Liam Dann: Oil price plunges, markets drop as Delta fears grow

After all the local excitement of mortgage rate hikes and inflation fears last week, global markets have delivered a reminder that economic recovery from Covid will be far from straightforward.

Global oil prices have plunged more than 10 per cent in the past week following an Opec deal to lift production and growing concern about the Delta strain of Covid-19 undermining the recovery.

On Wall Street, sharemarkets took the biggest hit of the year (the Dow Jones was off nearly 3 per cent) as fear returned to markets and investors sought haven assets.

The local NZX-50 opened down half a per cent.

After last week’s local focus on rising inflation and rising interest rates, this latest market turn was a timely reminder that there are no one-way bets in the pandemic economy.

“Despite the vaccine rollout, markets do not appear to be embracing the idea of learning to live with Covid-19,” said Brian Martin, ANZ head of global economics.

“Sentiment appears to have shifted, at least for the moment, to a persuasion that growth and earnings expectations may be overdone.

“With so much good news and optimism having been priced this year, an adjustment to sentiment is not an uncommon occurrence, particularly as the pendulum is slowly swinging towards less accommodative monetary settings”.

S&P 500 fell 2 per cent last night, US 10-year yields were down 11.5bps.

Risk sentiment around the world declined sharply overnight, wrote ASB economist Nathaniel Keall.

“Rising cases of the ‘Delta’ Covid variant look to be the main culprit, with investors fleeing into ‘safe-haven’ assets amid anxiety about the implications of the more-transmissible strain on the global economy,” he said.

“And of course, we are seeing an example of how difficult it can be to suppress an outbreak over in Aussie.”

Crude oil prices slumped 7 per cent over night – adding to last week’s losses.

Opec last week ended a two-week dispute and agreed to increase production.

The deal will see monthly supply hikes of 400,000 barrels a day, and puts Opec back in control of the market after two volatile weeks, Bloomberg news reports.

It follows a stand-off between Saudi Arabia and the UAE over their relative shares of any output increases.

The fall in oil prices takes some pressure out of the global inflation surge at a time when it was threatening to force central banks to pull back on economic stimulus and lift interest rates.

Equity investors will also be spooked by the prospect of rising rates and we should expect Wall Street to test the resolve central bankers in coming weeks.

In New Zealand mortgage rates are already on the rise, the Reserve Bank has called time on its bond buying programme and markets are forecasting an Official Cash Rate hike next month.

While it would take a lot to derail this narrative recent history suggests that oil can do it.

In 2014 oil prices plunged 40 per cent, sucking emerging inflation out of the global economy and forcing the Reserve Bank to reverse cash rate hikes.

This time around we have the added layer of risk in the pandemic threatening the recovery story.

As we’ve learned with the speed of outbreaks and lockdowns. Things can change – fast.

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