Volatility in oil markets dominates news flow; RBA minutes released this morning

Markets unsettled to begin week

Global markets have been absorbed by the events surrounding the weekend’s major attack on a Saudi oil facility, allegedly by Iran. Having settled last week, the VIX is creeping higher, as a greater level of fear and uncertainty seizes market participants. It’s by no means been a rush to the exits from risk-assets last night. But there’s certainly been a general desire for safety. The S&P 500 closed 0.32 lower in Wall Street trade, while the DAX and FTSE shed 0.7% and 0.6%. Bond yields fell across the globe as flow retreated into safe havens, which also lifted gold prices.

ASX held together by oil’s gains

The ASX 200 ought to open 13 points lower this morning, as a follow through of the bearish sentiment in global markets. The ASX itself proved rather resilient yesterday, in the face of higher market volatility and lower risk appetite. Of course, the reason for this is clear enough. The market was held together by a massive rally in energy and mining stocks, with the former adding over 4% during the day’s trade. Looking deeper into market action for the ASX, and the true mentality of investors was clearer. 8 out of 11 sectors were lower, on quite underwhelming market breadth.

Oil prices spike; could still head higher

Naturally, the greatest attention was directed to activity in oil markets yesterday. It made for an eventful morning’s trade on Monday, as traders scrambled to price-in the Saudi/oil news-flow. Brent Crude prices spiked 20% in early trading, before pledges from US President Trump to tap into emergency US oil reserves to stabilize market prices calmed nerves. Nevertheless, crude prices remained 10% higher overnight. And they could conceivably climb further again, after Saudi Aramco, the company’s whose facilities were attacked over the weekend, suggested that it could still be weeks before its production returns to normal levels.

Markets fear an oil shock

The arguably greater impacts of the instability in oil markets right now is the knock-on effects it may have in broader markets. Fundamentally, the risk of outright conflict between Iran and its supporters, and the US/Saudi coalition forces, is materially higher. If some level of military conflict were to occur between the adversaries, it could have economically crippling consequences. The most extreme of these would be a 1970s style episode of stagflation, brought about by a considerable energy shock. Markets hope cooler heads prevail, in order to avoid this potential outcome. But with US President Trump seemingly champing for a fight, perhaps this is wishful thinking.

China data disappoints, yesterday

Secondary to events in oil markets, but still of high-significance, China’s monthly economic data dump occurred yesterday – and greatly underwhelmed expectations. Chinese Industrial Production missed estimates, and revealed its weakest print since 2002. While Retail Sales and Fixed Asset Investment numbers also came in short of forecasts. It’s another sign China’s economy is in a weaker state than previously expected – and is slowing down at a “faster” rate. It invites a dynamic whereby Chinese policymakers will need to ply more economic-stimulus in the near future – especially considering that the most recent round of US tariffs on China’s economy is probably yet to show their full effects.

Johnson meets Juncker; no progress made

Another relevant political event shaping market activity in the past 24 hours pertained to Brexit. UK PM Boris Johnson met with European Commission President Jean Claude Juncker to discuss the UK and EU divorce agreement. As one might expect – and is almost customary – the talks resulted in little material progress. Despite this, a no-deal Brexit isn’t considered the most probable outcome for Brexit, in the short-term. The default position in financial markets is that we’re in for another Brexit delay. That’s given the Pound boost, with the Cable holding above the 1.24 mark, having touched 1.25 at stages late last week.

RBA Minutes highlights local session

The day ahead in Australian markets will be highlighted by the RBA’s minutes from its last meeting, a fortnight ago. Fundamentally, market participants will be using the minutes to test their “wait and see hypothesis” about the RBA. That is: the RBA is keeping a positive view on the local economy, and are holding-off further action on rates to judge whether its last two-cuts are sufficient enough to stimulate economic activity. Markets think in the long run that that’s unlikely, still pricing in one more rate cut from the RBA before year end. Currently, market pricing suggests it’s a sixty-forty chance this will be in November.