US equity indices retraced mildly from their recent peak on rising geopolitical tensions surrounding the gulf area and surging oil prices.

Gains in energy (+3.29%), real estate (+1.02%) and utilities (+0.08%) helped to offset a broad sell-off in other sectors. Higher crude oil prices will bring a negative impact to the economy, adding cost burden on energy, transportation and raw materials.

Geopolitical risk remains the key catalyst to dominate trading for the rest of the week. President Trump said Iran appeared to be responsible for the Saudi Arabian oil facility attacks over the weekend. This has raised the likelihood of a US military response to Iran in retaliation, and marks a significant backlash in the prospect of US-Iran talks to remove current sanctions.

Saudi’s state oil company Aramco said they are becoming less optimistic on the pace of output recovery, and the maximum spare capacity that could be brought into production in the coming weeks is estimated at about 3.9m barrels a day. The attacks had caused a shortage of 5.7m barrels of Saudi crude output a day.

Both China’s industrial output and retail sales growth in August fell short of market expectations, cooling off to decade-low levels. Industrial output grew by only 4.4% year on year, dragged down by slower manufacturing and mining activities. Part of the reason is due to sluggish property construction and weakening domestic demand.

This cyclical downturn will probably get worse by an impending 15% tariff increase by the US on $300 billion goods on 1 September. Due to the absence of ‘front loading’ activities, China’s export in August has fallen by 1% from a year ago as heightened tariffs inhibited shipping of goods from China.

Retail sales in August grew at a pace of 7.5%, below expectations of 7.9%. Retail sales growth resumed its multi-year downward trajectory since July, suggesting domestic consumption remains weak. Auto sales growth – the barometer of consumer sentiment – has fallen by 6.9% in August, marking its 14th consecutive month of decline.

Recent trade developments, including China’s exception of US agricultural goods from additional tariffs, has ignited the prospect of an ‘interim deal’. Worsening economic data will call for more stimulus and a softened stance to negotiate a deal with the US.

Crude Oil Brent (Cash) chart

 

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