Markets Scramble and Crude Oil Prices Surge as More Pain is Seen Ahead
Sep 5, 2023
Investors were in a downbeat mood as liquidity poured back into financial markets after closures for the U.S. Labor Day holiday.
Stocks slid across global exchanges while the U.S. dollar traded broadly higher against major currencies and gold declined as bond yields shot higher. Borrowing costs pushed up in tandem across Asia Pacific, European and North American markets.
Surging crude oil prices might be the culprit. The bellwether West Texas Intermediate (WTI) contract is on track to score a fifth-consecutive day of gains, advancing to the highest level in nearly 10 months. Traders may be thinking that higher energy costs will filter into inflation and complicate Fed-led global central banks’ exit from an aggressive interest rate hike cycle and transition to a much-hoped-for reversal in the opposite direction.
Oil prices are up after Saudi Arabia said it will extend through December the production cutback program of 1 million barrels per day (bpd) unveiled in July. The move exceeded analysts’ expectations. Last week, a survey by Bloomberg showed most respondents expected an extension for just one additional month. In a parallel statement, Russia said it would prolong an export reduction of 300,000 bpd through the end of the year.
The bad news might continue. Wednesday’s economic calendar brings three releases that threaten to show the global economy can ill afford an oil price shock as broad-based recession worries deepen. That might keep stocks under pressure as the greenback extends gains.
First up is a monetary policy announcement from Canada’s central bank. It is widely expected to keep the target overnight rate unchanged at 5%, but markets will be keen to hear what officials have to say about the path forward. Gross domestic product (GDP) data published last week showed the economy unexpectedly shrank in the second quarter, with weak external demand and swelling inventories mostly at fault. Nearly 80% of Canada’s exports are heading for the U.S., implying the weakness in these numbers speaks to increasingly difficult conditions in the world’s largest economy.
Next, the monthly purchasing managers’ survey from the Institute of Supply Management (ISM) is expected to show that activity growth the U.S. service sector slowed for a second consecutive month in August, registering at the weakest level since May. This has been a critical area of resilience for the global economy at a time when the Eurozone is all but confirmed to be in recession and China struggles to revive its economy after scrapping COVID-era lockdowns in December. It is also the pocket of sticky inflation most acutely targeted by the Fed. Signs of weakness here may signal that worldwide recession is becoming increasingly unavoidable.
Finally, China is due to report August trade figures. Analysts expect both imports and exports to have fallen 9% year over year, extending a protracted slide in cross-border demand in both directions. Data from Citigroup shows China’s economic data outcomes still tend to underperform relative to baseline forecasts despite a dramatic lowering of growth expectations since mid-July. That opens the door for more downside surprises.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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