Asia Morning: The Aftermath: Oil Shock

Market Analysis /
10 Sep 2019

Equity Markets
Global equity markets are stabilising after the drone attack but remain in a state of limbo trying to access the economic damage of a possible lengthy oil price shocker, keeping in mind that every recession since 1973 has included an oil price shock, versus the favourable medium-term S&P 500 correlation to higher oil prices.  All the while, nervously evaluating the possibility of a joint military response from the U.S. and Saudi Arabia

Still, with trade war news winds blowing favourably and a torrent of central bank easing in the offing, barring an Iranian smoking gun in hand, investors don't appear willing to throw in the equity market towel just yet. Probably believing that a military “boots on the ground” response is perhaps the least palatable option especially given how tough a sell middle east war premiums have been during past escalations.  Keeping in mind, the most recent comments from President Trump noted that (any) "U.S. military strike would be proportional."

Source: Bloomberg

Oil markets
Key damage assessment reports are starting to circulate, and on first estimates, they are indicating it could take weeks if not months to restore full production capabilities at Abqaiq oil facility, which is suggesting that oil prices could remain elevated for some time.

Although there's ample storage at hand to blunt the immediate impact of the terrorist attack, the markets are now left debating what constitutes enough spare capacity when the possibility of another attack remains elevated, which will also pressure prices.
With that in mind, this attack was carried out with such precision, implying the use of some very high-tech weaponry. So, with the proliferation of superior drone technology and its apparent ease of access to middle east rebels, it also suggests that supply risk premiums could remain elevated and impact oil markets for quite some time.
Still, ongoing damage assessments will be crucial to gauge the interval of this market disruption and the consequential duration of higher oil prices.

Source: Bloomberg

Gold Markets
Gold prices are showing signs of stabilising, suggesting the markets are looking to establish a new price floor. It appears conviction remains positive so long as Gold hangs around $ 1500.
Flows have been very mixed caught between pre FOMC position squaring while hedging for a possible U.S. military response on Iran.
 However, the hefty long COMEX positioning still seems a consistent driver in the absence of any fundamental change in Fed pricing or trade conflict escalation and could limit gains over the near term.

 Source: Bloomberg


Currency markets
The oil dependence vs independence currency trade is in vogue with both the U.S. and Canadian oil independence a given this could support both currencies over the immediate term.
Asia currency exposure to Oil
The Yen (JPY) typically a safe harbour in stormy seas is conflicted as the JPY is very exposed to Gulf oil dependency as is Chinese Yuan.
India sensitivity to higher oil prices is enormous as they are a massive importer of crude. As such, higher oil prices could cause the current account to widen.
However, the most favourable investment sensitivity is in Malaysia since they are a consistent net exporter of Oil and gas, running a surplus in trade in these products of 2.7% of GDP in the past year.
The currency markets price action could hold the key determining how the attack on Saudi Arabia’s oil nerve centre continues to play out across global markets.

 Source: Bloomberg



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