After three weeks of fairly decent gains equity markets have come under pressure in early trading in the wake of heightened tension in the Middle East and a sharp rise in oil prices, in the wake of the drone strikes on Saudi Arabia’s oil production facilities, which took out a decent proportion of its output capacity.
Fears over the removal of up to 5% of the world’s oil production capacity has seen Brent prices post their biggest ever one day jump, rising to their highest levels since May, though we have pulled back from the highs of the day. Some of these fears have been tempered ahead of an update on the damage later today, while reassurances from Russian oil minister Novak that there is plenty of spare capacity have also helped temper some of the sharp rise in prices.
Investors appear to be weighing up the consequences of a number of different factors, including the likely reaction function of the US to an attack on one of its key allies in the region, and a possible retaliatory strike against Iran, and the longer term effect such a loss of capacity might have on a global economy, which is slowing down and that still appears over supplied.
Talk of a supply shock seems premature at this time, given that a lot of the concerns about lost capacity might be misplaced, and with the US ready to release spare capacity from its strategic reserves, oil prices have already slid back from their highs and could well slip back further. If prices continue to climb sustainably higher then these concerns would be valid.
To reinforce those concerns about a slowdown the latest Chinese economic numbers have shown that both industrial production and retail sales have slowed further in August. Industrial production rose by 4.4% its slowest pace since 2002, while retail sales also slipped to 7.5%.
The last thing the beleaguered travel sector needs is sustained higher oil prices so it’s no surprise that airline stocks have come under pressure in early trade with IAG and EasyJet sharply lower, while BP and Royal Dutch Shell are higher.
UK supermarket Sainsbury’s appears to be following in sector peer Tesco’s footsteps, by looking to hive off some its non-core assets with reports it is looking to explore the possibility of selling its £1.2bn mortgage business.
Swedish high street retailer H&M shares have been on a slow climb for the last few months on hopes that the worst of its recent problems appear to be behind it. Earlier this year the company reported that sales were rising despite profits being sharply lower from a year before. The company has been having trouble reducing its high inventory levels and this has raised concerns that it is achieving sales at the expense of its margins. Sales for the quarter rose 12% to Skr62.2bn, the sixth successive rise in sales, however investors appear less convinced with the progress with the shares dropping sharply on the open.
Tullow Oil shares are also higher after the company announced that it had successfully made a new discovery in the Guyana basin as part of its Joe-1 exploration programme. The discovery of new oil in the upper tertiary basin has raised hopes that higher value discoveries could manifest in the coming weeks, helping prompt further share price gains.
The rejection by the London Stock Exchange of last week’s £32bn HKEX bid doesn’t appear to have deterred HKEX management, who look set to launch a charm offensive on LSE shareholders. While one can see the attractions of what looks like a lucrative deal, the political risk given current events in Hong Kong cannot be understated. There is also the fact that over half of HKEX board is appointed by the Hong Kong government, meaning the business would be susceptible to political interference.
For that reason alone, regulators should be wary of waving this deal through, while the LSE, Refinitiv deal would also find itself the victim of any successful bid.
After five weeks of gains against the euro the pound may is slightly weaker as party conference season gets under way, and Prime Minister Johnson heads to Brussels for lunch, and possibly a couple of sherries with European Commission President Jean Claude Juncker.
Commodity currencies, unsurprisingly have moved higher led by the Norwegian Krone and Canadian dollar after the sharp rise in oil prices.
Gold prices have also rebounded pushing back above the $1,500 level, along with silver which has also recovered some ground after some big losses last week.
US markets look set to pull back from their recent peaks, having failed to move beyond their recent record highs, as a predominantly risk off tone creeps back into market sentiment.