A renewed slump in oil prices to seven-month lows dragged down world stocks and long-term bond yields on Wednesday, as bets that global inflation and interest rates will stay lower for even longer began to build again.
Signs of a growing glut of supply sent Brent crude futures skidding back to $45.50 a barrel before talk of more OPEC cuts halted the slide and steadied government debt yields and Wall Street futures prices.
The current slump in price of crude oil Wednesday came on the heels of Saudi Arabia’s King Salman announcing his son next in line to the throne on Wednesday, handing the 31-year-old sweeping powers as the kingdom seeks radical overhaul of its oil-dependent economy and faces mounting tensions with regional rival Iran.
Although Mohammed bin Salman’s promotion to crown prince was expected among those who follow the royal family closely, the timing was a surprise, putting the kingdom’s future in relatively untested hands.
Meanwhile, the earlier slide in energy costs had boosted bond prices and flattened yield curves as investors priced in lower inflation for longer, while safe-haven flows underpinned the Japanese yen.
The spread between yields on U.S. five-year notes and 30-year bonds US5US30=TWEB shrank to the smallest since 2007 as investors wagered the Federal Reserve might have to delay further rate hikes.
The recent setback for crude and commodity prices as well some equity markets is partly down to doubts over U.S. President Donald Trump’s promised multi-trillion dollar stimulus program, which had raised hopes of boosting inflation and growth.
“Brent now the lowest since mid-November: remember that whole reflation thing? No, neither does the market,” Rabobank analysts told clients, referring to Brent crude futures, which have slid almost 10 percent this month.
Oil had nudged its way back above $46 ahead of U.S. trading. It shed 2 percent on Tuesday, taking U.S. crude futures 20 percent off recent highs and thus into official bear territory, a red flag to investors who follow technical trends.
It also meant oil was on course for its worst start to a year since 1991.
In Asia there had been muted reaction to global index provider MSCI’s decision to add the first batch of mainland Chinese stocks to its popular emerging equity benchmark.
Indexes in Shanghai and Shenzen moved around 0.5 percent higher after the decision, which could ultimately bring $340 billion of foreign capital to the so-called A-share market.
The acceptance of some Chinese “A” shares into MSCI’s Emerging Markets Index was seen as a symbolic win for Beijing after three failed attempts. Yet the step is still a small one.
Only 222 stocks are being included and, with a weighting of just five percent, they will account for only 0.73 percent of the Emerging Markets Index.