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High oil prices dampen market sentiment

Stocks were trading lower as signs were mounting that the recent deceleration in inflation in some of the world’s largest economies may only be temporary. Particularly oil prices – which have been marching higher since June – came into focus for investors midweek.

Shane Strowmatt, LGT
Reading time
5 minutes
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Oil prices shot up on Tuesday after Saudi Arabia announced it will extend its production reduction of 1 million barrels per day until December. Also on Tuesday, Russia said its export reduction of 300,000 barrels per day will be extended for the same period. The coordinated moves sent Brent past USD 90 per barrel on Tuesday, continuing a strong rally since June, when it was trading near USD 70.

The possibility of higher energy prices took a toll on market sentiment Tuesday. Market participants were concerned that increased energy costs could set off another round of inflation or at least put an end to the slowing of inflation in recent months. That could cause central banks to continue or resume their interest rate hiking cycles.

In Asia, equity markets were trading generally lower midweek. Austrialia’s S&P/ASX 200 lost 0.8% after the country released its second-quarter gross domestic product figure of 2.1% growth. Chinese markets continued to trade in the red Wednesday with Hong Kong's Hang Seng Index losing 0.6% and the Shanghai Composite down 0.3%. South Korea’s Kospi also lost 0.6%. The Nikkei 225 bucked the trend on Wednesday, gaining 0.4%.

In New York, stock markets couldn’t find a clear direction on Tuesday after the extended holiday weekend. The Dow Jones Industrial closed 0.6% lower at 34,641.97 points, while the S&P 500 lost 0.4% to finish the session at 4496.83 points. The tech-heavy Nasdaq-100 turned positive and closed with a mild gain of 0.1% at 15,508.24 points.

Corroborating the view that high prices could come down very slowly was survey data on consumer inflation expectations out of Europe. Consumers expect inflation to be around 3.4% in 12 months, according to a survey by the European Central Bank (ECB), which targets an inflation rate of 2%. Looking three years ahead, consumers still don’t think the ECB will reach that goal, instead expecting inflation to be 2.4% at that time. The ECB will take into consideration the higher energy prices and stubbornly high consumer inflation expectations when it announces its monetary policy decision next week.

Corporate news in focus: Swiss Life half-year figures, Richemont annual general meeting.

Economic data in focus: German industrial orders (08:00 CET), ifW economic outlook for Germany (09:30), eurozone retail sales (11:00), US trade balance (14:30), US Services PMI (15:45), US ISM Services PMI (16:00), US Fed Beige Book (20:00).


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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.

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