Ladies and Gents oil muddies the water

The price of oil, which so far has shown surprisingly limited reaction to the ongoing conflict in the Middle East, did jump yesterday as US President Joe Biden indicated Israel was considering an attack on Iran’s oil infrastructure as a response to Iran’s missile attack on their country. The price of Global Benchmark crude rose to $77 a barrel. The Vix fear index climbed above 20 for the first time since the end of last month. Stocks around the globe have had a shaky start to the last couple of months, on economic concerns then recovering those losses on reassuring comments from central bankers. It may be that the market may now focus more on geopolitical risk.

A spike in the oil price muddies the waters on several fronts; apart from the risk of adding to the inflation story, rising oil prices are a direct tax on the consumer and business. It complicates life for the Fed in the coming months when deciding monetary policy. Two-year treasury yields, the most sensitive to changes in interest rate sentiment, have been on a downward trend since the middle of the year as rate cut expectations have increased, falling to a low of 3.55%. Yesterday the US two-year closed higher just above 3.7%, reflecting the greater uncertainty higher oil prices create. Stocks in the US finished the day modestly lower, thanks to a more encouraging services PMI report earlier in the day. The index came in at 54.9 against an expectation of 51.7.

In contrast, the UK S&P services PMI Index came in slightly below expectations and consequently, alongside a slightly weaker-than-forecast manufacturing report earlier in the week, the composite index, which had been steadily climbing since June, fell back. Sterling, which had been noted for its recent strength, gave up some ground over the past few days as Andrew Bailey raised the possibility of the Bank of England being more aggressive in cutting interest rates in the coming months. Sterling has been relatively stronger against both the dollar and the euro as the Bank of England was expected to be less aggressive in easing monetary policy than the Fed or the ECB. Andrew Bailey’s comments come ahead of the much-anticipated budget later in the month, which, whilst we wait to hear what Ms Reeves’s plans are with taxes and spending, has left the UK economy rather in limbo, reflected in some of the recent economic data.

After some slightly better-than-expected US jobs data earlier in the week, today is the big day of the week as we get a whole raft of US employment data out later today. The main ones are the unemployment rate, hourly earnings, and non-farm payrolls. The consensus is for a slight drop in non-farm payrolls this month after a modest increase in August. Stocks in Europe, look like they will start the day on the front foot.