Shares skid as oil surge threatens inflation shock

Stock markets fell as the inflationary jolt from rising oil prices threatened to raise living costs and interest rates around the world; Investors suffering from liquidity shortages desperately fled to the US dollar.

Crude oil futures rose almost 30 per cent to almost US$120 ($A171) per barrel on Monday; It was one of the biggest one-day jumps on record and threatened to soar the costs of products from oil to jet fuel.

Brent crude futures were last up almost 13 per cent at US$104.5 ($A149.0) a barrel, while US futures were up 12 per cent at US$101.8 ($A145.1).

Iran appointed Mojtaba Khamenei as supreme leader to replace his father, Ali Khamenei, signaling that conservatives remain firmly in place for a week at war with the United States and Israel.

This situation was unlikely to be welcomed by US President Donald Trump, who declared his son “unacceptable”.

Investors had been preparing for higher energy costs for a long time, as tankers could not cross the Strait of Hormuz due to ongoing conflicts in the Middle East and the threat of Iranian drone attacks.

Investors are waiting for Washington’s reaction, said Helima Croft, head of global commodity strategy at RBC Capital Markets.

“Because there is no clear definition of what winning looks like, it is difficult to predict whether it will take a few weeks or many months.”

This news was good news for Japan, a major importer of oil and natural gas, as the Nikkei closed at 5.2 percent following last week’s 5.5 percent decline.

China, another major oil importer, saw its blue-chip index fall roughly one percent, despite having large stocks of crude oil.

China said on Monday that inflation had already picked up in February before the current oil rally, with consumer prices rising at an annual rate of 1.3 percent.

This is not necessarily a negative development, given that the country has long struggled with inflation.

The market sell-off wreaked havoc on Wall Street, with S&P 500 futures falling by one percent and Nasdaq futures losing over one percent.

European shares fell to their lowest level in more than two months on Monday, while the pan-European STOXX 600 index lost 1.63 percent for its third session of losses.

The benchmark index lost 5.5 percent last week, its worst weekly performance in almost a year.

In bond markets, the risk of rising inflation outweighed safe haven concerns that would push up global yields.

The yield on the 10-year Treasury note rose five basis points to 4.175 percent, from a low of 3.926 percent a week ago.

Interest rate futures fell as investors feared the risk of higher inflation would make it harder for the Fed to ease policy, but disappointing employment numbers appeared to support stimulus.

Data on US consumer prices to be released on Wednesday is expected to show that the annual interest rate will remain at 2.4 percent in February.

The Fed’s preferred measure of core inflation for Friday is expected to remain at 3.0 percent, well above the central bank’s 2.0 percent target, and analysts see a risk of an even higher number.

The threat of energy-fueled inflation has led markets to bet that the European Central Bank’s next move to raise interest rates is likely to be in early June.

For the Bank of England, markets are now pricing in only a 40 per cent chance of another easing, compared to two or more cuts before the Middle East conflict began.

Nervous investors sought the dollar’s liquidity while avoiding currencies from countries that are net energy importers, including Japan and much of Europe.

The dollar strengthened 0.4 per cent to trade at 158.385 yen, outpacing safe-haven demand and sending gold down 1.2 per cent to US$5,106 ($A7,280) an ounce.

The euro fell 0.5 per cent to US$1.1557 ($A1.6477).