Higher oil price hurts stocks

(10.03.2011) Surging oil prices and concerns that an increase in energy prices could hurt the economic recovery were important drivers in financial markets yesterday. Stocks fell, interest rates decreased and in the FX market Swiss franc strengthened.

By Maren Romstad, Analyst at DNB Markets

oil rigLibyan turmoil is still an important driver in financial markets. Yesterday oil prices increased, after reports that a pipeline had been hit in Libya.

American households are relatively vulnerable for an increase in oil prices and, hence, more and more are concerned for the potential negative consequences for the US economic recovery. US equity prices fell and interest rates on US Treasuries declined.

Tonights drop on Asian stock exchange was the largest in two weeks, and might also be due to some disappointing macro figures. China swung to a surprising trade deficit in February, which was the largest in seven years. The deficit is, however, expected to be temporarily. In spite of several contractive measures from Chinese authorities, one must take into account the strong figures in January and the effects of the Chinese New Year.   

It’s evident that Libyan fights are hurting investor’s risk appetite. Despite the rise in oil prices, the oil price sensitive Norwegian stock exchange also fell yesterday. However, higher oil prices may have been a contributing factor to the strengthening of the Norwegian krone versus the euro and the US dollar.

European stocks also declined
yesterday. The fall may have been intensified by an auction of Portuguese two-year notes. Demand was low and the interest rate paid almost reached 6 per cent. This is almost 2 per cent higher than they had to pay in a similar auction in September last year. Soaring borrowing costs are reflecting concerns in the market that European leaders could fail to take concerted action to eliminate fears of sovereign defaults in Europe. Turmoil and falling stock markets contributed to a strengthening of the Swiss franc yesterday. The Swiss currency is often viewed as a safe haven in currency markets.

Unlike the rest of this week, there are some highlights on today’s agenda. Internationally, the monetary policy meeting in Bank of England will probably attract most attention, as more and more signals are indicating an interest rate hike soon. Perhaps most important is the split interest rate committee. At the previous policy meeting one voted for a rise with 50 basis points, two wanted to hike rates by 25 basis points, five voted for an unchanged policy, while the only American in the committee voted to increase the securities purchases. Since the February meeting, the figures have been mixed, thus, we expect interest rate to be kept unchanged at 0.50 per cent. According to Reuters only 1 of 63 expects an interest rate hike at today's meeting. Given that rates are kept unchanged, we must wait until the minutes are published in a few weeks before we get new information. What is particularly exciting this time is if even more have voted for an interest rate hike. The pound strengthened ahead of today's policy meeting.

Here at home Statistics Norway publishes inflation figures for February. In recent months, inflation has been lower than projected by Norges Bank and if our projections this month is right, Norges Bank will probably lower their inflation forecasts short term at the monetary policy meeting next week. We expect core prices to increase by 0.8 per cent y/y. Norges Bank is expecting 1.0 per cent, while consensus is at 0.9 per cent.

We also get Swedish inflation figures for February. In Sweden has also inflation been lower than the central bank's forecasts in recent months, and can put a damper on the planned rate hikes from the Riksbank. There is a broad consensus this time, and we, consensus and the Riksbank expect 2,3 per cent y/y. Yesterday's macroeconomic figures from Sweden were far better than expected and may have been a contributing factor to the Swedish krona strengthened over the past day. Industrial output rose sharply from December to January and thus confirms the high activity level in the Swedish economy.