gains for a second day and strengthened against most Group-of-10 currencies. The Norwegian krone was little changed after an earlier rally on the expected benefit to the Scandinavian country from higher energy prices. 

The policy-sensitive two-year Treasury yield jumped eight basis, pushing it back above 4.1% as traders weighed the announcement from OPEC+, which had previously given assurances that it would hold supply steady. Treasuries had ended the first quarter on Friday with yields falling as investors wagered that interest-rate cuts were on the horizon.

Futures for the S&P 500 fell 0.3% and those for the Nasdaq 100 declined 0.6% as positive sentiment from Friday ebbed. The S&P 500 had jumped 3.5% last week, the most since November, while the tech-heavy Nasdaq 100 notched its biggest quarterly gain since June 2020. 

“For equity investors, this could be a rude awakening, as markets imply a Goldilocks outlook of reduced discount rates but no recession,” said Ronald Temple, chief market strategist at Lazard Ltd. in New York. “The OPEC+ production cut is another reminder that the inflation genie is not back in the bottle.”

Goldman Sachs Group Inc revised its price forecast for Brent crude on the output cut, projecting it to reach $95 per barrel this year-end and $100 in December 2024, analysts including Daan Struyven and Callum Bruce wrote in a note.

Shares rose in Japan and Australia, with Asian energy stocks advancing. Semiconductor stocks, however, slid after Beijing launched a security review of imports from Micron Technology Inc. 

Equities in Hong Kong fell slightly while those in Shanghai posted a small gain. Caixin manufacturing PMI data registered a larger-than-expected drop on Monday, suggesting some weakness in China’s economic recovery.

The bumpy open to Monday trading and fears of rising prices contrasts with the upbeat tone last week that came with turmoil in the banking sector receding and cooling in a key measure of US inflation. 

Excluding food and energy, the Federal Reserve’s preferred inflation gauge — the personal consumption expenditures price index — rose 0.3% in February, slightly below the median estimate. That suggested the Fed may be close to ending its rate-hiking campaign. The PCE price index was up 5% from a year earlier, a deceleration from January but far higher than the Fed’s 2% goal.

The OPEC+ cut, combined with increased energy demand from China, will raise the danger of more persistent inflation, said Lazard’s Temple. “It also likely limits the latitude central banks might have to relax monetary policy even if the economy slows,” he added.

“We’re now probably about to enter a very short-term down leg again,” Paul Gambles, MBMG Group co-founder and managing partner, said on Bloomberg Television. “We’ve had a year of pretty irresponsible policy guides and all the damage that they’ve done is now starting to show up.”

Elsewhere in markets, gold and Bitcoin declined. The cryptocurrency notched its best quarter since March 2021 with a gain of about 70% in the first three months of this year. BM/DM

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