London — The oil price surged on Friday, as the escalating conflict in the Red Sea region threatened to further disrupt global trade, while stocks rose in light of U.S. inflation data that reinforced investors’ view that interest rates could soon fall.
Oil rose by 4% after the United States and Britain said they had launched strikes from the air and sea against Houthi military targets in Yemen in response to the group’s attacks on ships in the Red Sea, a dramatic regional widening of the Israel-Hamas war in Gaza.
Brent futures were last up 4% at $80.52 a barrel, while U.S. West Texas Intermediate (WTI) crude rose 4.1% to $74.99.
“Oil prices have climbed sharply following the attacks, with Brent Crude now around 7% higher since early December, before Houthi rebels began targeting ships in the Red Sea,” Susannah Streeter, head of money and markets at Hargreaves Lansdown, said.
“Reports coinciding with the UK/US military action suggest the British government is modelling scenarios which could see prices rise by $10 a barrel, if the Red Sea crisis continues, with gas prices at risk of going up by 25%,” she added.
Meanwhile, global stocks rallied, underpinned by the prospect of a drop in interest rates. The MSCI All-World share index was up 0.2%, reflecting a bounce in Europe, where the STOXX 600 rose 0.7%, led partly by a rally in shares of aerospace and defence companies, where the sector index hit a record high.
U.S. stock futures fell 0.2%, while government bond yields edged lower, reflecting demand among investors for safe-haven assets.
The dollar rose against a basket of major currencies, as did gold, which benefited from investor risk aversion, rising 0.9% to $2,046 an ounce. Other classic safe havens such as the Swiss franc held mostly steady, a situation that some analysts said could change.
“If we see a massive escalation of the situation … then the traditional flight-to-safety will see U.S. Treasuries, safe-haven currencies like yen and Swiss franc benefit.” said Khoon Goh, head of Asia research at ANZ in Singapore.
STELLAR NIKKEI
In Asia, Japan’s Nikkei (.N225) extended its impressive gains so far this year, jumping 1.5% to another 34-year high, helped by solid results from Fast Retailing Co (9983.T), owner of clothing brand Uniqlo.
Chinese inflation data showed the country’s economic recovery remained weak in December, with the consumer price index falling 0.3% from a year ago. However, separate trade data showed exports rose at a faster than expected clip last month while imports returned to growth.
Data on Thursday showed U.S. consumer prices rose more than expected in December, with a closely watched core measure coming in slightly above consensus.
However, the details of the report showed that pressures picked up in specific pockets of the consumer market, such as energy and the cost of used cars, as well as other seasonal factors that should abate, according to economist Mohit Kumar at Jefferies.
“Our view remains that for the Fed to cut rates aggressively they need to either see the economy falling off a cliff or a sharp fall in inflation. And we do not see either scenario,” he said in a morning note.
Fed officials drew few new conclusions from the data. Richmond Fed President Thomas Barkin said it did little to clarify the path of inflation.
Futures showed traders are attaching a 73% probability of a rate cut by March, compared with 68% a day earlier. They are also pricing in around 150 basis points (bps) of easing this year.
Treasuries held steady after a powerful rally in the shorter-dated bonds overnight. The two-year yield was virtually unchanged at 4.27%, having fallen 11 basis points overnight, as was the 10 year at 3.98%.
Euro zone government bonds drew in flows, pushing the yield on the benchmark 10-year German Bund down 4 bps to 2.165%.
Adding some support in the European bond market were comments from European Central Bank (ECB) President Christine Lagarde who said rate cuts could happen if the central bank had certainty that inflation had fallen to its 2% target.
*Amanda Cooper, Stella Qiu & Rae Wee; editing: Kim Coghill, Mark Potter & Hugh Lawson – Reuters
