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Saturday, March 2, 2024

Rising oil prices spark inflation fears, causing stocks to fall

Oil prices inching closer to $100 per barrel are intensifying expectations of prolonged higher interest rates, exerting continued pressure on global markets. The U.S. benchmark oil price briefly breached $95 per barrel, a level not seen in over a year, while Brent remained near $97. A decline in stockpiles at a major storage hub highlighted a widening global supply shortage.

The potential ripple effect on inflation is keeping the 10-year Treasury yield around 4.6%, its highest since 2007. The dollar saw minimal movement following its longest winning streak in a year. In Europe, the Stoxx 600 slipped by 0.4%, and U.S. futures posted modest declines.

Arnaud Girod, Head of Economics and Cross-Asset Strategy at Kepler Cheuvreux, commented, “The combination of surging oil prices and rising interest rates is certainly unfavorable for stock markets.”

Hawkish remarks from central banks have dashed hopes for a swift shift toward lower interest rates, making September the worst month for global stocks in a year and the weakest for global bonds since February.

Simultaneously, Neel Kashkari, President of the Minneapolis Federal Reserve, cautioned that a potential U.S. government shutdown and the effects of an autoworker strike could slow the economy, potentially reducing the need for aggressive central bank action. Kashkari stated in a CNN interview, “If these downside scenarios impact the U.S. economy, we might need to take less drastic monetary policy measures to bring inflation back down to 2%.”

Federal Reserve Chair Jerome Powell and several other central bank officials were slated to speak on Thursday. Upcoming data releases include U.S. gross domestic product and initial jobless claims, ahead of the personal consumption expenditures price data on Friday, which is the Fed’s preferred inflation gauge.

Global stocks also face the risk of further selling due to a significant options position held by a JPMorgan Chase & Co equity fund. Tens of thousands of protective put contracts held by the fund are set to expire on Friday at a strike price not far below the current level of the S&P 500, potentially leading to market disruptions.

In China, mainland shares edged lower ahead of an extended break for onshore markets, which will close on Friday and reopen on October 9. Chinese developers extended their losses after falling to levels not seen since 2011. Trading in China Evergrande Group was suspended in Hong Kong, and bondholders of Country Garden Holdings Co Ltd reported that they had not received a coupon payment due on Wednesday.

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