Markets Get a Crude Awakening

Oil prices surge after pipeline attack, seeing risk-off sentiment take hold, aiding the dollar, as global risks and headwinds intensify.

Previous Day's Market Highlights

Financial markets were dominated by reaction to this weekend's oil pipeline attack in Saudi Arabia on Monday, with economic releases taking a back seat compared to geopolitical issues. The bombing, believed to have been carried out by drones, severely damaged the Abqaiq oil processing plant and knocked out approximately 5% of the world's daily oil supply, sending prices soaring. Global benchmark Brent jumped almost 20% at Sunday's open, the largest spike on record, before prices settled with a gain of 14.7% at $69.06bbl. For FX markets, the typically commodity-focused Canadian dollar and Norwegian krone gained ground, adding 0.3% and 0.65% respectively, while risk aversion also took hold. The US dollar also rallied, adding 0.6% against a basket of peers, despite the usual inverse relationship with crude prices, as investors flocked to a haven. This flight to safety was also in evidence in the bond market, where Treasury yields fell by around 5bps across the curve.

Looking more broadly, the increase in crude prices, and increased awareness of geopolitical risks in the Middle East, will be key for financial markets going forward. The lack of information over how quickly normal production can be resumed, in addition to increasing uncertainty and concerns over the security of oil supplies, and the prospects of retaliatory action, may lead to a sustained rally in prices. Such a rally would have consequences for both global growth and inflation. Sustained higher prices would act as a headwind to the global economy, hitting the already beleaguered manufacturing sector the hardest, as higher prices would likely slow spending. Increased prices would also have an inflationary effect, leaving central banks with a conundrum. Globally, monetary policy continues to lean towards the dovish side of the spectrum, with central banks loosening policy as economic growth slows. Should the pace of price increases quicken, policymakers would need to decide whether to alter their loose monetary policy stance. This conundrum is reflected in market pricing for the Fed's Wednesday meeting, with the chances of a cut now standing at 66%, down from a near-certainty just a week ago.

Elsewhere on Monday, Prime Minister Johnson visited Luxembourg for lunch; and seemingly little else. The PM's talks with EU Commission President Juncker yielded little in the way of concrete progress; merely resulting in the PM reiterating that the Irish backstop must go, and Juncker repeating that any fresh proposals must be compatible with the existing Withdrawal Agreement. Yes, I'm getting a sense of déjà vu as well. The pound largely ignored today's talks, dipping 0.55% against a stronger dollar, and gaining 0.15% against the euro. The pound took a brief trip above €1.13, however failed to hold onto these gains.

Speaking of the common currency, the euro's post-ECB rally continued to fade on Monday, with the common currency shedding 0.6%. The failure of eurozone government's to take heed of the ECB's message that fiscal policy must take charge continues to weigh on the common currency, while relatively dovish comments from a couple of ECB policymakers also exerted pressure. Greece's central bank chief Stournaras indicated that incoming President Lagarde will likely keep up the current ultra-loose policy, while Chief Ecnomist Lane indicated that the ECB's price stability mandate is unconditional, and that QE can continue for 'an extended period of time'. Both comments are consistent with the theme of 'whatever it takes' becoming 'as long as it takes'.

Finally, global equity markets slid amid the risk-off tone. In Europe, the pan-continental Stoxx 600 declined 0.4%, despite an almost 3% gain in the oil and gas sector. US markets also declined, with the benchmark S&P 500 closing 0.3% lower, below the 3000 mark.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1280 1.1301 1.0930 3.28%
GBP/USD 1.2415 1.2506 1.1958 4.38%
EUR/USD 1.1010 1.1164 1.0926 2.13%
GBP/AUD 1.8155 1.8336 1.7792 2.97%
GBP/NZD 1.9600 1.9622 1.8996 3.19%
GBP/CAD 1.6455 1.6608 1.5956 3.93%

Today's Market Highlights

Once again, today sees a relatively light economic calendar, ensuring that focus will remain on geopolitical events. Markets will likely continue to focus on rising tensions in the Middle East, which will remain the dominant force driving shifts in risk sentiment, along with US-China trade headlines. Market participants will also be keenly focused on Brexit, with the UK's Supreme Court today set to begin hearing judicial review cases pertaining to the legality of Parliament's prorogation. Should the prorogation, or advice leading up to the event, be ruled illegal, MPs may be recalled to the Commons - though this is unlikely to have any immediate impact on the pound.

On the data front, today's highlight comes from the eurozone in the shape of September's ZEW sentiment surveys. The reports, a useful leading indicator of economic health, are expected to show a modest improvement in sentiment from last month, despite remaining firmly in pessimistic territory. The economic sentiment index, where business rate the 6-month economic outlook, is expected at -37.0 for Germany, and at -32.2 for the eurozone; both indices remaining well-below their long-run averages. Market participants will also pay attention to this afternoon's industrial production figures from the US, expected to show activity in the sector remaining subdued, with an increase of 0.2% MoM expected.

Turning to central banking, today's only notable speaker is ECB Executive Board Member Coeuré. Overall, markets will likely strike a tentative tone today, with apprehension ahead of tomorrow's FOMC policy decision likely to take hold.

Today's Economic Calendar

Time Currency Release Consensus Previous
10:00am EUR Germany ZEW Survey - Economic Sentiment (Sep) -37.0 -44.1
10:00am EUR Euro Area ZEW Survey - Economic Sentiment (Sep) -32.2 -43.6
2:15pm USD Industrial Production (MoM - Aug) 0.2% -0.2%