Oil prices surged on Friday due to the escalating conflict in the Red Sea region, which posed a threat to global trade. The United States and Britain launched strikes against Ansar Allah military targets in Yemen after the group attacked ships in the Red Sea. This widening of the war in Gaza caused oil prices to rise by 4 percent, with Brent futures reaching $80.52 a barrel and US West Texas Intermediate (WTI) crude rising to $74.99. The increase in oil prices followed the reports of the UK/US military action, which suggested that prices could rise by $10 a barrel if the Red Sea crisis continued. Gas prices were also at risk of increasing by 25 percent. In contrast, global stocks rose because of US inflation data that supported the view that interest rates could soon fall.
The MSCI All-World share index increased by 0.2 percent, with Europe’s STOXX 600 rising by 0.7 percent. The rally in European stocks was partly led by aerospace and defense companies, resulting in the sector index reaching a record high. However, US stock futures fell by 0.2 percent, and government bond yields decreased as investors sought safe-haven assets. The dollar strengthened against major currencies, and gold rose by 0.9 percent to $2,046 per ounce due to increased investor risk aversion. While the Swiss franc remained steady, analysts predicted that this situation could change if the Red Sea conflict escalated further.
Japan’s Nikkei index continued to soar, rising by 1.5 percent to achieve a new 34-year high. Solid results from Fast Retailing Co, the owner of clothing brand Uniqlo, contributed to this impressive performance. Although Chinese inflation data suggested a weak economic recovery in December, trade data showed higher-than-expected growth in exports and a return to growth in imports. Meanwhile, US consumer prices in December surpassed expectations, particularly in specific areas such as energy and the cost of used cars. However, economist Mohit Kumar at Jefferies noted that overall inflation remained steady and did not indicate a need for aggressive rate cuts by the Federal Reserve (Fed).
Despite the economic data, the Red Sea conflict remained a key concern for investors. The possibility of rate cuts by the Fed increased, with traders attaching a 73 percent probability of a rate cut by March. They also priced in around 150 basis points of easing throughout the year. Additionally, bond markets in the eurozone attracted investors’ interest, leading to a decrease in the yield on the benchmark 10-year German Bund.
European Central Bank (ECB) President Christine Lagarde mentioned that rate cuts could be considered if inflation fell to the central bank’s 2 percent target. However, it’s important to note that inflation pressures were limited to specific sectors of the consumer market and should subside over time. Fed officials did not draw significant conclusions from the data, with Richmond Fed President Thomas Barkin stating that it did not offer much clarity on inflation trends.
It is crucial to monitor the Red Sea conflict as it has the potential to further disrupt global trade and impact oil and gas prices. The outcome of the conflict will influence the decisions of central banks, particularly related to interest rates. Investors should remain cautious and stay updated on the latest developments in the region.
