Stock Market Chaos Sparks Oil Selloff

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FILE PHOTO: An investor watches stock prices at a brokerage office in Beijing, China July 6, 2018. REUTERS/Jason Lee

By Nick Cunningham

The plunge in global equities on Wednesday and Thursday dragged down crude oil, with even concerns about falling Iranian supply not enough to keep crude from a steep selloff.

Brent fell more than 1.2 percent on Wednesday and was down another 1.5 percent in early trading on Thursday, falling back to the low-$80s per barrel, down from over $86 last week.

The same supply concerns are still there – Iran’s oil exports are dwindling, and it is unclear if OPEC can fill the gap. But the sudden cracks in the global economy took on a higher priority.

The conditions for an equity selloff have been building for quite some time. On October 9, the International Monetary Fund cut its forecast for global growth to 3.7 percent for 2018 and 2019, down from a previous estimate of 3.9 percent. The Fund said that “growth has proven to be less balanced than hoped,” and that the “likelihood of further negative shocks to our growth forecast has risen.” Also, the ongoing trade war between the U.S. and China, combined with the strength of the dollar and the turmoil and emerging markets could also lead to an economic slowdown.

China’s economy is already showing some signs of strain, and China’s central bank just slashedthe amount of cash that banks have to hold in reserve, the so-called reserve ratio, by one percentage point. The move is seen is an attempt to keep growth aloft amid worrying signs of trouble.

In the U.S., the Federal Reserve has been going in the opposite direction, tightening interest rates in an effort to avoid inflation.

These various red flags for the global economy have been known for a while and are the background context for the sudden and painful selloff in global equities that began mid-week.

The Dow Jones Industrial Average fell more than 800 points, the worst single-day performance in over eight months. Tech stocks were hardest hit, but soon the selloff spread around the world. China’s main stock market, the Shanghai Composite Index, fell more than 5 percent, and Japan and South Korea each saw a roughly 4 percent plunge.

Some analysts point to rising bond yields on U.S. treasuries, which makes equities less attractive. “The rise in Treasury yields has been the primary catalyst for the selloff in equities,” Steven Friedman, senior economist at BNP Paribas Asset Management, told the Wall Street Journal. “Equity investors are growing concerned that the [Fed]’s projected rate path will choke off the expansion.”

President Donald Trump, afraid of taking the blame for the sudden stock market concerns a few weeks from the mid-term elections, said the sudden volatility was not due to the trade, but was instead the fault of his central bank. “That wasn’t it,” he said of his trade fight with China in a Fox News interview. “The problem I have is with the Fed…the Fed is going wild. They’re raising interest rates and it’s ridiculous.” He went on to add that “the Fed is going loco.” Trump reiterated those comments at a campaign rally Wednesday evening.

Needless to say, crude oil cannot escape the global plunge in equities. Strong oil demand and high prices are predicated on ongoing global growth. “The de-risking that we saw in equity markets swept other markets with it, including oil, where the move was compounded by API data and EIA forecasts,” Harry Tchilinguirian, global head of commodity markets strategy at BNP Paribas, told the WSJ. Weekly data showed a significant increase in crude oil inventories. The API reported a 9.7-million-barrel increase for the week ending on October 5, far higher than analysts had expected.

The turmoil and volatility in the financial markets could be brief, just as it was earlier this year. It could also be the beginning of a broader economic slowdown that a growing number of analysts and economists have been fearing. If that is the case, even Iran sanctions won’t be enough to carry crude oil up to $100 per barrel.

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