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Renewed oil sell-off rattles stock markets

Tuesday 18:45 GMT

Overview

Further sharp losses for oil prices kept global equity markets on the back foot as participants waited to see whether the Federal Reserve would today deliver a widely-expected rise in interest rates.

Hot topic

Energy stocks ran into heavy selling as Brent came close to sliding below the $50 a barrel mark for the first time this year, after Opec raised its estimates for oil production this year from outside of the cartel.

Sudi Arabia subsequently put out a statement asserting its commitment to “stabilising the global oil market” .

The international crude benchmark touched $50.25 before rallying back to $50.98, still down 0.7 per cent on the day. Brent had fallen 10 per cent over the past week amid mounting concerns that rising crude production in the US was offsetting Opec’s output cuts.

US West Texas Intermediate was down 1.5 per cent at $47.70 a barrel.

“Oil has declined below its 200-day moving average and with non-commercial IMM positions sitting near record highs, while US oil inventories keep growing, there seem to be more short-term downside risks to oil,” said strategists at Morgan Stanley.

“The US has become the new swing producer, with oil profit margins determining the pace at which the US increases or decreases its oil production, marking a significant difference to Opec’s attempts to keep prices high by regulating supply via cartel-like agreements.”

Equities

On Wall Street, the S&P 500 energy sector was down 1.2 per cent in mid-afternoon trade, helping to drag the benchmark US equity index down 0.4 per cent to 2,364 — leaving it 1.3 per cent short of the record close set at the start of this month.

Hefty losses for European-listed oil stocks helped pull the Euro Stoxx 600 index down 0.3 per cent, although the UK’s FTSE 100 outperformed with a drop of just 0.1 per cent — helped to some degree by sterling’s retreat towards two-month lows against the dollar and the euro.

Forex

The pound’s weakness reflected a belated bout of uncertainty over the UK’s exit from the EU after Nicola Sturgeon, Scotland’s first minister, called for a second referendum on independence — just before parliament cleared the way for prime minister Theresa May to trigger the start of Brexit.

“Sterling initially appeared nonplussed by Ms Sturgeon’s announcement on Monday,” noted Jane Foley, senior currency strategist at Rabobank.

“This likely reflected relief that no fresh information was given with respect to dates of the independence referendum. Sterling’s recent bias lower had also laid the ground work for position adjustment.”

But Ms Foley added: “News that there is little impediment to prime minister May pushing the Brexit button is weighing heavily on the pound on Tuesday.”

Sterling fell as low as $1.2110 against the dollar before rebounding to $1.2159, down 0.5 per cent on the day but little changed from where it ended last week. The euro was up 0.1 per cent versus the pound at £0.8727, having earlier touched £0.8785.

The US currency was mostly firmer elsewhere, with the dollar index — a measure of its value against a basket of peers — up 0.3 per cent at 101.63.

The euro was down 0.3 per cent at $1.0617 although the dollar was 0.2 per cent lower versus the yen at ¥114.70.

“The dollar is trying to find its feet again as the slide from last Friday shows further signs of stabilising broadly,” said Shaun Osborne, chief FX strategist at Scotiabank.

“The dollar is higher against most of its G10 peers on the day though movement has been relatively limited, outside the pound’s sharp drop.

“Trading volumes in the North American session may remain relatively subdued due to — firstly — the winter storm that is affecting the North East of the US, and secondly, the Fed decision and Dutch election on Wednesday.”

Futures markets have assigned a 93 per cent probability of the US central bank raising overnight interest rates by 25 basis points today, according to CME Group.

More important, said Ulrich Leuchtmann, currency analyst at Commerzbank, will be whether there are any new signals about future US interest rate policy.

“Over the past few days the market has adjusted its view on the long term speed of Fed rate hikes to the upside,” he said. “For the time until year-end, two further rate hikes — following tomorrow’s step — seem very likely from the market’s point of view, with two more in 2018 being almost certain.”

Fixed income

Ahead of the Fed decision, the yield on the two-year US Treasury note was flat at 1.38 per cent — but still in sight of a recent seven-year high — while that on the 10-year was 1bp lower at 2.59 per cent.

The 10-year German Bund yield, which moves inversely to its price, fell 2bp to 0.45 per cent despite news of a further improvement in the ZEW economic sentiment survey for March and a pick-up in eurozone industrial production at the start of the year.

Commodities

Gold showed only a muted reaction to the firmer dollar, with the metal down just $1 at $1,202 an ounce.

Copper rose 0.4 per cent in London to $5,820 a tonne.

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