High Oil Prices Worry Markets

(23.02.2011) The unrest in Libya and high crude oil prices spurs flight to safety.

By Kyrre Aamdal, Senior Economist at DNB Markets

oljeplattformWith open US markets the US stocks recorded its largest daily drop since August last year. S&P500 fell 2.05 per cent while the Dow fell 1.4 per cent. Several commentators pointed at high oil prices. The recent strong increase in oil prices increases the risk of a major pullback after a lengthy rally. The CBOE volatility Index rose 27 per cent, and stock market indices in Asia this morning continues down. 10-year Treasury yield dropped 12 bps from Friday's close, underpinning the flight to safety issue.

This week the US Treasury will auction 35bn USD of five-year notes on Wednesday and 29bn USD of seven-year notes on Thursday. Monday the USD seems to strengthen as fear in the markets increased. But yesterday the USD pulled back, with EURUSD up 0.8 per cent from yesterday morning. The Norwegian Krone had increased a bit versus the Euro, and thus the USDNOK is down 1.3 per cent from yesterday morning. In general the NOK has appreciated versus most currencies the last 24 hours. Brent oil prices have been trades in the 106-108 USD/brl range.

In Norway the Prime Minister Jens Stoltenberg said that the fiscal policy in 2011 will be back on the "spending rule". This rule says that the structural, non-oil budget deficit should be in line with four per cent of the Norwegian Pension Fund Global over time. The interpretation of the rule is that the government over time will be able to spend 4 per cent of petroleum revenues. During the recession the government increased spending of petroleum revenues substantially. In 2009 the government projected it would be back on the spending rule in 2018.

Higher revenues from an improving economy, lower expenses than forecasted due to low unemployment and sickness leave and higher oil prices have contributed to reduce the difference from actual spending and the rule for spending. The Finance Minister Mr Sigbjørn Johnsen said spending the next years may be below the spending rule. He argues that a period with strong growth should be used to build reserves rather then increase the level of public spending.

Yesterday Moody's put Japan's government debt on "negative outlook". One month ago Standard & Poor's downgraded Japan's debt. Moody's fears political challenges will make fiscal efforts to dampen debt growth difficult. About 95 per cent of the Japanese government debt is held by domestic investors. Japanese yen fell yesterday modest against the USD, but USDJPY has increased 0.8 per cent from yesterday morning. Tonight Japanese trade figures showed a 1 per cent monthly increase in the value of exports, but a 5.8 per cent drop in the volume. The difference have to some extent been caused by a strong Japanese Yen.

In the US consumer confidence index increased by 5.6 points to 70.44, the highest level in three years. Higher stock prices and lower taxes are probably the reason for the increase. The expectation index has the highest correlation with the growth in private consumption, and the recent level indicates 4 per cent growth y/y in private consumption. Stock markets seemed however to put more weight on Wall-Mart, who posted its seven straight drop in U.S. sales. Case-Shiller's home price index fell further in December, its sixth straight decline in a row, and the index is now close to the bottom from May 2009.