June 1, 2023

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Oil Fuels Inflation Risks, Weighs On US Futures: Markets Wrap

(Bloomberg) — US stock futures fell and the dollar rose along with Treasury yields as a sudden production cut from OPEC+ sent oil prices up about 5%.

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The group’s decision to cut production by more than 1 million barrels per day came as a jolt to global markets on Monday. It reverberated across asset classes as investors rushed to adjust to the risk that inflationary pressure could be more persistent than previously thought.

The dollar continued its gains for the second day and strengthened against the G10 currencies. The Norwegian krone was little changed after a previous rally on the Scandinavian country’s expected benefit from higher energy prices.

The weakening of the yen amid concerns about Japan’s dependence on oil imports and with deteriorating confidence among the country’s major manufacturers increased the case for the central bank to maintain ultra-easy monetary settings for a longer period.

The policy-sensitive two-year Treasury yield jumped nearly eight basis points, pushing it back to 4.1% as traders weighed on the announcement by OPEC+, which had previously given assurances it would keep supply steady. Treasurys finished the first quarter on Friday with yields lower as investors bet interest rate cuts were on the horizon.

S&P 500 futures were down 0.3% and Nasdaq 100 futures were down 0.6% as positive sentiment waned from Friday. The S&P 500 jumped 3.5% last week, the most since November, while the tech-heavy Nasdaq 100 posted its biggest quarterly gain since June 2020.

“For equity investors, this could be a rude awakening, as markets point to Goldilocks’ expectations of discounted discount rates but no recession,” said Ronald Temple, chief market strategist at Lazard Limited in New York. “The OPEC+ production cut is another reminder that inflation harvesting is no longer in the bottle.”

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Goldman Sachs Group Inc. Its forecast for the price of Brent crude when production is cut, it expects to reach $95 a barrel this year-end and $100 in December 2024, analysts including Daan Struyven and Callum Bruce wrote in a note.

Stocks rose in Japan and Australia, with Asian energy stocks advancing. However, semiconductor stocks fell after Beijing launched a security review of imports from Micron Technology Inc.

Shares in Hong Kong fell while shares in Shanghai posted gains. Caixin manufacturing PMI data posted a bigger-than-expected decline on Monday, pointing to some weakness in China’s economic recovery.

Monday’s bumpy opening and price concerns contrasted with last week’s upbeat tone that came as turbulence in the banking sector subsided and a key measure of US inflation cooled.

Excluding food and energy, the Fed’s preferred measure of inflation — the personal consumption expenditures price index — rose 0.3% in February, just below the median estimate. This indicates that the Federal Reserve may be close to ending its campaign to raise interest rates. The PCE price index rose 5% from a year earlier, a slowdown from January but well above the Fed’s 2% target.

Lazard Temple said the OPEC+ cut, along with increased energy demand from China, will increase the risk of sustained inflation. “It is also likely to limit the latitude that central banks may have to ease monetary policy even if the economy slows,” he added.

“We are now on the verge of once again entering a short-term downturn,” Paul Gambels, co-founder and managing partner of the MPMG Group at Bloomberg Television, said. “We’ve had a year of evidence of wildly irresponsible politics and all the damage they’ve done is now starting to show.”

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Elsewhere in the markets, gold and Bitcoin fell. The cryptocurrency had its best quarter since March 2021 with gains of around 70% in the first three months of this year.

Main events this week:

  • The Eurozone’s S&P Manufacturing PMI, on Monday

  • US construction spending, ISM manufacturing, light vehicle sales, Monday

  • Eurozone Producer Price Index, Tuesday

  • US Factory Orders, US Durable Goods, Tuesday

  • Australia rate decision, Tue

  • Loretta Mester, President of the Federal Reserve Bank of Cleveland, speaking Tuesday

  • S&P Global Services PMI in the Eurozone, Wednesday

  • US Trade, Wed

  • UBS Annual General Meeting, Wed

  • US Initial Jobless Claims, Thursday

  • Louis Federal Reserve Bank President James Bullard speaks Thursday

  • US Unemployment, Nonfarm Payrolls, Friday

  • Good Fri. Many markets closed, including the US stock and bond markets

Some of the major movements in the markets:

Stores

  • S&P 500 futures were down 0.3% as of 1:20 p.m. Tokyo time. The S&P 500 rose 1.4% on Friday

  • Nasdaq 100 futures fell 0.6%. The Nasdaq 100 rose 1.7% on Friday

  • Japan’s Topix rose 0.6%.

  • Hong Kong’s Hang Seng fell 0.6%.

  • China’s Shanghai Composite Index rose 0.6%.

  • Australia’s S&P/ASX 200 rose 0.7%

currencies

  • The Bloomberg Spot Dollar Index rose 0.4%.

  • The euro fell 0.4 percent to $1.0794

  • The Japanese yen fell 0.5 percent to 133.46 per dollar

  • The offshore yuan fell 0.4 percent to 6.8953 per dollar

  • The Australian dollar fell 0.3% to $0.6665

Digital currencies

  • Bitcoin fell 1.4 percent to $27,680.75

  • Ether fell 0.8% to $1,775.77

bonds

  • The yield on the 10-year Treasury note advanced five basis points to 3.52%.

  • The 10-year Japanese bond yield advanced four basis points to 0.36%.

  • The yield on the 10-year Australian Treasury note was little changed at 3.30%.

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goods

  • West Texas Intermediate crude rose 5.4 percent to $79.75 a barrel

  • Spot gold fell 0.9 percent to $1,951.70 an ounce

This story was produced with help from Bloomberg Automation.

– With assistance from Matthew Burgess.

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