Oil Jolt Reverberates Across Asset Classes, at Least for Now
Oil’s ripple effect into equities and currencies may be more limited than the dramatic commodity surge suggests, strategists say.
(Bloomberg) -- Oil’s ripple effect into equities and currencies is dominating the market narrative on Monday but may be more limited than the dramatic commodity surge suggests, according to strategists.
The strike, which removed about 5% of global energy supplies, sent oil prices soaring. Brent had its biggest spike in dollar terms since futures started trading in 1988 and topped $71 a barrel. President Donald Trump authorized the release of oil from the U.S. emergency oil reserves. Gold rose about 1%, while S&P 500 futures fell as much as 0.8% but had pared the loss to 0.4% as of 7 a.m. London time. The Norwegian krone and Canadian dollar, both from energy-producing nations, were the best performers among Group-of-10 currencies.
While the attack roiled energy markets, multi-asset investors should look at the bigger picture as there might be opportunities to take advantage, strategists said.
Any initial selling in equities “is likely a buy,” said Kay Van-Petersen, global macro strategist at Saxo Capital Markets Pte in Singapore. “Generally speaking there is a positive correlation over time between oil and U.S. equities. Energy is still likely to stay bid if there is some kind of response from Saudi Arabia and allies. It’s worth noting that the situation is also very dynamic and no doubt they are working 24-7 to repair the damage.”
The incident adds to an already busy week for markets, with policy decisions from the Federal Reserve, Bank of Japan and more as well as Brexit discussions and the open of the United Nations General Assembly regular session.
“This could create a little churn here ahead of the Fed,” said Tony Dwyer, equity strategist at Canaccord Genuity LLC in New York. “Clearly oil is breaking out, but if there were a true fear there it seems like the equity futures would be down more.”
Stephen Innes, Asia-Pacific market strategist at AxiTrader, agreed.
“Investors will turn to bargain-hunting as trade-war winds blow fair and of course with the prospects of Fed easing and all the other central banks leaning dovish,” he said.
A Possible ‘One-Off’
Brian Barish, chief investment officer at Cambiar Investors LLC in Denver, said the oil spike may be a short-term, one-off event.
“I certainly would not run out and make any major decisions based on this,” he said. “The energy market remains generally oversupplied so it’s short-term relief but I don’t see this changing the larger picture.”
There might be opportunities in the currency market, with energy-producing nations faring better and importers having a worse time.
“We should see buying in the Russian ruble as the day rolls on,” said Chris Weston, head of research at Pepperstone Group Ltd. in Melbourne. “This is obviously not a good day if you are an oil importer.”
Read about currency traders piling into the krone and loonie.
For Andrea DiCenso, a portfolio manager at Loomis Sayles in Boston who was visiting Sydney, it was too early to make decisions.
“I personally think it’s unlikely that oil will remain sustainably high given this,” said DiCenso, who also oversees foreign exchange and commodity activity for the firm’s multi-asset strategies said. “You will get a push from short-covering and then some price stabilization once we understand how much is really taken off the market each day.”
Oil-reliant economies like Japan, China, South Korea, India and the Philippines are likely to get hurt most, according to Margaret Yang at CMC Markets Singapore Pte. Energy and oil-related sectors are likely to outperform, she said.
The traditional havens behaved in keeping with a risk-off theme. Treasury futures imply yields will fall three to five basis points across the curve from Friday’s closing levels, and the Japanese yen is up 0.2% versus the dollar. Gold may present an opportunity as well.
“Gold may have just gotten a key catalyst that will allow it to resume its bullish march toward $1,600 an ounce,” said Ed Moya, senior market analyst at Oanda Corp.
Expect increased volatility as geopolitical tensions flare, said Nick Twidale, co-founder at X-Chainge in Sydney.
“The U.S. has already firmly placed the blame for the strikes on Iran’s doorstep and if the situation escalates further from this level we could see much more disruption to oil and overall global markets in the days and weeks ahead,” Twidale said.
--With assistance from Serene Cheong, Tina Davis, Ruth Carson, Moxy Ying, Abhishek Vishnoi and Stephen Spratt.
To contact the reporters on this story: Joanna Ossinger in Singapore at jossinger@bloomberg.net;Andreea Papuc in Sydney at apapuc1@bloomberg.net
To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Adam Haigh, Ravil Shirodkar
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