Saudi Oil Attacks What to expect from stocks and oil prices

After gapping about 20% higher as markets responded to the weekend attack on Saudi Arabia’s oil infrastructure — which reduced the nation’s oil output by more than half — oil prices have given back a significant chunk of those gains, although they still remain sharply higher on the day. The Saudi news also triggered a safe-haven response in the wider markets with gold rising and most stock indices and US index futures falling. Sentiment was hurt further by fresh signs that the ongoing US-China trade war was hurting activity at the world’s second largest economy. Industrial production in China rose by just 4.4% year-over-year in August compared with 4.8% in July and 5.2% expected. This was also the worst reading since February 2002. On top of this, retail sales growth slowed down again, this time to 7.5% compared to 7.6% in July and below expectations of 7.9%.

FTSE outperforms on oil, pound

Despite the latest slowdown signs in China and falls for global stocks in response to the Saudi news, the UK’s FTSE 100 managed to reclaim most of its lost ground before almost turning flat this morning. Other major indices were still lower at the time of writing, however. The FTSE’s relatively strong performance is hardly a surprise given that BP and Shell (both of which rose on the oil news) are among the heaviest weighted stocks in the index. However, stocks of insurance companies and International Consolidated Airlines Group fell, and that prevented the FTSE from rising more meaningfully. Also helping the FTSE was the fact that sterling eased off its monthly highs hit on Friday as the GBP/USD hit a key resistance area circa 1.2480 as investors awaited fresh Brexit-related headlines.

Oil attack implications

The oil attack means Saudi’s crude production capacity could be impacted for weeks and this could keep Brent prices and stocks of energy companies supported for a while. However, OPEC’s other members will be more than happy to step up production to make up for some of the short falls in Saudi’s regular crude production. US President Donald Trump has meanwhile already authorised the release of US reserves and this has helped to lower prices following the big spike overnight. However, the longer-term impact is unclear at the moment and depends on how severe or otherwise the damage is going to be. Also, with the US suggesting that Iran could have been behind the attack, there is a small risk that this could turn to something much bigger in the region, possibly involving US military action. However, if this turns out to be a one-off attack and everyone is convinced that it was indeed the Houthi rebels rather than the Iranian government, then in that case the situation could calm down pretty quickly.

Fed in focus

Meanwhile, with lots of central bank meetings to look forward to this week, the focus for equity investors could quickly turn to interest rates from oil prices. Clearly, most of the attention will be on the Federal Reserve on Wednesday. A 25-basis point rate cut is widely expected, and it would be a major shock if the Fed doesn’t deliver. But some, including Donald Trump, want more than just 25 basis points. In fact, the US President has called for “boneheads” Fed to cut rates to zero or lower in a tweet last week. Understandably, with US data not deteriorating as badly as, say, Germany, the Fed is reluctant to cut aggressively and rightly so. The risk therefore is that the Fed refuses to provide a dovish outlook for interest rates. In this potential scenario, a rate cut might only provide mild support for stocks. With most other major central banks already being or turning dovish, the Fed will also need to be super dovish for stocks to rally meaningfully.

Source: eSignal and FOREX.com. Please note this product may not be available to trade in all regions.

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

FOREX.com is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment and CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.forex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.forex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 42.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.

Delayed London Stock Exchange (LSE) Data

The London Stock Exchange (LSE) market data displayed or referenced on this website is provided on a delayed basis and is not in real time. The delay period may vary but is typically at least 15 minutes. This data is intended for information purposes only and should not be relied upon for trading, investment, or other financial decisions. We do not guarantee the completeness, reliability, or suitability of the data for any particular purpose. Users should consult real-time data sources and obtain professional advice before making any financial decisions.