Oil prices rise, ASX set to fall
Stan Choe
Another rally in oil prices has rattled stock markets as hopes for a possible Fed cut this year collapsed.
The S&P 500 index fell 1.5 percent, closing for the fourth consecutive week and experiencing its longest winning streak in a year. The Dow Jones fell 443 points (1 percent) and the Nasdaq composite fell 2 percent. The Australian share market is poised to fall, with futures pointing to a loss of 156 points, or 1.8 per cent, at the open. The Australian dollar was trading at 70.10¢ at 5.22am AEDT.
The market’s losses deepened as oil prices erased an early decline and accelerated on Friday afternoon (Saturday AEDT). Brent crude oil, the international standard, increased by 3.3 percent and settled at $112.19 per barrel. Benchmark US crude oil increased by 2.3 percent to $98.32 per barrel. Oil prices are expected to rise again when trading resumes this morning.
Stocks also buckled under the weight of rising yields in the bond market. Higher yields make mortgage interest and other borrowing more expensive for U.S. households and companies, slowing the economy and lowering the prices of all kinds of investments. Treasury yields are rising on concerns that a war with Iran will lead to a long-term rise in oil and natural gas prices, increasing inflation.
Concerns have grown so much that investors have canceled nearly all their bets that the Fed might cut interest rates this year, according to data from CME Group. Some even think the Fed may raise interest rates in 2026; This is an almost unthinkable scenario before the war begins.
“I think it’s going to shake up the market,” Ann Miletti, head of equity investments at Allspring Global Investments, said of the rate hike. However, he also said that if oil prices remain high for a long time, it will negatively affect the economy so much that the Fed will not increase interest rates.
Low interest rates would boost the economy and investment prices, and that’s something President Donald Trump angrily wants. Before the war, traders were betting heavily that the Fed would cut interest rates at least twice this year.
But lower rates carry the risk of worsening inflation. And investors now see little room for central banks around the world to cut interest rates to help their economies. In addition to the Federal Reserve, central banks in Europe, Japan and the United Kingdom also kept interest rates steady last week.
The price of Brent crude oil zigzagged sharply from around US$70 per barrel before the start of the war to US$119.50 this week. Huge swings occur from hour to hour as financial markets try to gauge how long the war will last and how much damage it will cause to oil and gas production in the Persian Gulf.
The U.S. stock market has a history of rebounding relatively quickly from past conflicts in the Middle East and elsewhere, as long as oil prices don’t stay too high for too long. Miletti said oil prices are not yet at the red flag point, but “if the period is long enough, we’re getting close.”
“If we are in a similar situation three months from now, not only me but many other investors will be much more careful,” he said. Although companies were able to adapt to gradual increases in oil prices, Miletti said they were not able to quickly change their business models after the sudden rise became the new normal.
On Wall Street, Super Micro Computer lost a third of its value and fell 33.3 percent, helping send the U.S. stock market plunging. The U.S. government has charged the company’s senior vice president and two others with conspiring to smuggle billions of dollars’ worth of computer servers containing advanced Nvidia chips into China.
The company said it was cooperating with the investigation and was not a defendant in the indictment. It placed two accused employees on administrative leave and terminated its relationship with an accused contractor.
Nearly three in four stocks in the S&P 500 fell. Shares of smaller companies, which feel the impact of higher interest rates more than their larger rivals, led the decline. The Russell 2000 index, which covers small stocks, led the market with a 2.3 percent decline.
Among the few gainers was FedEx, which rose 0.8 percent after reporting a much stronger profit than analysts expected in the latest quarter.
Overall, the S&P 500 fell 100.01 points to 6,506.48 points. The Dow Jones Industrial Average decreased by 443.96 points to 45,577.47, and the Nasdaq composite index decreased by 443.08 points to 21,647.61 points.
In the bond market, the yield on the 10-year Treasury note rose to 4.38 percent, from 4.25 percent at the end of Thursday and from 3.97 percent before the war began. This is an important move for the bond market.
The two-year Treasury yield, which more closely tracks expectations for what the Fed will do, jumped to 3.88 percent from 3.79 percent at the end of Thursday, near its highest level since the summer.
When bonds pay more interest, they make other investments less attractive. This is especially true for things like gold, which return nothing to their investors. The price of gold finished the week at $4,574.90 per ounce, damaging its reputation as a safe place for money in uncertain times. Earlier this year, gold was breaking records and briefly rose above $5,400 per ounce.
Outside of Wall Street, stock indexes in Europe fell sharply following declines on Thursday. Indices also fell in China, but South Korea’s Kospi gained 0.3 percent.
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