Monday 20 November 2017

Markets struggle as oil slumps to seven-month low

Traders work on the floor of the Buenos Aires Stock Exchange in Buenos Aires' financial district, Argentina
Traders work on the floor of the Buenos Aires Stock Exchange in Buenos Aires' financial district, Argentina

A renewed slump in oil prices to seven-month lows dragged down world stocks and long-term bond yields on Wednesday, as bets that global inflation and interest rates will stay lower for even longer began to build again.

Signs of a growing glut of supply sent Brent crude futures skidding back to $45.50 a barrel before talk of more Opec cuts halted the slide and steadied government debt yields and Wall Street futures prices.

Poorly-performing banking stocks continued to hold down Europe's main markets in London, Paris and Frankfurt though they too were off their lows as energy firms began to recover.

The earlier slide in energy costs had boosted bond prices and flattened yield curves as investors priced in lower inflation for longer, while safe-haven flows underpinned the Japanese yen.

The spread between yields on US five-year notes and 30-year bonds shrank to the smallest since 2007 as investors wagered the Federal Reserve might have to delay further rate hikes.

Thirty-year German debt yields bonds also tumbled back towards two-month lows, adding to a more than 20-basis-point drop over the past month and ahead of what will now be a closely watched sale of 30-year debt in Berlin later.

The recent setback for crude and commodity prices as well as some equity markets is partly down to doubts over US President Donald Trump's promised multi-trillion dollar stimulus programme, which had raised hopes of boosting inflation and growth.

"Brent now the lowest since mid-November: remember that whole reflation thing? No, neither does the market," Rabobank analysts told clients, referring to Brent crude futures, which have slid almost 10pc this month.

Oil had nudged its way back above $46 ahead of US trading. It shed 2pc on Tuesday, taking US crude futures 20pc off recent highs and thus into official bear territory, a red flag to investors who follow technical trends.

It also meant oil was on course for its worst start to a year since 1991.

In Asia there had been muted reaction to global index provider MSCI's decision to add the first batch of mainland Chinese stocks to its popular emerging equity benchmark.

Indexes in Shanghai and Shenzen moved around 0.5pc higher after the decision, which could ultimately bring $340bn of foreign capital to the so-called A-share market. The commodity and bond market turbulence and falls in Europe pushed MSCI's all-country share index down 0.2pc. (Reuters)

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