Market Strategists Map Out Implications From Oil-Attack Shock

(Bloomberg) -- With the U.S. and Saudi response to Saturday’s attack on a critical oil facility in Saudi Arabia still to come, strategists are starting to pencil in the implications for global assets.

Monday’s initial surge in crude started to fade Tuesday, when the effects in other markets also appeared scant. Asian stocks saw a mixed session, with U.S. futures and the dollar little changed.

Even so, Morgan Stanley strategists led by Andrew Sheets cautioned that a move like the one on Monday -- when West Texas Intermediate surged 15% -- can have a lasting impact.

“Similar large one-day spikes (driven by supply) have been followed by below-average returns for commodities, credit, commodity/EM currencies and EM equities in the next six months,” Sheets and his team wrote in a note Monday. “Bonds, the U.S. dollar and yen have done well. In equity sectors, staples, financials and stocks outperformed on average.”

The following are further perspectives on the implications:

Eastspring Investments

The Federal Reserve will have to weigh whether the move in oil is a short-term disruption or the start of a prolonged oil shock, according to Virginie Maisonneuve, chief investment officer at Eastspring said in an interview with Bloomberg Television Tuesday.

“If this tension lasts for a little bit longer, Trump might get his Christmas early in terms of rate cuts,” she said.

Read more from JPMorgan’s strategists warning that oil at $80 is where the S&P 500 breaks

Citigroup

“A supply side oil shock is unhelpful for global equities,” analysts including chief global equity strategist Robert Buckland at Citigroup Inc. wrote in a research note.

Stocks in Russia, Norway, Canada and the U.K. tend to perform best when oil prices rise, alongside the energy and materials sectors -- which also feature heavily in most global indexes, the analysts said. Stocks in Turkey, India and Indonesia would likely underperform, they added.

Nomura

Any sort of a hawkish turn by the Fed in reaction to the potential inflation implications of oil-price gains could affect trend-following strategies, according to Nomura Holdings Inc.

Masanari Takada, a cross-asset strategist at Nomura, warned of a “nightmarish” situation for commodity trading advisors. The long positions in bond futures and short positions in commodity futures they built up through August “are now being knocked down in domino-like fashion,” Takada wrote in a note to clients.

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