Marketmind: Runaway oil

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FILE PHOTO: Pump jacks operate at sunset in Midland

A look at the day ahead in European and global markets from Anshuman Daga

Just when stock markets seemed to be regaining their footing after a wild third quarter – beset by rising interest rates and the dollar’s runaway gains – there’s more trouble brewing.

This time, oil prices are to blame.

Brent crude futures rose to a three-week high of nearly $94 a barrel after OPEC+ agreed sharp oil production cuts, the largest reduction since 2020, causing one of its biggest clashes with the West.

President Joe Biden called the surprise decision “shortsighted” and called on his administration and Congress to explore ways to boost U.S. energy output and reduce OPEC’s control over energy prices

Oil’s upward march couldn’t have come at a worse time.

Markets are already pricing in a recession in major economies and a sharp increase in energy prices will add to already-high inflation and interest rates.

European Commission President Ursula von der Leyen pitched gas price caps to EU leaders in a bid to contain soaring energy costs.

While Asian equities clawed back on Thursday, the dollar clung onto gains as bets on further Fed hikes firmed up. [MKTS/GLOB]

“No Fed pivot is possible against a backdrop where oil prices march higher on supply destruction in response to demand destruction as monetary policy is tightened,” Michael Every, global strategist at Rabobank said in a note.

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On Wednesday, San Francisco Federal Reserve President Mary Daly underscored the Fed’s commitment to curbing inflation with more interest rate hikes.

More gains are in store for the unstoppable dollar, according to a Reuters poll of foreign exchange strategists.

The dollar index, up a blistering 16% so far this year, is likely to extend its dominance beyond 2022, powered by more interest rates and the strength in the U.S. economy.

Britain’s pound held steady on Thursday after weakening a day earlier as British Prime Minister Liz Truss sought to restore her authority following a chaotic first month in power.

Fitch cut its outlook for its credit rating for British government debt to “negative” from “stable”, just days after a similar move from Standard & Poor’s following the government’s Sept. 23 fiscal statement.

Graphics: OPEC + agree to massive cut in oil supplies to boost prices https://graphics.reuters.com/OPEC-CUT/zdvxolajzpx/chart.png

Graphics: The race to raise rates https://graphics.reuters.com/GLOBAL-CENTRALBANKS/gdpzyznwyvw/chart.png

Key developments that could influence markets on Thursday:

Economic data: Euro zone retail sales (August); Germany industrial orders, Netherlands CPI, U.S. initial jobless claims

Speakers: Fed’s Loretta Mester, Lisa Cook, Charles Evans and Christopher Waller all speak at various events

IMF’s Georgieva speaks ahead of IMF/World Bank meetings

(Reporting by Anshuman Daga; Editing by Kim Coghill)

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