Stocks slide as Oil surges, stoking inflation fears

U.S. Crude surges to a 12-Month peak on depleting Cushing Reserves

By Ahmed Azzam | @3zzamous | 28 September 2023

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  • WTI crude hits 12-month high at $95/barrel on Cushing shortage.

  • 10-year Treasury yield holds at 4.6% due to oil price surge.

  • Global equities face potential tenth straight loss.

  • Fed's Kashkari hints at policy shifts if economy falters.

Oil soars, markets tremble

In an abrupt twist, the world's financial markets witnessed a tectonic shift as the price of West Texas Intermediate (WTI) crude oil surged to a notable $95 per barrel, marking its loftiest pinnacle in over a year. This vigorous rally was set in motion by a pronounced decline in stockpiles at the pivotal Cushing storage hub—a development that has raised alarm bells in the energy sector.

At the epicenter of this confluence of events is the imminent specter of a deepening global oil deficit, which has cast a long shadow over the world economy. The erosion of stockpiles at the largest U.S. storage facility, now hovering precariously below 22 million barrels, has compounded concerns regarding persistently elevated inflationary pressures.

In concert with the oil price rally, the 10-year Treasury yield has held firm at approximately 4.6%, a level last observed in the annals of history in the year 2007. This steadfastness in long-term yields underscores the market's lingering trepidation over inflation's sustained presence.

In the wake of surging oil prices, the world's financial landscape bore witness to a cascade of consequences. Asian equities bore the brunt of this turbulent energy surge, experiencing a discernible descent. The United States appeared to demonstrate a degree of resilience after the decline of the previous days, with equity futures and Treasury securities betraying signs of fortitude. Yet, these heightened oil prices served to bolster the prevailing narrative of a protracted period of elevated energy costs, thereby exacerbating the global economic quandary.

Equities' ominous streak

Notably, an oft-cited barometer of global equities finds itself on the precipice of a disconcerting milestone—a potential tenth consecutive loss, a record reminiscent of a bygone era marked by financial turmoil. Simultaneously, Japan grappled with its own economic ripples as its 20-year yield ascended to levels last encountered in 2014.

Kashkari's cautionary words

Neel Kashkari, a prominent figure within the Federal Reserve, imparted his insights in a series of television interviews, noting that the central bank may reassess its stance should external factors, such as a governmental shutdown or a protracted United Auto Workers (UAW) strike, introduce headwinds to economic growth. However, Mr. Kashkari tempered these remarks by cautioning that the prospect of multiple interest rate hikes remains a distinct possibility should the efficacy of previous monetary tightening measures fall short of expectations.

Data on the horizon

Turning our attention to the immediate horizon, the financial community eagerly anticipates forthcoming economic data emanating from the United States. Preliminary indications hint at a potential upward revision of final second-quarter GDP growth, edging up to 2.2% year-on-year, a marginal improvement over the prior 2.1% estimate. Concurrently, initial jobless claims are projected to exhibit a modest uptick to 215,000, while the August figures for pending home sales are poised to reflect a 1.1% contraction. These forthcoming metrics shall serve as critical barometers, illuminating the nation's economic trajectory amidst the prevailing turbulence.

As the relentless oil ascent persists, the ominous specter of inflation casts a pall over the global financial landscape. Investors and policymakers alike find themselves in the throes of a complex and delicate dance as they navigate the turbulent waters of an uncertain economic future.