Spike in Oil Price Drives Global Markets Lower
Globally stock markets have sold-off this week as geopolitical unrest spreads in the Middle East with violence increasing in Libya, a major oil-producing state. The broad losses came after April Nymex crude oil futures rose past $US100 a barrel for the first time in over 2 years, due to the potential of disruptions to supplies. Brent Crude rose to over $US120 a barrel. Overnight the crude oil futures price spiked above $US103 as the Libyan rebels that are controlling large areas within the country promised an offensive against the capital, Tripoli.
Investors are concerned that the rising crude prices will hurt consumer spending and ultimately slow down the global economic recovery, and that the turmoil could spread to other oil exporters in the region.
Trading in the Australian market has been dominated by investor sentiment from overseas. The earthquake in Christchurch has again put the spotlight back on the insurers. Stocks sensitive to higher oil prices weighed on the market, and even the local energy sector sold off. Small and mid cap resource stocks have seen profit-taking recently as oil is a major input cost for these mining operations. The federal government is revisiting the imposition of a carbon tax and this has added to the negative investor sentiment. Traders have used this week’s corporate earnings reports as an excuse to take profits, resulting in a number of “bull traps” being triggered, as discussed in the Analyst’s Eye this week.
The ASX All Ordinaries has backed off the 5000 level, while the S&P ASX 200 failed to reach the key psychological level of 5000.
The US markets traded lower in a week shortened by the Presidents’ Day holiday. These markets have seen their biggest falls since last August. The three major markets are testing their 50 day moving averages where we would normally expect to see some short-term support. However, if oil prices remain at these elevated levels then this support is likely to give way near-term.
Overnight the Dow closed down -0.3% at 12,068, while in the broader market the S&P 500 index was down -0.1% at 1,306 and the tech-heavy Nasdaq ended up 0.6% at 2,738. The S&P 500 held below key support at 1324. The next target is 1275.
European stock markets are backing off two and a half year highs, having sold-off sharply this week, due to the Middle East unrest, the oil price spike and concerns over the global economic recovery. The Stoxx Europe 600 index has fallen for a fifth straight session.
Libya is the first major oil exporter to be engulfed by the crisis and there are fears that the unrest will continue to spread in the Middle East, seriously impacting oil production in the medium term. Libya exports around 1.2 million barrels of oil a day – Saudi Arabia, on the other hand, exports 6.5 million barrels a day.
The 3 major European markets (U.K., France, and Germany) are testing their 50 day moving averages, where we would expect to see some short-term support, but again if oil prices remain at these elevated levels then this support is likely to give way near-term.
Overnight in London, the FTSE 100 index closed down -0.1% at 5,920, the German DAX was down -0.9% at 7,130, while in France the CAC was down -0.1% at 4,009.
Asian markets have generally sold-off heavily this week, with the exception of China. The Japanese and Hong Kong markets have sold-off due to the geopolitical tensions in the Middle East and the rise in the price of oil, as well as Moody’s downgrade of Japan and China’s hike in interest rates. In Hong Kong the Financial Secretary reported the economy grew 6.8% in 2010, (exceeding forecasts of 6.5%) and expects the economy to grow 4%-5% in 2011.
In China the market has traded flat, despite the Chinese consumer confidence index falling in the fourth quarter to the lowest since 2009, indicating concern over inflation is weighing on sentiment and has been running above the government’s 4 percent target for the past four months, despite a number of recent interest rate rises.
Yesterday in China the SSE Composite closed up 0.6% at 2,878, while in Hong Kong the Hang Seng Index was down -1.3% at 23,906 and in Japan the Nikkei 225 Index was down -1.2% at 10,452.
Next week we should see the S&P ASX 200 index find support around 4800, its 50 day moving average, but selling pressure will likely resume if the oil price remains at these elevated levels and unrest in the Middle East is not resolved soon.
The focus for next week will again be on the unrest in the Middle East, Asian concerns over inflation, European debt concerns and locally the continuing earning reporting season. Key levels for next week will be 4880 to 4730.
Investors need to monitor the tensions in the Middle East and North Africa, with unrest in Libya and Bahrain and tensions between Iran and Israel over the Suez Canal. Be prepared to hedge your positions, as the current low options volatility provides investors with long term portfolios opportunity to hedge their positions cheaply.
By Michael Hevern
Head of Research