On Monday, global energy stocks led equities advances as crude oil prices touched three-year highs of about $80 a barrel, while US government borrowing costs rose for the sixth week on expectations of higher interest rates.
Stocks also benefitted from a lessening of Sino-US tensions and Chinese authorities’ decision to pump in additional cash to cushion the fallout from real estate major Evergrande’s troubles, while Germany’s election result provided some reassurance that a pure left-wing coalition government would not be formed.
Rather, a coalition of the center-left Social Democrats, the Greens, and the liberal FDP appears to be more likely.
While early German equities gains faded, European energy and banking stocks rose around 2.5 percent aided by higher crude prices and bond rates, with the former reaching its highest level since February 2020.
The jump in oil prices is fueling anticipation that global inflation may endure longer than expected, compelling central banks to intervene and boosting so-called reflationary assets, which benefit as interest rates climb.
On Wall Street, the industrial-heavy Dow Jones appeared to be on track for a solid session, while futures for the tech-heavy Nasdaq, which performs poorly when interest rates climb, were down 0.3 percent.
“Overall, it’s a great tale because we have a solid economic macro story,” said Fahad Kamal, CIO of Kleinwort Hambros in London.
Central banks were signaling their intention to progressively eliminate pandemic-era stimulus, which was raising bond yields, according to Kamal.
“TINA is still a significant component, and it becomes even more so when interest rates rise…
Given rising rate expectations, not only energy stocks but also bank stocks, are performing exceptionally well “‘There is no option,’ he continued, using the ‘there is no alternative’ (TINA) phrase popular among market bulls.
Over the month of September, oil futures have risen to roughly $9 a barrel. Brent crude was trading at $79.25 a barrel on Monday, while US crude was up 97 cents to $74.95.
The price hikes, which come on top of a 300 percent increase in European gas prices this year, risk raising inflation expectations and hastening the end of super-cheap money.
“The current global oil supply-demand deficit is bigger than we expected,” Goldman Sachs said, adding that “the recovery in global demand from the Delta impact will be even faster than our above-consensus prediction.”
As a result, investors are adjusting their portfolios; 10-year Treasury bond yields, a key predictor of global capital costs, increased 9 basis points last week, while the Dow Jones index, which is heavy on industrials, outpaced the Nasdaq index of technology stocks.
On Monday, 10-year Treasury rates touched a three-month high of -0.210, the highest since late June, while German 10-year government borrowing costs overcame an early slump to achieve a three-month high of 1.49 percent, the most since late June.
The higher rise in US rates, especially on an inflation-adjusted basis, is also helping to raise the dollar, which gained 0.15 percent against a basket of key currencies, edging closer to a one-month high achieved last week.
China, on the other hand, continues to be a source of concern.
Concerns about property developer Evergrande missing a bond coupon payment last week and facing another in the coming days have been exacerbated by a power supply shortage that is causing an industrial contraction and putting pressure on the economy’s outlook.
Evergrande’s electric car unit had its Hong Kong-listed shares plummet by as much as 26% when the company announced it urgently required funds.
Despite this, Chinese blue-chip stocks rose 0.5 percent, boosted by another cash injection from the central bank and optimism that Huawei executive Meng Wanzhou’s release would help to repair relations with the West.
“On top of Evergrande and the regulatory crackdown, there are now energy shortages. These events are unrelated, but their proximity could lead to something more serious “Kamal said.
The focus now shifts to fiscal policy in the United States, with the House of Representatives set to vote on a $1 trillion infrastructure bill on September 30, and a September 30 deadline for funding federal agencies looming, potentially resulting in the second partial government shutdown in three years.
