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Higher global energy prices and the impact on stock markets

26 Oct 2021 03:30 PM

The global economy is currently facing a real crisis with rising energy costs, which threatens the global economic recovery, and the strange thing is that the rise in oil, natural gas and coal prices is accompanied by a rise in commodity prices in addition to supply chain disruptions.

Rising energy prices are usually a drag on the economy, which affects everything from consumer spending to airline ticket prices to industrial production as well as employment.

Oil prices have recently jumped globally after OPEC+ decided not to change the current policy with a gradual increase of 400K barrels per day, despite the demands of many countries to increase production to limit the sharp rises in oil prices, which reached more than 69% in 2021, which is affected many industries. Also, natural gas prices rose by more than 115%.

For example, looking at inflation indicators around the world, we will find it at record high numbers. In the United States, CPI is stable at its highest level in 13 years at 5.4%, and we will find that the rise in energy costs has increased by about 25% compared to the previous year.

So, what do those numbers mean? High energy costs affect the economic recovery, and all the money spent on energy bills is money that is not spent on consumption, which may undermine the economic recovery after the Corona pandemic period, and economic recovery is a phase that follows a recession characterized by GDP growth, rising incomes and lower unemployment.

An increase in energy prices often lowers economic growth expectations and raises inflation expectations in the short term, so lowering economic growth expectations will lower corporate earnings expectations, negatively impacting stock prices. In addition, the increase in input prices linked to energy prices leads to a reduction in profit margins.

High inflation has a direct impact on the stock exchanges and the daily shares prices, meaning that high inflation makes us look for a higher return, especially when we invest in stocks whose real value is declining, and meaning that inflation is high, the central bank may intervene and limit the money supply and then raise interest rates, which is reflected in a decrease in the cash flows of companies and a decrease in their market value.

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