October is a month known for famous stock market crashes and fabled volatility. However, it should be comforting to know that these market episodes are actually outliers in history. Price charts tell us that, in most years, any shake out in equities has already taken place in September. Sadly, this month has started on a rocky road with numerous headwinds hitting risk sentiment.
Immense uncertainty surrounds the medium-term outlook for US fiscal policy. The never-ending debt ceiling issue could result in the US Treasury running out of cash and a potential default event. Budget reconciliation measures may need to be used as the Republicans and Democrats engage in a risky and protracted battle.
There is also no guarantee that even a short-term extension of the spending authority will help, with the 2022 mid-term election year and President Biden’s infrastructure push still in play over the medium term.
The markets are facing other stiff headwinds in the meantime. The global energy crisis has seen natural gas prices surge to record highs recently as Europe and Asia fight over shipments. Recent price gains saw gas in Europe and the UK trade at more than $200-a-barrel of oil equivalent, or almost three times the price of crude.
Since lockdowns have eased, there has been a rapid increase in energy demand, with governments also looking to reduce reliance on highly polluting coal. This is putting pressure on European policymakers and governments, especially to protect consumers and households from higher costs through subsidies. Historically low gas inventories, which is particularly the case in the UK, as fears of a cold winter in the northern hemisphere increase, also mean the gas market is very tight.
The price explosion has added fuel to a recent drop in bonds prices, with traders pushing the widely watched US 10-year Treasury bond yield above 1.5 percent to levels not seen since June. This suggests markets are becomingly increasingly concerned about inflation due to the rallying energy prices and continued supply chain disruptions.
How policymakers at the world’s central banks respond to the energy price spike is key for foreign exchange markets going forward. As inflation expectations move higher and output gaps are slowly closing, so the monetary policy stimulus punchbowl is being taken away.
The US Federal Reserve is near the front of this queue, with its recent hawkish shift boosting the dollar. At present, those currencies of the big gas exporters like Norway and Russia have been outperforming.
Oil is further adding to this inflationary cocktail with Brent and WTI crude trading at multi-year highs as OPEC+ plays it steady on supply increases. The group recently agreed to continue with its additional 400,000 barrels per day in November based on “current oil fundamentals and the consensus on oil outlook”, dashing hopes of extra production.
Inevitably, fuel switching seems to be picking up due to high gas prices, with the demand spill from natural gas and coal into oil products for heating and manufacturing.
The lack of urgency from OPEC+ alarmed traders, as the risk of higher prices potentially leads to demand destruction. OPEC+ is set to meet next on November 4 to decide on December output. If the current energy crunch situation continues, pressure to raise production will grow increasingly loud. The next major Brent target to the upside is the 2018 high at $86.75.
Hussein Sayed, chief market strategist at Exinity Group.
Follow us on
For all the latest business news from the UAE and Gulf countries, follow us on Twitter and LinkedIn, like us on Facebook and subscribe to our YouTube page, which is updated daily.
By Hussein Sayed
More of this topic
Energy crunch turns heat up on inflation and global policymakers
If the current energy crunch situation continues, pressure to raise production will grow increasingly loud
October is a month known for famous stock market crashes and fabled volatility. However, it should be comforting to know that these market episodes are actually outliers in history. Price charts tell us that, in most years, any shake out in equities has already taken place in September. Sadly, this month has started on a rocky road with numerous headwinds hitting risk sentiment.
Immense uncertainty surrounds the medium-term outlook for US fiscal policy. The never-ending debt ceiling issue could result in the US Treasury running out of cash and a potential default event. Budget reconciliation measures may need to be used as the Republicans and Democrats engage in a risky and protracted battle.
There is also no guarantee that even a short-term extension of the spending authority will help, with the 2022 mid-term election year and President Biden’s infrastructure push still in play over the medium term.
The markets are facing other stiff headwinds in the meantime. The global energy crisis has seen natural gas prices surge to record highs recently as Europe and Asia fight over shipments. Recent price gains saw gas in Europe and the UK trade at more than $200-a-barrel of oil equivalent, or almost three times the price of crude.
Since lockdowns have eased, there has been a rapid increase in energy demand, with governments also looking to reduce reliance on highly polluting coal. This is putting pressure on European policymakers and governments, especially to protect consumers and households from higher costs through subsidies. Historically low gas inventories, which is particularly the case in the UK, as fears of a cold winter in the northern hemisphere increase, also mean the gas market is very tight.
The price explosion has added fuel to a recent drop in bonds prices, with traders pushing the widely watched US 10-year Treasury bond yield above 1.5 percent to levels not seen since June. This suggests markets are becomingly increasingly concerned about inflation due to the rallying energy prices and continued supply chain disruptions.
How policymakers at the world’s central banks respond to the energy price spike is key for foreign exchange markets going forward. As inflation expectations move higher and output gaps are slowly closing, so the monetary policy stimulus punchbowl is being taken away.
The US Federal Reserve is near the front of this queue, with its recent hawkish shift boosting the dollar. At present, those currencies of the big gas exporters like Norway and Russia have been outperforming.
Oil is further adding to this inflationary cocktail with Brent and WTI crude trading at multi-year highs as OPEC+ plays it steady on supply increases. The group recently agreed to continue with its additional 400,000 barrels per day in November based on “current oil fundamentals and the consensus on oil outlook”, dashing hopes of extra production.
Inevitably, fuel switching seems to be picking up due to high gas prices, with the demand spill from natural gas and coal into oil products for heating and manufacturing.
The lack of urgency from OPEC+ alarmed traders, as the risk of higher prices potentially leads to demand destruction. OPEC+ is set to meet next on November 4 to decide on December output. If the current energy crunch situation continues, pressure to raise production will grow increasingly loud. The next major Brent target to the upside is the 2018 high at $86.75.
Hussein Sayed, chief market strategist at Exinity Group.
Follow us on
Latest News