Wall Street falls; oil surges; ASX set to tumble
Stan Choe
Updated ,first published
The Australian share market is set to dive at the open as energy supplies continue to take a hit from the war in Iran, with oil rising above $100 a barrel for the first time in four years on Monday morning.
The price of US crude oil surpassed the milestone it last crossed during the invasion of Ukraine on Sunday evening (US time). At 09.21 AEDT, West Texas Intermediate was up 16.7 per cent to $106.04 per barrel, while international standard Brent was up 14.1 per cent to $105.73.
This came after a weak update on the US jobs market sent stocks lower, capping Wall Street’s worst week since October.
The S&P 500 index fell 1.3 percent after a report showed U.S. employers cut more jobs than they created last month.
After falling to 945 points, the Dow Jones index closed with a loss of 453, or 0.9 percent, and the Nasdaq composite lost 1.6 percent. The Australian share market is set to fall heavily, with Saturday futures pointing to a loss of 156 points, or 1.8 per cent, at the open.
The combination of a weak economy and high inflation creates a worst-case scenario for U.S. investors because the Federal Reserve does not have a good tool that can solve both problems at the same time.
“You can’t gloss over this report,” said Brian Jacobsen, chief economic strategist at Annex Wealth Management. “The negative employment figure combined with the big rise in oil prices will cause traders to worry about stagflation risks.”
Stagflation is what economists call the miserable mix of a stagnant economy and high inflation, and a separate report on Friday added to that negativity after showing that U.S. retailers made less money in January than economists expected. This has raised the alarming possibility that spending by U.S. households, the main engine of the economy, could be approaching its maximum level.
Usually when the economy is unstable and the job market is weak, the Federal Reserve lowers interest rates to stimulate business. Lower rates could make it easier for households to get mortgages and companies to raise money to expand, while also boosting stock and other investment prices. The Fed cut its key interest rate several times last year and has indicated more will come this year.
But low interest rates could make inflation worse. The Fed’s hands may be increasingly tied as rising oil prices due to disruptions in the energy sector push inflation up.
Oil prices have risen, with Brent rising from $70 at the end of last week, as the war expands and covers critical regions for the production and movement of oil and natural gas in the Middle East. Much will depend on what happens in the Strait of Hormuz off the coast of Iran, where roughly one-fifth of the world’s oil is carried. Over the weekend, the United Arab Emirates and Kuwait began reducing oil production.
The cuts by the two OPEC members follow many others in the region. Iraq began shutting down production earlier this week as storage tanks began to fill, while Saudi Arabia closed its largest refinery and Qatar closed the world’s largest liquefied natural gas export facility following drone attacks.
The US government on Friday detailed a plan announced by President Donald Trump to provide insurance to ships crossing the strait, but it had little impact on the market.
Of course, the U.S. stock market has a history of rebounding relatively quickly after conflicts in the Middle East and elsewhere, as long as oil prices don’t jump too high for too long. Uncertainty about how high oil prices will go this time and for how long has caused wild fluctuations in financial markets, sometimes on an hourly basis, over the past week.
On Monday, the S&P 500 index lost an immediate 1.2 percent at the start of trading but regained it all and finished the day with a small gain.
Trump’s latest signal on war was that he wanted Iran’s “unconditional surrender” and apparently ruled out negotiations.
In the bond market, Treasury yields have fluctuated as higher oil prices put upward pressure and discouraging updates on the U.S. economy put downward pressure.
The yield on the 10-year Treasury note initially rose to 4.19 percent, then fell to 4.14 percent. This is up from 4.13 percent at the end of Thursday and 3.97 percent a week ago.
Smaller companies often feel the pain of higher borrowing costs more because most need to borrow money to grow. Smaller companies can be more reliant on the strength of the U.S. economy for profits than larger multinational rivals, and the smallest stocks on Wall Street suffered some of the sharpest declines on Friday.
The Russell 2000 index, which covers small stocks, led the market with a 2.3 percent decline.
Among the S&P 500’s largest companies, companies with high fuel bills led the decline. Old Dominion Freight Line lost 7.9 percent, cruise line Carnival lost 5 percent and Southwest Airlines lost 5.3 percent.
In total, the S&P 500 fell 90.69 points to 6,740.02 points. The Dow Jones Industrial Average decreased by 453.19 points to 47,501.55, and the Nasdaq composite index decreased by 361.31 points to 22,387.68 points.
In foreign stock markets, indices in Europe declined following the good closing in Asia. In London, the FTSE 100 fell 1.2 percent, while the Hang Seng in Hong Kong rose 1.7 percent.
South Korea’s Kospi index was virtually unchanged after falling 12.1 percent on Wednesday, its worst loss in history, before recovering 9.6 percent on Thursday.
access point
The Market Summary newsletter is a summary of the day’s transactions. Let’s each take ittoday afternoon.
