- Oil prices continue to rise as tight supply kicks in
- Rising bond yields put pressure on equity markets
- Dollar rally takes a breather, helping to boost gold
Soaring oil prices spell trouble for euro and yen
The global markets begin a pivotal week with another sharp increase in oil prices. WTI crude prices have risen more than 30% this quarter due to a supply shortage caused by Saudi Arabia and Russia reducing their production.
It is notable that oil prices continue to rally despite concerns about lower demand from Europe and China. This demonstrates the tightness in the supply side of the equation. The fact that oil prices rose on Friday, even during a risk-off period in equity markets, further supports this notion.
The rising oil prices have implications beyond energy markets. They put pressure on consumers and contribute to inflationary pressures. This complicates matters for central banks, which now have to deal with the risk of persistently high inflation amidst an economic slowdown.
Soaring oil prices have a negative impact on the currencies of energy-importing economies, particularly the Eurozone and Japan. This is due to the indirect effects on trade and economic growth. Therefore, the evolution of energy prices will be crucial for the euro and yen, which are already facing challenges.
Stocks decline as yields jump
On Friday, Wall Street experienced a decline in stock prices, with the tech sector leading the way. Some analysts attribute the sell-off to the massive option expirations from the previous week, while others point to the consistently rising bond yields.
It seems that stock markets are feeling the impact of rising yields, as last week saw a shift away from tech shares towards value-oriented stocks. This is a typical response to elevated yields. The pressure is expected to continue, especially as 10-year US Treasury yields briefly reached their highest levels since 2007 due to rising energy prices.
In summary, the impressive rally in stock markets this year appears to be losing momentum and could potentially reverse. Valuations remain historically high, leaving Wall Street vulnerable if bond yields continue to rise. Earnings have fallen for three consecutive quarters, raising questions about whether they will rebound in the fourth quarter as analysts project, given the imminent global growth slowdown indicated by business surveys.
Dollar takes a break, gold rebounds
In the currency markets, the US dollar took a slight step back on Friday and remains under pressure. Despite the record-breaking US yields and stock market decline, the dollar failed to strengthen.
This cautious sentiment could be attributed to the upcoming FOMC decision on Wednesday, which has kept dollar traders on edge. In addition to the Federal Reserve, central bank meetings in the United Kingdom, Switzerland, and Japan are also on the agenda for the week. As a result, the markets can expect heightened volatility.
Gold prices staged an impressive recovery on Friday, erasing earlier losses and trading even higher. The fact that gold managed to close higher during a week when the US dollar and Treasury yields were rising is noteworthy and suggests a hidden demand for gold, possibly from central banks increasing their reserves.
This is further supported by the fact that gold is trading just under 8% below its record highs, despite rising yields. However, this relative resilience is not enough to turn the outlook positive. For a more positive outlook, the economic landscape would need to shift, causing market concerns about a recession and speculation of interest rate cuts by the Federal Reserve. Currently, these scenarios are not on the horizon.
