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The slump in oil prices, stemming from OPEC’s reluctance to come to an agreement to cut output, triggered the risk aversion across the world.
The Bloomberg Commodity Index slipped below 80 for the first time in nearly 17 years. Naturally, market participants sold risk assets and bought debt. Asian indices were steeped in red. Japan and Australia ended lower, accompanied by China. Singapore and Hong Kong looked set to follow suit. The energy and material sectors in Asia saw significant selling pressure, following what happened in the overnight session.
Sovereign bonds were bid not only from safe-haven demand, but also on prospects of an extension to subdued inflation expectations arising from weak oil prices. The yield on 10-year Australian bonds fell 11.6 basis point to 2.83%. In my opinion, the play on commodities is temporal.
Although the failure of OPEC to set a production quota is, in a way, unprecedented, and simply underscored the declining influence that it held in the global energy markets, it really does not say anything new about the underlying fundamental problem – oil glut.
If anything, the low crude prices are helping Saudi Arabia’s plan to expand its market share by forcing out the US shale producers and Russians, who are disadvantaged with higher production costs compared to crude oil extraction.
Therefore, the lower-for-longer oil prices are here to stay. This means the global inflation outlook continues to look subdued, which will complicate the central bank policies of many economies. Specifically, the ECB and BOJ may need to relook their inflation objectives for ongoing asset-purchase programmes.
Even basing on core inflation, which strips out the volatile food and energy components, may be problematic as lower fuel prices may also pass through to other consumer goods.
Major currencies are rather quiet today, with market attention solely on commodities and related equities. The dollar index wandered around the 98.50 mark, keeping JPY and EUR close to yesterday levels.
Interestingly, GBP/JPY has been getting some attention recently, ever since many global banks started to publish their 2016 FX outlooks. Morgan Stanley touted short GBP/JPY as one of its top 10 trade ideas for 2016. The main premise hinges on the Brexit scenario which could hit the sterling when uncertainty over UK’s future mounts.
The STI is moving in tandem with the rest of Asia, declining below 2900 and staying thereabouts for much of Tuesday. While majority of the 30 stocks making up the index is lower, SIA outperformed the rest, surging over 4% to around S$11 after Morgan Stanley upgraded the stock to overweight. Renewed declines in oil prices may have also boost hopes that the national carrier may see more fuel savings in the future.
*For more timely quips, you may wish to follow me on twitter at https://twitter.com/BernardAw_IG