| 27 May 2024, Monday |

Oil shares lead charge as crude hits new 3-year highs

On Monday, global stock markets gained, led by significant gains in energy stocks as crude oil prices soared to three-year highs of about $80 per barrel, while European stocks firmed after Germany’s election results ruled out the possibility of a fully left-wing coalition.

An ostensible lessening of Sino-US tensions, as well as Chinese authorities’ willingness to inject additional cash into financial markets to potentially offset the fallout from the beleaguered real estate business China Evergrande Group, helped stock markets.

A pan-European equity index was up half a percent, while German stocks were up 1.1 percent.

The energy sector led the way higher, rising over 2%, while Wall Street was expected to be firmer as well, with S&P 500 futures up 0.3 percent.

Following the election on Sunday, Germany now faces months of discussions to establish a coalition government, with three parties needing to join forces to reach the 50% barrier in the Bundestag. A coalition of the center-left Social Democrats, the Greens, and the liberal FDP is a possible outcome.

RBC Capital analysts advised investors that “one essential lesson for markets should be clear: a fully fledged centre-left coalition… does not have a majority in parliament.”

“This would have been the alternative that would have most likely resulted in the most significant adjustment in German policies and attitudes toward European politics, particularly in terms of fiscal expansion. This option is no longer an option.”

In early trade, German 10-year government borrowing prices dipped slightly before rising to -0.217, the highest level in almost three months.

Increasing focus is on energy markets where oil futures have climbed around $9 a barrel over September. Brent crude traded on Monday at $79.07 a barrel, while U.S. crude rose 97 cents to $74.95.

Shares in European oil majors such as BP, Shell and Total rose as much as 2.5%

Coming on top of this year’s 300% rise in European gas prices, the price surges threaten to further inflame inflation expectations.


Nor is the issue confined to Europe, with a Chinese power crunch triggering a contraction in industry and pressuring the economic outlook.

Goldman Sachs forecast Brent to hit $90 per barrel by year-end, adding “the current global oil supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast”.

Such an increase could stoke speculation that global inflation will prove longer-lasting than anticipated and hasten the end of super-cheap money, favouring reflation trades in bank and energy stocks while bruising bond prices.

Investors are therefore repositioning portfolios; U.S. 10-year Treasury bond yields, a key determinant of global capital costs, jumped 9 basis points last week while industrials-heavy U.S. Dow Jones index outperformed the Nasdaq index of tech stocks.

U.S 10-year Treasury yields rose to 1.473% rising to their highest in almost three months.

The rise in U.S. yields, especially on an inflation-adjusted basis, is also lifting the dollar which rose 0.15% against a basket of currencies inching towards the one-month high hit last week .

Earlier, Chinese blue chips gained 0.5%, shrugging off problems at Evergrande, which faces another bond coupon payment this week. The increase came as a result of another cash infusion from the central bank, as well as anticipation that Huawei CEO Meng Wanzhou’s release would help to repair relations with the West.

However, Evergrande’s electric car unit’s Hong Kong-listed shares fell as much as 26% after the company announced it urgently required funds.

Later in the day, attention will turn to U.S. fiscal policy, with the House of Representatives set to vote on a $1 trillion infrastructure bill, and a Sept. 30 deadline for funding federal agencies looming, perhaps resulting in the second partial government shutdown in three years.

  • Reuters